Ladies and gentlemen, welcome to the Q1 2021 Conference Call of DT Group. This conference will be recorded. As a reminder, during the presentation, all participants will be in a listen only mode. After the presentation, there will be an opportunity to ask questions. May I now hand you over to Laszlo Bencic, Chief Financial and Strategy Officer.
Laszlo, the floor is yours.
Thank you. Good afternoon or good morning depending where you are. Thank you very much for joining us today for the 2021 First Quarter OTP Group Interim Results Presentation Conference Call. I promised my colleagues to be relatively short in the overall presentation. As far as I understand, we have received some gentle Feedback, and I'm sometimes too loquacious.
So I will focus on a couple of slides, maybe less than 10, Just to highlight some messages, which we consider particularly important. The presentation what we use is on the website. It was Uploaded at 1 pm Central European Time. So hopefully, you've been able to look at it, but we are Also showing it on the screen while I'm talking. So let's start on Page 4 maybe, which shows the P and L, the major P and L lines for the group.
And Eric, some remarks, which are worth making. Obviously, we had a good quarter, almost as good as the Q3 last year. And that was driven by risk loss Primarily, obviously. So if we look at the last five quarters, the risk cost dynamics, The Q1 of last year was quite high with this SEK 92,000,000,000 and then it went somewhat lower close to SEK 40,000,000,000 2nd quarter and then the 3rd quarter was really low. And therefore, we actually achieved last year, 3rd quarter historic high profit level.
And in the Q1 last quarter last year, we also provisioned more. Now all these provisionings last year were related to Kind of forward looking expectations, IFRS 9 methodology, not actual Credit losses, what we identified were more like anticipations of potential future losses, which So far, I have not really manifested. So and therefore, we in the Q1, we didn't provision much, Because there was no need. So if we look at the 90 days plus due developments or the Stage 3 ratio, the 90 days past year ratios, they were improved and did not deteriorate. So there is no reason to further provision.
Putting aside the risk cost part of the story, I think the most important number here is the Operating profit year on year adjusted growth rate. And there are a couple of adjustments which we made here. First one for FX, exchange rates. And then you probably remember last year, we divested Slovakia during the Q4. So that introduces some noise if you want to compare year on year quarters.
Plus, we made a kind of classification methodology change in Hungary Relating to operating expenses, there was SEK 4,400,000,000, half equivalent of local taxes, Which we pay in Hungary quarterly, roughly this amount and it's roughly SEK 16,000,000,000 SEK 17,000,000,000 per year. So it's quite a big amount. It has been so far, it used to be in operational expenses. It's really a tax based on revenues, not on profit, But revenue tax and it's paid on local municipality level. And we learned Now that we have changed auditors, by the way, we have now Ernst and Young.
So the figures that you see here are Audited figures no, for we sorry, for Hungary it's audit and for the group it's we have an audit review. So, I reviewed numbers by the new auditor Ernst and Young and they kind of draw our attention to the fact that other banks in Hungary I typically account for this local tax as corporate tax. It's very Hungarian specific, so we don't have that in any other country. So therefore, we have classified it. So if we make these two adjustments, then we end up with a 13% Operating profit without one offs growth year on year using the first Order as a benchmark.
And I think this is quite a good result given the difficulties that we have all had during the last year Despite the COVID situation and the economic contraction, substantial economic contraction in some of the countries where we operate, All in all, we managed to increase our operating results by more than 10%. It was 13%. So I think this is Quite remarkable and we are quite happy to see it and especially because this was primarily driven by revenue growth. Revenues grew 8%. And each revenue line including net interest income grew and also net fees, Which is also remarkable given that the margin compression in case of the NII And the drop in business activity and transaction volumes during the COVID situation, which had a negative impact on fees.
The next slide I think I should talk a little bit more about is the Stage A, about margins. We have had this long story of margin compression. So for many years now, we've experienced quarter on quarter, year on year Compression in margins and we when we talked about our expectations regarding this year net interest margin, We said that it may continue to decline. And indeed, if you look at year on year expectations, last year, the annual net Interest margin was 3.61 percent. And if we compare to this number, it was very, very likely that The annual number for this year will be lower.
However, what happened during the Q1 compared to last quarter last year, Q4, Margin actually increased not by 5%, but by 4%. I mean, these are rounding problems here, but So basically, 4 basis points, primarily driven by margin increase in Hungary, which was then driven by The end of this temporarily lower APR of newly dispersed Consumer loans last year, they jumped up to their kind of market levels. And also the moratorium related Adjustments, negative adjustments which we made last year gradually come back to NII over the course of The duration of the portfolio, so then I was also lifting up the younger margin. So the question is whether The situation will continue over the course of the year or not. And my short answer would be that we don't know That concludes you there are a lot of factors at work here.
And if all the factors work out for our benefit, then we can Imagine a scenario where there will not be further quarterly decline in margin, but again, this would be a kind of lucky Best scenario and due to the very intense price competition, it is quite possible that we will See further slight decrease in margins. Let's move to volumes, Page 9, quarterly loan volume dynamics. Given again that we had in the Q1 the second wave of the end of the second wave And the first half of the third wave of the virus in most of the countries where we operate. So operationally and in terms of COVID related restrictions and the negative ramifications on the economy, this was still Very much negatively affected period. Despite all these Headwinds, we managed to grow the portfolio 2% just in 1 quarter.
Hungary was particularly strong with 3% and within Hungary consumer loans 7%. Part of this was this baby shower loan, this baby loan. But if you just look at market based cash loans, their volumes grew 4.8%, so almost 5% quarterly growth And market based cash flows in Hungary, which is quite a good number. And housing loan growth wasn't astronomical, but In fact, if we look at New submissions of loan applications then year on year, if you compare this quarter with the Q1 last year, then the increase was 35 percent in terms of housing loan applications by clients. Russia remained negative, But this is seasonal.
So in previous years without COVID, we had seen Similar low growth in the Q1, even the Q2. And this is the country where we expect the biggest recovery, the strongest Adjustment in the trajectory of portfolio growth. You may remember that last year, Russian volumes declined by 11%. It all goes according to expectations. Then second half of this year, we should see a very robust Growth in our Russian volumes may be more than 20%.
And in the other countries, We expect marginal improvement and actually acceleration of lending activity. Some countries, it might be quite robust, which were not so strong so far due to the improving economic conditions And the kind of petering out of the COVID related restructurings. So 2% in loan growth. And if you go to deposit growth to Page 11, it was actually 3% on a quarterly basis. And nominally, it was even the difference was obviously much bigger.
So I mean SEK 250,000,000,000 more Almost SEK 30,000,000,000 more half deposit growth than the loan growth. So this last quarter was typical in a sense of the last Five quarters that loan growth the deposit growth nominally was much stronger than loan growth Therefore, our excess liquidity further increased. This We hope to turn around second half of this year. And hopefully, second half, we are going to see larger Nominal loan growth than deposit growth. And then we slowly, again, started Kind of improve and build back the efficiency of our balance sheet.
Okay. Maybe a few words about net fee income, 13. Here what you can see is that, okay, year on year we had 5% FX adjusted net fee income growth without the Divest I mean, the divested OBS, the Slovakian Bank. And here what you see is a very mixed picture. So some countries, Hungary, Bulgaria, were growing quite fast.
And then you can see some negative numbers here. And then I I mean, the overall 5% is not bad, but it could have been better if some countries were not Kind of laggards and not have actually negative growth. And then let's have a look at this. So we have Croatia And Montenegro with minus 3% and minus 17%. Obviously, in these two countries, They have a very large exposure to tourism and typically transactional Revenues are related to tourism, tourist industries, tourists spending money, ATM withdrawals, etcetera.
And this did not happen during the course of basically last year and that had an impact on the Q1 as well. So In these two countries, I think it's we believe it's quite reasonable to expect improvement once the COVID situation is over. And then in Serbia, it was just a technical reclassification, which happened in the Q1 this year. So that was if we had that technical change, it was actually positive. And then we have Russia, where again it was the Biggest negative nominally, the year on year change and that's purely due to the loan volumes.
The new Loan generation, which is still lower than last year. And we typically generate fee income in Russia When we sell new consumer loans and we also sell insurance products and we get the commissions. So that's a lot far apart Revenue fee in Russia and as soon as volume growth Turns around here and starts to increase. Again, we believe it's reasonable to expect Fee income to grow as well. So all in all, again, this I think 5% growth in this environment year on year is not bad, but it could have been better if these Countries who are not underperforming and once they do come back to normal performance after the COVID restrictions are over, Then hopefully, we will see even higher growth rates.
Maybe a few words about operating First, Page 15. Overall, if we do Adjustments to the divestment of Slovakia, FX and the spend of SEK 4,400,000,000 I mentioned, The reclassification of local taxes and the year on year growth for this quarter was 3%, which is, I think quite okay. And then here as well you can see some negative numbers. We've actually managed to decrease the cost base And it's primarily Bulgaria, Serbia, Montenegro And Croatia. And these are the 4 countries where we have done mergers during the last 3, 4 years.
It started with Croatia And then Serbia and then Bulgaria and then Montenegro. And Last one, the latest happened in Serbia just over the last weekend. It was very successful. All this We're on time, on budget. And as you can see, we in each case, we still have some or We still have or still have some cost savings manifested.
In Serbia, where we Should see further cost synergies to manifest due to the last acquisition while we did. And the last line what you see here is growth in the Q1 that was just related to a consolidation of an entity which used Which used to be out of the consolidation, which we acquired last year. Okay. So Maybe 19, Page 19, I mentioned the Serbian Merger, which was done successfully on time, on budget. And in fact, this is the 3rd Merger, we should finish during the COVID situation.
So just to remind you, last year end of April, We finalized the merger in Bulgaria just in the middle of the COVID lockdowns where we had very serious lockdowns. And back last year in December, we did the Montenegrin merger and now We finished the merger in Serbia. And with this, we actually completed the integration and merger Process of this second wave, this last bunch of acquisitions, which we have made, The Solgen assets plus the MBG assets in Serbia. So now all the merger processes are over. And with With this last action, we actually created a bank in Serbia, which has the largest loan volumes.
So this is the largest bank by loan volumes in terms of market share. By assets, we are number 2, but Actually deposits are not making huge returns on this. So we are quite happy to have a leading position in landing volumes. And the good thing is that actually even during this merger process, we managed to Substantially improve and increase our volumes, as you can see on this chart, and also our market shares actually in Serbia. So despite Being busy with the Merge during this period, we managed to increase our market shares Which is, I mean, a huge credit to all our colleagues who are going to listen to Serbia and growth together with Fantastic performance.
Maybe next Slide Page 20, the loan book. Again, not much happened in terms Of stage migration or Our credit portfolio quality changed. Therefore, we didn't provision much, as you know. And in fact, the Stage 3 ratio remained stable and the provisioning levels also remained more stable. And as you can see on this chart, we We believe that we are very conservatively provisioned in terms of Stage 1 and Stage 2 loans performing loans compared to Some other banking groups, so we believe that there's a lot of reserve here in case our Optimism related to the future is manifesting, which is unlikely, by the way.
Finally, maybe a few words about the macro situation and expectations regarding to the macro situation, Page 24. I mean across the countries where we operate, we expect a very robust Economic recovery once the COVID situation is over, and we expect this to be over by the end of the second quarter. Maybe some countries will come out faster and some countries somewhat slower. But by the Q3, we expect all of these countries to be out of the negative effects of the COVID related restrictions. And therefore, we expect a very robust economic growth period to start with high consumption, Hi.
Labor demand, increasing Wage inflation, increasing inflation in general. And in this environment, we expect New investments to start and new capacities to be built, therefore, Strong kind of investment cycle to start. And that is again, it's true for pretty much all the countries where we operate. Especially, I mean, if We talk about the timing. It's maybe worth noting that Hungary is the most advanced in terms of the Vaccinations in Europe.
So we have vaccinated more than 40%. It's like 43% of the population in Hungary has Received the first chapter. Hungary is quite in the forefront of vaccination and we Pretty soon should reach a level where this kind of poor immunity kicks in and then we can safely Operator, that's strong restrictions. So in a nutshell, this was what we Intended to or I intended to present, but I'm very sure that we have a lot of questions which we will attempt to answer. So please, I'd like to ask my colleagues to open this the floor for questions.
Thank you. Ladies and gentlemen, we will now begin our question and answer session. First question is from Andrei Novacek, HSBC.
I have a couple of questions. 1st, can you talk a bit about the Hungarian loan moratorium? The participation rate seems to have dropped somewhat, That's probably because of strong loan growth, right? So how do you gauge what will happen after this ends in June, July. What are the metrics to look at here?
Indeed, I mean, maybe we can go to the slide where we had the indeed, the number dropped. So we are at 32%, that's 32% of the gross loans. And as Jirayaki pointed out, it Typically, December moves because the overall portfolio, so the denominator Increases, so what we obviously The experience from other countries where the participation rate was much less than Hungary, But where the moratorium ended already back last year during the COVID situation, so not in this So dynamic economy growth environment, but we expect to be there by July. But during For in the middle of the COVID situation, so in Bulgaria, the Stage 3 ratio out of those Clients who exited the moratorium is less than 3%. In Romania, it's 5%.
And we only see higher numbers in Croatia And in Montenegro, which were hit hardest by the whole COVID situation due to They are the large exposure to the tourism industry. So in these countries, it's like 8%, 9%. But again, in these countries, the participation ratio was much smaller between 5% to 10%. And out of this 5% to 10%, when the moratoriums ended between 3% to 8%, 8%, 9% actually ended up in Stage 3. So if you assume that in these countries where the participation ratio was much smaller, actually the kind of More exposed or higher credit risk clients entered the moratorium in the first place and they ended up with these ratios.
Then I think it's fair to assume that in Hungary, we should not see higher Then probably lower like in Bulgaria or Romania 3% to 5% with moratoriums which were Between 6% 10% of total portfolios, I can't imagine that numbers will be higher In Hungary, we are in Hungary, 1st of all, a much bigger kind of participation rate we have. And the timing of the moratorium ending will be in the middle of kind of Huge rebound in economic activity. Therefore, it should be kind of low single digit. The actual default rate of the moratorium volumes in Hungary based on Formal logic and experience what we have in other countries where the moratorium already ended.
And then in that context And given the low amount of loan loss provisions in Q1, why didn't you revise your cost of risk guidance?
I mean, because we believe that it's The cost of this this year should be less than last year.
Materially less presumably?
I think that's fair, correct to assume, yes.
Okay. And then quickly, just one other thing. I noticed the number of employees in Hungary is rising again. What is it due to? And what is the outlook for salary increases and bonuses in Hungary and In Hungary and across the platform?
Thank you.
Arjan, It's increasing economic activity. I mean, we are extremely busy. I mean, if you go back I mean, maybe we can show these two slides. Hungary, Csaba, 1 on corporate and 1 on retail. I mean, this is corporate.
So Just go to the corporate. So corporate lending, in fact, I mean, just the Q1 no, this is Rita, if you go to corporate. So Just in 1 quarter, Q1 this year, micro and small company loans increased 14% Due to this Funding for Growth Go program, where we basically Issued almost SEK 600,000,000,000 half loans. I mean, this is these are small loans, right? A huge work, huge operational work.
And if you go back to the retail slide on 16, again, I mean, this is I mean, Applications, we accepted 35% more mortgage applications, housing loan applications Q1 this year than Q1 last year. So that's a massive growth of activity. So that's the more or less the reason behind the FTE growth The fact that it's not getting less. In terms of wage dynamics, I think it's fair to expect again high, maybe even double digit level of wage inflation coming back quite soon. We even today, it's the labor market is relatively tight.
Unemployment levels are low. And once the heat will be on the second half of the year, I Expecting general inflation to go up, but wage inflation will be for sure higher and stronger Then CPI, which is going to again generate Pressure on the Hungarian kind of efficiency and but Actually, if you look at our cost to income ratio, group level, in Q1, it was 51.2 Percent. And obviously, if you want to compare it with previous quarters, then you have to adjust back with this SEK 4,400,000,000, Which we reclassified. So if you make that adjustment, then on group level, it was 50 2.7, right? And the Hungarian cost to income ratio was 1st quarter was 50.5%.
So these are I mean, These are not bad numbers, right, in such a low rate environment and low net
Thank you. The next question is from Anna Marshall, Goldman Sachs. Please unmute your microphone and go ahead. Good afternoon.
Thank you for the presentation. So a couple of questions for me, please. Firstly, on the outlook, I've noticed that basically you've removed the outlook slide from the presentation. And I appreciate you've already commented on some elements like cost of risk or margin trajectory. But Generally, kind of is there anything else you can comment on the other elements of the previous outlook?
Do you expect Okay. Carla, more positive, less positive dynamics there. So this is my first question. And then the second one On M and A, so you said that you've completed the merger processes that you initiated before. And how does the picture look like going forward?
And in particular, do you comment on the kind of attractiveness on of some of the kind of markets that have been mentioned in the press.
Well, in terms of outlook, I mean, we did not put the slide because we haven't changed the outlook. So basically, we made Five statements. First of all, that the ROE may be higher this year than last year. I mean, based on the Q1, I mean, I think it becomes I mean, I think it's a very valid statement that it may be like this. And in Q1, we made the adjusted ROE was more than 18% and The accounting ROE was almost EUR 15,000,000 and you probably remember that we accounted for the entire bank tax for the Whole year in Hungary, so therefore typically the accounting result of the group is lower in the Q1.
And then we said that we expect around similar levels of lung growth like Last year, we had 9%. Again, here I think the first quarter results of 2% is actually quite positive and quite supporting To believe that indeed, it will be at least as much as last year, given this Narrative, what we have that we expect the loan growth to materially accelerate second half of this year, especially in places like Russia. Net interest margin, again, the outlook was that it may continue To decline and I said today that it will definitely or most I mean, We still expect it to decline on a year on year basis. Quarter on quarter, it's another story. There are many factors here and if everything goes extremely well then it may actually not decrease further on a quarterly basis.
Risk costs, as I said, we said that we expected this year to be lower than last year. We continue to expect that. And then we said that the cost to asset ratio may be lower this year than last year. Last year, we had 2.9%. The first quarter was EUR 2.63.
Again, if we make this adjustment with the local taxes, then it's €2.71 So I think it seems possible that we can Yes, to this level. So that's the output. So no change basically. I mean, we could have like I mean, so no change in general. I think, I mean, the Q1 results Made these statements what we made when we presented the last year results even more probable, I think.
The second question was related to M and As. Indeed, we have completed the mergers, so we kind of digested The last wave of acquisitions and now they are firmly rooted in the group structure And turning out efficiently returns. So we're very happy. And I think and it's not just The IT mergers and the system changes and the processes and organizations, but I think also culturally, We managed to integrate these entities in a positive way, in a way that we OTP itself improved and reached a higher level by combining our strengths with the strengths of Other organizations and actually creating something more than the 2 Previous units. So I think we have gained a lot also in terms of knowledge, culture, approach, Diversity, which is, I think, which are extremely important for future success.
And indeed, we are we feel quite ready to continue and do further acquisitions and do The very difficult job of integrating and merging further banks into the group. But here, obviously, our intention is not alone is not enough. So we need assets, Good assets for sale and we need buyers who agree with or sellers who agree with our assessment of the values of assets And we are working on these stories. And we as always, we refrain from commenting press Releases or by or I mean or something appearing in the press, if you excuse me, I won't Make specific comments on any of these. Other than that, we are working hard on various
Thank you. The next question is from an attendee joined via phone. I open the line. You will May I ask your name and the name of the company?
Hi, good afternoon. This is Martin Amashur from UBS. And thank you for taking my question. I have 2 of these. Firstly, on net interest margin, I Just like to refer back to your comments on competitive pressure in some markets on net interest margin.
I'm just wondering if you could give us a bit more color on which countries and perhaps which markets do you see the most pressure that Good influence for the group NIM. And this in the context of obviously some positive developments on monetary policy rates In some jurisdictions like Ukraine and Russia. That's the first question. And the second question is on Hungary, mortgage lending, Specifically, on Slide 16, you're showing that Ootek's market share in mortgage loan Contractual amounts have declined slightly in Q1. It seems like this is really the first time for a long while.
I'm just wondering You can comment on the reasons for that. Are you seeing any, let's say, irrational behavior in the market from some of your competitors, perhaps pick up volume or are there any specific reasons for that? Thank you.
Yes. Okay. So Price competition in different countries. Clearly, the most competitive environments from our perspectives The ones which are either in the Eurozone or quasi Eurozone countries are kind of joining the Eurozone, especially Slovenia, I mean, as you can see on this slide, this is the lowest net interest margin country. The Slovenian corporate loan pricing from our perspective is really is getting to a territory which we Find hard to understand, so to say, why our competitors are going to those levels.
And Bulgaria started to continue to experience this margin pressure and very high competition. I mean, Bulgaria last year joined ERN2 and they're moving closer and closer joining the Eurozone. So I Our kind of Eurozone based competitors already consider it Eurozone and Eurozone So we see quite margin decline there as well. Now on the other side, Just as you mentioned in Russia, Ukraine where the rate environment started to increase and where we have rate hikes and inflation pressure, It seems that the margin environment is somewhat more accommodating. So I think these are the 2 kind of ends of the spectrum.
On one hand, Russia and Ukraine, which now seems somewhat Better from a margin perspective and then Bulgaria and Slovenia on the other hand, which is Yes, so competitive and declining. And the mortgage market share, can we go to that slide? In Hungary, maybe 16, I think. I would not try to read into this any Tremendously meaningful story. So it's still Quite high.
And disbursement in our case was lower in the Q1. This is partially due to the fact that December, November was weak due to the log I mean, the restrictive measures regarding the 2nd wave of the COVID situations. But then the Q1 was Extremely active in terms of new applications as you can see here, 35%. So and some of the new So what happened that the new subsidized structures kicked in and also The VAT decrease for new residential developments and there's a new subsidy type for refurbishments. And I think what happened that our clients kind of waited and they postponed There are real estate kind of purchasing and mortgage applications from the 3rd quarter From the last Q4 last year, when already these new measures were known but not yet introduced and they actually made the applications in the Q1 benefiting more from these subsidized structures.
And in general, whenever we talk about subsidized Structures and clients who use them, we typically have a much higher market share. For I mean, a good proxy to that is the On the second following Page 17, you see our market share from the it's not housing loan, but It's the most prominent subsidized structure at the moment. As you can see, we have 44%, 45% market share from BabyLines, Much higher than our overall market share. So maybe this somewhat explains the first end of Q1 somewhat lower Volume market share, but I don't and this does it doesn't mean that we're losing revenue at all.
Okay. This is very helpful. Thank you.
Thanks, Lucas.
Thank you. The next question is from
Thank you. This is Olga Risoulov from Bank of America. You very much for taking my questions. My first question is about potential provision releases. You say that you have provisioned quite But last year, you didn't see major reasons to add provisioning now.
Do you think there is there can be a situation for potential releases In the next quarters? And if yes, then in which regions or segments? You're just afraid to see that. This is my first question. The second question is about the fiscal stimulus in Hungary.
Earlier this year, You mentioned there was a new program launched in Hungary, lending for innovation. How substantial this program currently is? Why is it still small? Is it a nice addition to the programs which are already in operation? And do you think this will evolve into something This is my second question.
And my third question is about your cost outlook. You mentioned you anticipate higher CCI and also some wage Wage inflation in the regions over time. Can you possibly quantify your Is it cost growth, maybe even next year or at least trajectory? Do you think it will be mid single digits, higher or lower? Thank you very much.
Okay. I mean, it may happen that we will release provisions. I think it's way too early to talk about this. First, we should see What we expect to happen, right, the end of the COVID related restrictions. So if we are right, then For instance, in Hungary, we expect no further restrictions starting from June.
And hopefully, The tourist season will be very strong in the countries which were hit hard last year like Croatia and Montenegro. Having said that, they already lost the preseason. So that we already know that they lost the preseason. So April, May, Even June may not be too strong, but July, August and hopefully the post season, after season Turnout will be strong in these countries. And if all goes very well and there's no further wave of the virus, a new Version of the virus and so on and so on.
Then I think there is it can happen that we will end up for releasing provisions. But I mean, what you see today as provisions level Provision levels, they reflect our best judgment and based on the models And our discussions with the auditors, we always tend to be conservative and we are not going to give this up. So we believe that is that's the right We are always on the conservative side as much as possible given the different accounting And tax regulations. But within this context, if all goes well, yes, I mean, there's a potential. But it's too early to I count on that or kind of forecast it for sure.
The landing for reconstruction just started. So this is quite new. And again, this is one of The reasons why I think applications were lower in the Q4 and therefore New loans were generation was somewhat less in the Q1 and then applications jumped up in the Q4 because People were waiting for that. It is a meaningful volume around I mean, the loan The new volumes we expect are around €50,000,000,000 for this year, But we will see. But it's important.
Cost situation in general, Cost growth? I mean, first of all, we have this 3% year on year growth With all the adjustments, in an environment which is Somewhat muted or moderate in terms of post development actually because wage inflation was not strong during this period. So I would be surprised to see lower levels of cost growth than this. Certainly, if anything, cost trajectory should be somewhat higher than what we have seen last year. Having said that, of course, again, we are not in the cost cutting mode.
So It's really a very active growing period what we expect to happen, which is Then I mean, in itself, how much cost grow is not a good proxy. It's more like cost to asset or cost to income ratios, Which matter. And in terms of cost to asset ratio, which is independent of the margin development, therefore, we Just started to use that more. We expect we said that we expected improvement year on year. And indeed, if this kind of strong Economic activity kicks in and hopefully revenue growth will be strong.
Then I think The cost efficiency ratio should, if anything, improve despite whatever cost curves we are going to see. In general, we are going to have a higher inflation environment. That's what we believe. And that should have an impact On the revenue side as well.
Appreciate it. Thank you.
Thank you.
Thank you. The next question is from an attendee joined via phone. I open the line. You will receive an automatic message about it. May I ask your name and company, please?
Good afternoon, everyone. This is Robert Dziova from KPMB Securities. I have the following questions. Number 1, you are mentioning in your report that the first Time consolidation of the other subsidiaries in Hungary, taken together with the improvement in the equity consolidated entities, Edit about SEK 4,500,000,000 to the quarterly net profit. And my question is, should we think of it as one off or a new additional Run rate contribution to the net profit of the group.
Question number 2 is about cost of risk. You're commenting that the 1st Q recoveries at OTP factoring were lagging Previous quarters because of the upward revaluation of factoring claims, which was performed in the 4Q 2020. Essentially, you recognized some future expected recoveries already in the 4Q. So the question Being is the new level of the recoveries seen at OTT Core, perhaps Plus this SEK 1,000,000,000 reclass into other income shouldn't be thought as a new run rate compared to the SEK 9,000,000,000 Of recoveries generated in the 3rd and the 4Q of 2020? And question number 3, On the technical impact, the 2,500,000,000 half attributed to the loan repayment moratorium on the NII, My question is what will happen after the moratorium expire?
What would be the potential impact on the NII? And finally, question number 4. I was reading that there is potential to For the government to cut by 2 percentage points the employer contribution share of the social contribution in Hungary, Would you expect that to happen? And if so, when and would it help you to keep the costs the labor costs in Hungary Growth at a more maybe lower level than you discussed during the conference call? You haven't included this in your guidance yet?
Thank you.
Okay. So starting from the first one, this Q1, yes, I mean these are 2 very independent events what happened. So We included into the consolidation a new entity. It's an agribusiness, which we acquired last year. And it has an impact on other income because its total revenues Classified as other income.
So there was a close to SEK 2,000,000,000 positive Line on the other income side and there was roughly SEK 2,000,000,000 on contribution to the cost. The overall profit was relatively small in the Q1 coming from this entity. But these two gross lags, the revenue and cost lags will stay with us. So that's Less structural. Now the other one, which we said that was the result of entities which were equity consolidated.
These are basically evaluations coming from our Kind of private equity type investments. We have funds. We have investments fund. We have a digital fund. We have a VC fund.
We have a private equity fund. And they do generate Quite good returns and there was just kind of Appreciation of the value of one of these funds and the assets in the funds. So that was it's more of a one off. It's not going to Every quarter, but it's in a sense, but I mean, structurally, this is we expect them to contribute Substantially, I mean, they have actually quite good returns. So time to time, we expect from them Meaningful profit contributions.
So in a way, it's one off that This part in a sense that it's not going to be repeated every quarter, but it's not one off in a sense that it's not it is actually we expect further Gains coming from these portfolios in the future, but maybe not regularly or quarterly. Yes. Factor in recoveries and the one off appreciation we made last year. So I mean, there's a small yes, I mean, it has some effect, but not a big one. And actually, it's like There was a structural change as well.
We reclassified SEK1 1,000,000,000 to other income from Rizkos. That if you We still expect quite a robust recovery Coming from the factoring volumes and the Q1 was actually better than what we planned. And This value adjustments, which we made last year doesn't have a big material impact on the Recoveries that we are going to book this year. So indeed, we made this one off adjustment, but the impact For this year recoveries is accounting wise is not that big. And that means actually that We may do in the future further adjustments in the value of these volumes in factoring.
Then you had an NII what Yes. So this NII increase due to the moratorium. I mean, We accounted for when the moratorium was announced At the end of I mean, 4th quarter, we accounted for this This one off net present value loss. And that actually And now and this net present value loss is kind of spread over the duration of these loans. So the positive NII impact is so this kind of one off negative It's going to be less and less and we book an NII positive number to compensate for that.
And that should be there for the duration of the loan. So once and this has been already done for this expansion of the moratorium. So there's no further impact expected actually. So you won't see much when the in NII when the moratorium ends. The social contribution percentage, it has Decreased, now this is actually the 4th year, I think, that it decreases It has decreased actually in steps over the last couple of years.
And yes, there's some further decrease. At the moment, it's 17.5%. I think it came down from Something like 20. So it has already kind of came down quite materially. And the further Decreases will I'm afraid they may not be quite strong.
So Pretty much the current level, I think overall something to expect, especially now that Actually, if you look at the budget deficit, it sort of exploded last year and also this year. And even for next year, The newly accepted budget includes kind of 6% budget deficit. But this kind of Special period from the kind of EU perspective that temporarily they allow Member States to run much higher deficit than the kind of 3% expected. I think next year will be the last one where they accept that. So some kind of fiscal adjustment will need to be done after next year.
And therefore, I don't think there will be a lot of room to further decrease these kind of social contributions.
Thank you. The next question is from Simon Nellis, Citigroup.
Hi, everyone. Hi, Lazo. Thanks for the call. Actually, my first question would be on Stage 2 loans. I see that they've gone down for most divisions, but there was a big jump at Mercantile.
If you could talk about Stage 2 loan developments Generally and Mercantile in particular. Maybe I'll go 1 by 1, just makes it easier maybe for you.
Michael, so yes, I mean, this new requirement the requirements by the Better Central Bank, We applied for OTP core at the year end, but not in Mercantile. So that was The kind of so the Mercantile, we apply the requirements of the Central Bank only at the end of the Q1. It was kind of a catch up of what
you did.
That was the real expectation. So in the rest of the I mean, rest of the Hungarian book actually did it earlier than we were supposed. So that's the Rational behind American Tail increase, the fact that the OTP core, so the other Non American to Hungarian loan book Stage 2 decreased. It's also because of the denominator is growing, right? So we are Growing Stage 1 Portfolio.
Okay. And then why generally elsewhere have Stage 2 been Loans been going down? It's not migration to Stage 3. So is it just improving ratings or
what's happening? I'm In Romania, there is some decrease, but there also the Stage 3 ratio decreased. And then And there's yes, there's a small increase in Serbia, 30 basis points in Stage 2. So actually, there's no Yes. Okay.
It's Croatia where we had a decrease. Yes. Croatia was the other country where we had a Stage 2 decrease. And it's due to the fact that you probably remember there was an earthquake in the Q1 in Croatia, in part of Croatia, and it was Actually quite severe in certain parts of Croatia. And we actually classified loans from that Region to Stage 2 year end, just to be on the safe side because of the impacts Of the earthquake.
But really, there wasn't much problem manifesting from this portfolio. So in the end of the first We put most of these loans back to Stage 1 because we have not experienced kind of fundamental deterioration. So as far as I can see, it's just kind of Hungary core where we had decreased and it's Croatia where we had decreased, which is materially in Stage 2.
Okay. And what is the right level of Stage 1 and Stage To provisioning coverage, do you think, in a more normalized environment? I think you kind of hinted that it was around 1.6%, the level you had at the end of 2019. Is that Still valid or what's your thought there?
I mean, That's a quite new territory, so to say. So the whole Stage 1 and Stage 2 classification and also can we go to that slide maybe, So this is a quite this is something new. The whole IFRS 9 was basically introduced in 2019 and then Already in 2020, there was a huge shock, right, to the system and to the an enormous challenge for the methodology. And this was nothing but a it was not at all a normal kind of cyclical economic recession, it was a very special event what happened during the COVID. So therefore, it was an extreme Challenge for the models, which were obviously built on kind of normal economic cycles and the impact on portfolio qualities.
I think it's very difficult. So we started with 1.6, but whether 1.6 was the right one or not, Maybe our competitors are right when they have just 0.5, right?
Yes. Okay. So it's still And
what we will only know when we are through 2 economic cycles. So maybe in 15 years, You will know quite well how much it should be, right?
Yes, yes. Okay. Just two other quick ones. The effective tax rate going forward for OTP Core, I think it was 16% because of the tax Change?
Yes.
Is that the likely ongoing kind of effective tax rate going forward?
Yes.
And my other one is just on this treasury share swap. The loss, I guess, that was driven by the fact that your dividends are Tricked it, right.
Yes.
So what has to happen? Basically, once you're allowed to pay dividends that could reverse, so that would be maybe a 4th quarter event?
Yes. Once this ban on dividend payments is lifted, even if we don't pay dividends in that period, this can be Because this is just a valuation, right? So it's a valuation base. We have to take out this year Because I mean, it's just I mean, yes, once the restriction is over, this should turn back.
Okay. But for the next couple of quarters, it will remain negative?
I mean, it will remain as it that Won't be further negative numbers. So I don't think that will be material number coming in 2nd or Q3. Actually, Q3, it can because end of September we okay, yes. So there shouldn't be much in the second and third quarter. And If the ban is lifted as it should by end of September, then the Q4, more or less this demand should come back automatically, Because then we can again count on this amount to be paid out as a dividend.
Right. Okay. That's all from me. Thanks very much.
Thank you.
Thank you. If you have a question for our The next question is from an attendee joined via phone. I open the line. You will receive an automatic message about it. May I ask your name and company?
This is again, Robert Novak. Seeing that there are no further questions, I decided to maybe ask one more. It's about the Funding for Growth scheme. Do you have any expectations regarding the volumes of this program In the following quarters, do you think that the Q1 was rather a peak in lending? And or Is it this rate of lending of new corporate lending sustainable for at least a year or so?
I mean, the so So far, I mean, if you talk about the whole market, basically, SEK 2,000,000,000,000 was already Kind of used up from a total Volume of 3,000,000,000,000,000. So 2 third of the total Program as it is defined, I mean, obviously, I don't know what the intentions of the Central Bank are. I mean, obviously, there's a chance that they further increase The overall size of the program originally started from SEK 1.5 It's trillion and today it's 3. So they have already increased it gradually. But I don't know whether they will further increase or not.
Roughly, I mean, last year, again, we talked about the market, roughly, there was like per week, there was like SEK 50,000,000,000 new lands Issued under this refinancing program. This year, it's already somewhat lower. So it's back to kind of SEK 30,000,000,000 per week. New loan insurance. So we already see a kind of Decrease in the weekly or monthly amounts of loans generated under this refinancing And so far, the banking sector is up to a third of the toil program.
I think it's reasonable to assume that for the rest of the year, the current level of planning activity can continue. And then I think if I were the Central Bank, I would kind of consider the program Subject to the economic growth and the economic recovery, what we see in the second half of the year. Obviously, To a certain level of if we reach a certain level of GDP growth and economic activity increase and investment Intensification, then there will be less and less need for this specific Program to continue, but it's up to the Central Bank. And so far, they have been they have kept on increasing the program Overall scale when we kind of were getting close to the limits of it.
Okay, fair enough. Thank you.
I see.
Thank you. The next question is from Gabor Kemi, Autonomous Research.
Hello. Just a quick one from me on fee income, which was growing, I think, in the mid single digits In the Q1, I think you previously talked about fees growing in the at the rate of the nominal GDP As a run rate, is this guidance still valid? And when do you think we are heading towards
Yes. I mean, well, look, I mean, year on year, we grew again 5%. And given that we had a recession during this period and we had inflation, I mean, the blended inflation in the group is probably around 2 to 3%. So in fact, during last year, overall, we grew more than the nominal GDP in these countries. But that was a very exceptional year.
And I kind of tried to explain why we did not grow actually more than what we did. And it was specifically one specific issue in Serbia, which was a reclassification. So as you see on this slide, One item, we reclassified from fee income to cost. So that was just one technical item. But more importantly, Russia specifically had a big decline and that's a material amount what we generate In Russia for fee income.
And fee income generation is in Russia is not so much linked to transactions because we are not really a But the generation of new consumer loans, especially, I mean, POS Lens and that was not going well last year. So we had a year on year 11 And decline in volumes and therefore it's not surprising that actually the fee income declined. And then we had Montenegro and Croatia where We had lower levels of transactions, transaction revenues due to lack of tourist activity. So if these countries recover, so if tourism recovers and Russian Volume growth kicks in second half of this year, then we should get to kind of high higher Single digit numbers and if and that and we should be actually able to I mean, if we Again, I mean, last year was the exception because we had recessions and relatively low inflation And we had 5% growth. I mean, this year, obviously, especially second half, we will have Very high GDP growth levels and growing inflation.
So it might happen that for a short period maybe nominal GDP growth can be higher The net fee income growth. But if we look mid term, I think this assumption
As there are no further questions, I hand back to the speaker.
Thank you very much. So thank you for joining us today. Thank you for your very good questions. I wish you all the best. Take care of yourself.
I hope we will have We'll soon see the end of the COVID situation and life can go back to normal. Have a very nice We can and be well. Thank you. Bye bye.
Thank you for your participation. The Q1 2021 conference call is closed now.