Ladies and gentlemen, welcome to the second quarter 2024 conference call of OTP Bank. Please note that this call 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 László Bencsik, Chief Financial and Strategic Officer. László, the floor is open.
Thank you. Good morning or good afternoon, depending where you are, and thank you for joining us today on OTP Group quarterly stock exchange report related conference call. Especially thank you for joining us today, when it's kind of midsummer, and I'm sure there on Friday afternoon, so there might be other potential opportunities to spend your time. So thank you for deciding to listening to this presentation and Q&A. So starting the story on page three of the presentation, which is kind of you can see it, and it's also available on the website, so you can download it as usual. The half-year profit was HUF 508 billion, half consolidated after tax, which I mean, bottom line wise, is less than the first half of last year.
First half of last year was boosted by the two acquisitions, which were concluded in the first and second quarters of last year, and both of them happened with the badwill, and therefore close to HUF 180 billion, kind of one-off we booked in the first half of last year. Now, if we take this number out from the base, then the year-on-year improvement was actually 28% of the after-tax profit. Second quarter was strong, I mean, as well, 12% quarter-on-quarter increase, partially due to lower regulatory charges. As you probably remember, we accounted for the bank tax and the special bank tax for the entire year in the first quarter, and some other supervisory fees and charges as well outside Hungary.
So that kind of had an impact on the base as well, on a quarterly basis. In a year-on-year comparison, the kind of biggest improvement happened in the net interest margin. First half of last year was still characterized by this very excessive, for part of the period last year, close 18% level external rate environment, which did not help our margins. So, we, especially in Hungary, had a lower than usual net interest margin that normalized by the end of last year, and since then, it has been made more or less stable around this kind of 4.3 level. After the closing of the first half, at the end of July, we concluded the transaction of selling our Romanian business after 20 years of ownership.
The final financial impact of that transaction will obviously be seen in the third quarter this year, namely, the gain on the capital ratios. So you can expect, I mean, on a pro forma basis, because obviously we don't know how the balance sheet is going to look like at the end of the third quarter, but if we like, let's say, assume that, the sale had happened at the end of the second quarter, then you can see on this page the potential impact, improvement on the Common Equity Tier 1 and capital adequacy ratios, so in the range of 56-61 basis points. So this is what you can expect to happen, or kind of in ballpark numbers, to happen at the end of the third quarter.
If you look at the, P&L lines, then I think, the most important one is probably this 20% increase in operating profit year-on-year, first half, without the effect of acquisitions and without FX, changes as well. So just a kind of baseline comparable, business activity year-on-year generated 20% more, operating profits organically. And again, this is, to some extent, driven, or to a large extent, actually driven by, improvement in margins. I'm sure you noticed the, the somewhat higher risk cost, in the second quarter. We are not kind of used to these levels of numbers on a quarterly basis, HUF 4 billion-HUF 6 billion. But, part of that, or actually most of it, is related to, to events which are not-...
So much connected to the daily activities, and if we had not changed our methodology from starting from this year, we would have shown part of two items from this 4-6 as one-offs, namely the increased provisions on the Russian bonds in Hungary and in Bulgaria. We started to do that in 2022, and in 2022 it was a one-off adjustment item. And the other one is the impact of the extension of the rate caps in Hungary by another 6 months. And these together had almost HUF 30 billion equivalent impact. But I mean, I'm going to explain it later on when we have a slide about risk cost.
But again, out of this 46, roughly 30, the closest 30 is related to items which under the old methodology we used to have, would have been one of items. Going briefly into the Hungarian story, which is still our biggest single contributor to the group results. I mean, all in all, in terms of after-tax profit, the Hungarian kind of banking activity contribution was 28%. It's still by far the largest, but nevertheless, in terms of share in the total declining part. So the same story is being told on this slide, slide 5, a big improvement in net interest margin year-on-year, compare the first half of last year, and that resulted in a strong improvement in earnings.
On top of the improvement in margins, we had less kind of regulatory charges in the first half of this year than last year. In the kind of right bottom corner, you see the special levies and other charges in Hungary, and here we compare the first half last year to this year. So last year, they amounted to HUF 138 billion. First half this year, only HUF 97 billion, which is still a huge number, by the way, but at least lower than last year first half. The other kind of we kind of explained part of this, these kind of one-offs, non-recurring items here on the left lower slide of the slide.
Especially the impairment of the Russian on the Russian bonds and the and the, which kind of are held by the held by the Hungarian entity, and also the impact of the extension of the the rate cap in in Hungary. My usual two slides about the Hungarian retail and corporate activities. Hungarian retail lending accelerated, especially mortgage lending, and you might remember that last year we had a relatively modest growth in in mortgages, only 4% in a whole year. Now, this year, only in the second quarter, we grew 4% volume-wise in mortgages. And, if you compare the total new contractual amounts, so basically new business generation, first half this year to first half last year, then the increase was 2.6 times last year volumes. Obviously, last year was very low.
After a quite strong 2022 number, 2023 first half kind of then dropped like 50%. But it does seem to be a kind of fast recovery from the last year dip in new mortgage generation. In the other market segment of the retail market, consumer loans is also strong. Last year, this segment actually grew quite strongly. 16% was the annual growth last year, and this segment kept growing. So in the first six months this year, 4% growth. So the kind of growth rate somewhat slowed down, but now we have a much larger base than at the beginning of last year.
Plus, if you look at kind of new volume generation, new volume generation, new contractual amounts in the first half year of this year were more than 60% higher than first six months last year. The corporate story is somewhat different. Still, on a corporate market, especially mid and large corporate, we don't yet see clear signs of revival and the return of client loan demand. And we see some, albeit small growth in micro and small, which is primarily fueled by the still available subsidized products to this segment, mostly this Széchenyi Kártya MAX+ program, which is available for micro small companies. So in that segment, we see some increase in volumes and loan demand, but not much in mid and large corporate.
Now, this kind of picture, maybe not as polarizes in Hungary, but still applies to most of the region. So we typically see higher loan demand in retail than in corporate across the countries in the CEE region. In terms of profitability and actual net profit of net income of our foreign subsidiaries, foreign group members, I think across the board, quite strong performance in terms of nominal profits and in terms of return rates. Potentially with the exception of Romania, which had only 2% return on equity in the first half of this year. But here, the news is again, that we actually concluded this transaction and divested this asset from the group.
Looking into kind of the P&L lines across the kind of cross section within the group and trying to understand a bit more their development drivers and dynamics. Page 9 describes net interest income development year-on-year and quarter-on-quarter, and especially the year-on-year numbers, where appropriate, have been adjusted by the new acquisitions. So where you see actually two numbers, the second number is the without acquisition numbers. So all in all, I mean, without the impact of acquisitions, year-on-year, net interest income in the first half of the year increased by 25%. Hungary is obviously very strong, 50% year-on-year increase. Again, this is mostly attributable to the margin improvement compared to last year.
And then we have the Eurozone or Eurozone-related countries, Slovenia, Croatia, Montenegro, which uses the euro, despite not being in the Eurozone, and Bulgaria, which is already in ERM II, and there's a currency board for more than 20 years, so it's a kind of quasi Eurozone country in terms of rate environment at least it is. And as you can see, strong 20+ percent typical year-on-year improvements, which are again related to margin improvements as well. And but in some countries, obviously, we have strong volume dynamics as well. Now one maybe surprising number here on this chart is the -6% in case of Uzbekistan Ipoteka on a quarter-on-quarter basis. So the second quarter was 6% lower than the first quarter in terms of net interest income.
Now, this comes from primarily from volume dynamics. We in order to kind of pile up some liquidity for future expected loan growth, financing in local currency, and partially just strategically to reduce the loan-to-deposit ratio, you will see that deposit growth was exceptionally strong, and at the same time, basically unrelated to this, but loan growth was quite modest, which is a big change compared to the second half of last year and the first quarter, especially in retail. And that's because we just sold so much loans in the previous quarters that we had to kind of slow down, in a way, artificially, our loan production in order to catch up with operations, basically, with the IT and organizational capabilities of servicing and managing these loans.
So that's a temporary situation, and hopefully we can kind of change back gears to very high gears in the later part of this year, maybe fourth quarter. By then, we should be able to address most of these operational weaknesses, so to say. So the market is still quite strong, so in a way, it's sad that we cannot keep pace with it, but that's the reality at the moment. Margins on page 10 more or less reflect the same trends. So strong improvement in Hungary and in the euro-related countries, and in Uzbekistan, a decline in margins due to increase in deposits, and by the way, deposit rates increased as well. So that's how we managed to get more volumes in.
So that actually resulted in lower margins. On page 11, you see the kind of waterfall explanation of the quarter-on-quarter change in the net interest margin, which was rather small, altogether 3 basis points. More interesting on this slide, we put up the euro rate sensitivity and the HUF rate sensitivity. I mean, these are assuming a shift, a movement, a parallel shift in the yield curves, in the relevant yield curves, and the kind of 12 months effect or impact of that yield curve shift on the NII, theoretically, assuming a stable balance sheet or stable volumes. And in case of euro, this sensitivity decreased EUR 210 million per year on an annual basis for a 100 basis points shift downward, obviously.
So if the euro rate goes down, our NII goes down by EUR 110 million. And sure you noticed that this is a smaller number than what we talked about a quarter before or six months before. So we are in the process of trying to moderate this interest rate, interest rate risk, primarily by buying fixed euro assets, but also through IRS. But it's still a meaningful and potentially negative situation since the obvious expectation is that euro rates will decline and therefore part of this NII decline, at least on a kind of pro forma basis, is going to manifest. In case of the HUF rate, as similar to the previous two periods, we kind of reached a previous period.
We reached a rate environment where a kind of 100 basis points change would not have a material impact on the expected NII for the next year. So we are pretty much at a low, very low interest rate risk situation related to the HUF part of the book. Now, volume trends. I kind of started to talk about this. So as you can see in the second quarter, overall, volume dynamics improved compared to the first quarter. So the first quarter grew by 2%, second quarter, 3% altogether, and therefore we ended up having 5% growth in the first six months. And this was one of the parameters in which we gave some guidance at the beginning of the year.
We said that we expected better volume dynamics this year in loans than last year. Last year, the total year was 6% growth, so this year, in the first half, we already achieved 5%. So I think we can be fairly optimistic to expect that this 6%, which we had last year, will be surpassed this year. So there's an overall improvement compared to last year, and even if you look between the quarters, the second quarter seemed to be stronger than the first quarter, especially in countries like Bulgaria, Croatia, Serbia, Albania, Montenegro. We see 4-5% overall volume growth just in one quarter. So these are not annualized numbers obviously; these are quarter-on-quarter numbers.
We are very happy to see that in Ukraine, after a relatively long period of decline in loan volumes, we managed to restart lending again. We see demand which is justifiable and makes sense from a perspective. So we started to reignite our lending activities to some extent, albeit from a very low base, obviously, in Ukraine, but in one quarter we achieved 11%. And here you can see this kind of Uzbekistan situation, Ipoteka, only 2% quarterly growth in consumer loans and mortgages, which is much lower than what we were used to in the previous three quarters since we started to own the bank last year at the end of the second quarter.
In Hungary, again, strong, as you can see, 2% consumer loan growth and 4% mortgage growth in the second quarter, and corporate is still negative. This is something I talked about before. Okay, page 13, I covered, and then it leads us to the deposit dynamics, which is again, very positive, especially in Hungary. You may remember that last year, one of our biggest problem was the decline of retail deposits overall on the Hungarian market, so this was not specific to OTP. Actually, the decline was less in our case than in the market, but nevertheless, it was very painful. In one year, between mid-2022 to mid-2023, retail deposits declined by 10%, roughly, in our case, and that had a huge impact, huge negative impact on the margin.
Given that we don't pay much, not just us, most of the banks in Hungary don't pay much on as interest on retail deposits. Now, this trend has changed, and this is crucially important for the future development of our earnings in Hungary. So the first six months, retail deposits grew 5%, and the second quarter, 2%, so that seems to be now a well-established new trend. And the other number, which is interesting on this slide, is I think the strong growth in Ipoteka, I mean, 17% in just one quarter. So this is kind of the development I described earlier. Now, leaving net interest income behind, we reach on page 16 the net fee income details.
Fee income growth without the impact of the acquisitions was 14% year-on-year. And here you can see the per country numbers. Hungary, 13% year-on-year, 16% quarter-on-quarter. The quarter-on-quarter in other countries as well, quite strong, especially in those countries where are more kind of tourism dominated or where tourism is strong. There, we usually have this seasonality that the first quarter is much slower than the second quarter, plus some repricing also happened, especially in Hungary. We adjusted our fee prices in March this year. Given the very high inflation last year in the country, it was also possible.
The other kind of strong increase happened in Hungarian fund management, more than 50, almost 60% growth year-on-year in fee income, and this is just related to the surge in the asset under management in the high rate environment. Fund assets under management increased on the market and for our asset management company, which is by far the largest one in Hungary as well. So this is also kind of structural change. Other income. Now, the other income line is heavily, again, affected by the fair value adjustment. We always have to mark to market part of our assets, namely the subsidized housing loans and the Baby loans. And this exercise results in fair value adjustments up and down, depending on the kind of shape shifts of the yield curve.
So it's not just the increase or the decrease or the shift, it's also the shape of the yield curve which affects the fair value adjustment, and last year it was a big positive number. For the whole year, it was around HUF 80.5 billion, and a part of that was in the first half. This year, in the second half, we had HUF 6 billion positive, but the first quarter was actually negative. So, I mean, so far this year, it's +0, the impact of this fair value adjustment of these loans. And in the second quarter, we received HUF 10 billion dividends from the shares that we own at MOL, or the MOL shares what we own, sorry. That's the Hungarian oil company.
You may remember that we have a share swap with MOL for, I mean, almost, I mean, more than 10 years, for sure, 12, 13 years. And we benefit from the dividends paid by MOL on these shares. Cost dynamics. Cost dynamics was 10% year-on-year without acquisitions. Hungary was 6%, and this is, I think, an important development, that we managed to slow down the Hungarian cost increase from and despite the very high inflation, which we still had last year in Hungary. And then Bulgaria, relatively high growth, but this is related to the very dynamic business activity and transformation work what we do there.
In case of Slovenia, 19% year-on-year growth, organically, but this is—and I mean, Slovenia is to be watched because we expect to conclude the merger of NKBM and SKB are two banks in Slovenia, very soon. So during this quarter, we intend to—we plan to finalize the merger, and then after that, we expect cost synergies to be realized there. So hopefully when we kind of next year, we look into the year-on-year development, of course, we will be able to identify the positive impact of cost synergies being manifest.
Just like we can see in case of Albania, as you can see, it's minus 15% year-on-year for six months, and this is due to the fact that we concluded the merger in Albania close to the end of last year, in November, early December, and we already realized most of the cost synergies during the first six months of this year. Now, risk cost, again, this is an unusually high number, minus, I mean, HUF 46 billion risk cost in one quarter. I mean, whereas in previous quarters we were more used to zero or kind of even plus numbers. Again, if you look at the content of this number, most of this 46 manifested in Hungary is HUF 39 billion.
That 39 includes on the other risk cost line, the HUF 22 billion provision for the Russian bonds what we have in Hungary. Altogether, it's probably an interesting information. So the total volume of what we own of Russian sovereign bonds is HUF 128 billion, and including this latest provisioning, we provisioned 57% on this, so the net value is HUF 56 billion. Most of these bonds are in the Hungarian books, some of them in the Bulgarian one. Now, out of this HUF 128 billion notional amount, HUF 110 billion has not reached its maturity. And actually, these bonds are paying regular coupons. So we received regular coupon payments for these bonds.
Therefore, I mean, this kind of high level of provisioning might be surprising, but certainly there are difficult to identify levels of risk-related future payments and ultimate repayments of these still outstanding bonds. Therefore, in line with the expectations from the Hungarian Central Bank as supervisor, we increased provisioning on these exposures. Now, if the situation doesn't change, so if it continues as it is, that we will continue to receive coupon payments and hopefully also full repayment of these bonds might be expected. And in that good scenario, obviously, most of these provisions will be written back, but that is difficult to foresee and certainly at risk. And therefore, I think it was a prudent conservative decision to increase provisions on these exposures.
But this is certainly not related to any normal business activity what we have within the group. The other item, which is included in this Hungarian risk cost, is this HUF 5.6 billion provision, which actually appears among the risk cost and not other risk cost, for the extension of the interest rate cap on the variable mortgages in Hungary, which is now 10% of our total mortgage volumes in the country. The remaining part, so the remaining roughly HUF 9 billion is related to coming from basically four corporate exposures, which we classified from stage two to stage 3. Not all the nine, but roughly kind of 6.5. So the most of this is related to four corporate exposure.
In overall credit quality, in terms of, stage 3 ratio on a group level was stable quarter-on-quarter. Hungary increased, as I mentioned, we increased, we moved, certain corporate exposures, a handful of them from stage two to stage 3, and, therefore, the Hungarian stage 3 ratio increased and stage two ratio decreased. Given the size of the Hungarian portfolio, it had actually a visible impact on the group level as well. As you can see, I mean, that's behind the stage two decrease more or less. Coverage levels have not materially declined. On page 21, you'll see the development of our capital ratios. Common equity tier one went up to 17.4.
Capital adequacy ratio actually decreased 10 basis points, and this is due to the fact that we repaid the Tier 2 subordinated bonds, what we issued back in 2019. So they became callable, and we called them. It was EUR 500 million, so that disappeared from our subordinated capital. So therefore had a negative impact on the ratio. Nevertheless, due to the very high level of Common Equity Tier 1, is still a comfortable level of capital ratio. Here you can see on this page as well the kind of waterfall components of the change in the Common Equity Tier 1 ratio, which improved eighty-ba- Sorry, 180 basis points during the period. No, 80.
And 170 basis points was the impact of the profits after kind of deductible dividends, and that kind of shows the profit generation or capital generation capacity of the bank just in six months. On page 22, liquidity remains strong. We did a couple of issuances during the course of this year. Senior preferred MREL-eligible bonds in order to maintain our MREL adequacy given the paying back of the Tier 2 bond, and also we paid back another senior preferred bond what was matured in the second quarter. Or actually didn't mature. Sorry, there was a call date for this as well, because they were all callable as well.
In terms of expectations for the rest of the year, this year, from the perspective of the external environment, does seem to be better and improved compared to last year. This is very obvious from the macro parameters we observe, and we believe that the rest of the year should continue to be supportive. Therefore, we look optimistically in the future, so to say. Potentially the only kind of missing part, from an almost full picture is corporate loan demand growth, which is rather muted, especially in Hungary, but also in the other CEE countries, it's relatively slow. So, that's, that's the kind of next layer what we are looking for, what we are waiting for, recovery in corporate loan demands.
Looking into our management guidance on the last page, we pretty much maintain the expectations what we formulated at the beginning of the year. And the only exception is the net interest margin, where we believe that it's high time to acknowledge much better performance than what we originally expected. Originally, we guided for a similar net interest margin on a group level to last year. That was 3.9%. Now, the first six months is more, it's closer to 4.3%. And that's primarily due to, I would say, two factors.
One is that the euro rate environment remains higher, longer than we originally expected, and the other one is the preferable developments in Hungarian retail deposits, which has a strong impact on our NIM, especially in Hungary, but also for the whole group. So that was it, more or less, a formal presentation. I'm sure you have very exciting and interesting questions, so please ask them.
Thank you, ladies and gentlemen. We will now begin our question and answer session. If you have a question for our speaker, please click on Raise Hand icon or press star nine on your phone's dial pad. The first question is for Gábor Kemény .
... Hello. Thank you for the presentation. Our first question is on buybacks. I mean, your current program is coming to an end. How do you think about launching a new one? And are you planning to cancel the shares which you have bought back? The other question would be a broader one on your capital deployment plans, if you can share your latest thoughts, please. Now, on a pro forma basis, your CET1 ratio is approaching 18%, and you are clearly generating enough profits to support your balance sheet growth. So what is the latest on M&A versus distributions? And the final question will be on the financial transaction tax, please.
You offer this useful guidance on the 2024 impact from the FTT and the windfall taxes. How do you see the effect of all these in 2025? I guess we saw some news on SME fee hikes. I saw today something about raising mortgage rates to 8%. So, it would be helpful if you could give us a sense on what the bottom line impact might be from these measures. Thank you.
Very pertinent questions indeed. Thank you. Buybacks, indeed, we are reaching the end of the previous program, which was started in February. This is obviously something which we consider, so we give a careful consideration to this, question or opportunity. At this event or time, allow me not to say more. I think we will continue the practice which we have done before, namely that we announce buyback rounds on the day when we have, if we have, an approval for a tranche of buybacks, right? So I can't say really more than this.
As a tool, this is obviously part of our of the universe, what we kind of consider as a strong element of our capital strategy or capital deployment plan, as you phrased it. But as you rightly said, this has to be put into perspective and together with the potential acquisition opportunities. So we are trying to navigate optimally this field between dividends, buybacks, and well, first of all, organic growth, because organic growth is priority, and organic growth started to kind of strengthen again. Last year, we had 6% growth for the whole year. This year, already in the first six months, loan volume growth was 5%.
So now organic growth is becoming a strong and very well welcomed, obviously, factor in this equation. So first priority, organic growth, and then we continue to actively look at value-creating acquisition opportunities, as we have done during the last 20 years, and they may or may not come, and depending on whether they do come or don't come, we can obviously return more to shareholders in the form of dividends and buybacks. So that's more or less the kind of full picture which has not changed, which continues to be our kind of high-level thinking about capital allocation. In terms of what volumes exactly and when, again, we stick to our previous practice, so we will announce further actions when they become effective. Cancellation, you also asked about this.
That's a bit more complicated process. We need shareholders' approval for that, so we need a shareholders' meeting, an AGM, to approve any cancellation of shares. So I think we are, I might say, and then the next kind of the earliest this can happen is next year, April, to have a decision about this. This we have not so much considered so far. You probably very well know that we have not ever canceled any share. On the other hand, more importantly, we have never, ever issued new shares since the IPO in 1995 and 1996. So the same share count since then, the same number of shares.
So that's, that's something obviously we will kind of consider and think about, but not—this is not something imminent to consider actually due to the kind of more complicated approval process, and also due to the fact that after this buying back this HUF 60 billion, we have roughly 1.5% treasury shares of the total share count, which is not yet a huge amount, I would say. So maybe it makes more sense for us to accumulate and then address the question of canceling or not canceling them.
Transaction tax for next year, indeed, we're told that for this year, it's roughly to increase the impact of the increase of the parameters of the transaction tax translate into HUF 25 billion more transaction tax for the remaining part of this year. Well, this is for six months, so you can imagine that the increase for the whole year next year will be at least double, plus the volume impact coming from the higher volume of transactions. So this is a substantial amount. We are not allowed to pass this through to clients for retail clients this year.
There's no rule against passing it through to corporate clients, and indeed, we are just following the practice of our competitors who started to pass this on to their corporate clients. So we are going to do that, or we started to do that as well, like all the other banks. I mean, how much we can pass on to next year to retail will depend, obviously, on the kind of competitive pricing situation and the competitive moves of our competitors in the country, which I cannot foresee.
Thank you, László.
Yeah.
Thank you. The next question is from Máté Nemes, UBS.
Yes, good afternoon, and thank you for the presentation. I have three questions, please. The first one is on Bulgaria. There, I think you flagged that clearly that there's still an ongoing restructuring at the bank happening. There are certainly some signs you're seeing branches, I think, down 5% quarter-on-quarter. Costs are still around HUF 25 billion in the second quarter. I'm just wondering if you could give us some indication here, what the timeline is, and what sort of decline we should expect in cost base, i.e., how much of restructuring costs are in there, and then what is the savings that you expect as a result? The second question would be on corporate loan growth.
I'm just wondering if you could talk a little bit about the potential recovery of loan growth, not only in Hungary, but perhaps across the entire region. What would be the preconditions for a sustained pickup here? And the last question would be on the Russian bonds. Could you comment on the remaining maturity of these bonds, and also what could trigger further increase on coverage of these bonds? Thank you.
Okay. Bulgaria, I'm sorry if I used the word restructuring. That's probably not the right word. It's more transformation, and this transformation really started, when we brought DSK Bank back in nineteen, and we started the merger. Since then, we have been in permanent transformation, so to say. And I think we are kind of building a very modern, very competitive bank. It's not about cost reduction or cost cutting in a way. I mean, actually, cost efficiency is extremely good, if you look at the cost-to-income ratio of Bulgaria or if you look at the return on equity in Bulgaria, the current one, we make 22% return on equity, and then, and this is a quasi Eurozone country.
Last year, it was 24%. Capital requirements are extremely high due to being directly supervised by ECB directly, and the Bulgarian National Bank is, as an additional layer, they keep on piling up capital requirements on us. So, we have actually the highest capital requirement, and therefore, very low leverage in Bulgaria, and despite of that, we make this 20%+ ROE, and if you look at kind of growth, last year, loan volumes grew 20% in Bulgaria, right? This was the highest by far in CEE, and then potentially, I think the highest across Europe. I don't think there are very many banks growing organically. I mean, big systemic banks. We have. I mean, we have the largest loan volume in Bulgaria.
So 20% last year, and in the first half of this year, it's 88%. Again, I think quite, quite strong. So it's a very rapid, strong growth, which is very profitable. So we are quite happy with all the ratios, including operational efficiency. But what we do in order to maintain this dynamics and ensure that the bank will excel in terms of performance in the future, mid-long term, we are transforming more or less everything, right? I mean, only part of this is visible for the outside because we do a lot of work on improving our digital channels. For instance, we changed the mobile bank, the internet bank, and this is going to come to the market at the end of the year.
That will be a huge improvement compared to what we have. We basically do process reengineering in a way that we try to digitalize everything end-to-end, front to back. Change the organizational kind of... It's agile, but it's a kind of advanced agile approach, what we have, and a lot of other stuff. I mean, not to mention the fact that since October 2020, we have been under the direct supervision of ECB, because Bulgaria entered the Single Supervisory Mechanism, and we are a systemic bank there, but we don't belong. Our Bulgarian bank belongs to the OTP Group, which is, as a group, supervised by the Hungarian supervisor, the Hungarian National Bank, and not by ECB.
All the other systemic banks in Bulgaria, on their group level, are supervised by ECB. So there's not much kind of local presence there from ECB, unlike in our case, where we have a kind of daily very fruitful, actually, work with ECB. And it has been quite a quite an exciting story so far to change the bank, the way it operates, according to their requirements as well, and at the same time, achieve these levels of growth and profitability. So it's not, it's not about cost saving, and it's not about fixing a problem. It's about further transformation to create the best platform for future high performance in Bulgaria. Corporate loan growth, sustained pickup. That's difficult.
I mean, ultimately, corporate activity in Central Eastern Europe is closely related to core European economic development in general and corporate activity in general. So here we are, to a large extent, in the hands of Germany, Austria, and in general, core Europe. And I wish I could say that I'm very optimistic on the development potential of core Europe. I'm not. So that means that I think that it—I mean, it is a general problem for Europe, obviously, and it is somewhat a problem for CEE. But the good thing is that CEE has other levers.
There's still convergence, there's still local demand, which is strong, and there's still loads of FDI coming to the region, especially due to this kind of supply chain rearrangement, as capacities move back to closer to Europe. And then also, in case of Hungary especially, we see a bunch of investors from Asia bringing in substantial FDI. So I think, CEE, has a better positioning than core Europe in terms of growth potential, but a strong underlying driver behind this is still, and will be in the future, the performance of core Europe. And I mean, kind of we might have different views on that. I'm not very optimistic, to be honest, but I hope I will be proved wrong.
So, we expect gradual improvement in from a low base, albeit. So the second half, we expect to be better in corporate lending than the first half. But, to be honest, I don't know when we can get back to ten double-digit corporate loan growth across the region in corporate. That may not happen during the next six months. Your third question was? Sorry.
It was on the Russian bonds.
Oh, yeah, the bonds. Yeah. Maturity, yeah, I mean, they will start to mature next year, and then it's the next—starting from next year, the next two, three years. That's the kind of gradually or kind of more or less evenly distributed. If the current situation changes negatively, then either because of the legal environment or, in terms of the current, I mean, stopping the payments in form of the coupons or something like that, I'm sure we will have to revisit the situation. But to be honest, my feeling today is that we are quite conservatively provisioned. And if the current situation persists, then it might happen that a big chunk of these provisions, what we created so far, might be released.
Understood. Thank you, László. I appreciate the details on Bulgaria.
Thank you.
Thank you. The next question is from Simon Nellis, Citigroup.
Oh, hi. Hi, László. Thank you very much. Happy Friday, all. I was hoping you could elaborate a bit more on the interest rate sensitivity. I mean, in one quarter, the euro interest rate sensitivity went down by EUR 30 million for each 100 basis point rate cut. So do you think you can bring that down further going forward? And I guess the analysis is kind of on a static balance sheet. Are there any—you know, as you change the balance sheet, you know? I guess that's my question is: as you change the balance sheet, can you further reduce that sensitivity? And then on the Hungarian margin, you know, at what level of Hungarian rates would you actually start seeing pressure on your Hungarian margin, and what is your rate view for Hungary?
And then I have a few other more technical questions, but maybe let's take that one first. Thanks.
Mm-hmm. In this—I mean, it—it—yeah, I mean, the sensitivity decreased because we brought fixed assets, fixed securities, euro-denominated, and we made some IRS kind of deals which further reduce this. Having said that, that's more—that's less, less important in this case or less of a useful tool because it's difficult to kind of make them a kind of hedging hedge accounting subject to hedge accounting. Therefore, big volumes would of IRSs would imply big swings in earnings if there's a mark-to-market event, so we don't want to do them in big volume. So it's basically buying buying fixed securities, euro-denominated, and it's a fixed balance sheet in a sense that it's fixed for the next 12 months, right?
So this is not the same balance sheet that. So the quarterly change includes the impact of changes in the balance sheet during that quarter, right? And fixed balance sheet means that it's fixed at the end of the second quarter this year, and what would be the NII impact if the yield curve shifted first of July by 100 basis points? So that's how we calculate that. The expectation is that it can be further reduced. Yes, so the direction is that it will be further reduced, maybe not with the same big steps, maybe smaller quarterly steps, but the direction should be for smaller amounts for the future. Hungarian margin, again, it's less the interest rate itself now, which matters.
It's much more the deposit volumes, retail deposit volumes, especially, and the stability of retail deposit rates, very important. Those are actually much more important variables for us than the rate itself, unless the rate goes down to zero, right? So that's, but that's unlikely. But if it's like 6, 5%, it's still the same environment. At 2, 3%, it kind of-- it's getting to a different range. But again, it is much more important that we have a kind of healthy and nor- a kind of normal growth of retail deposits in the future- deposits in the future, and then that the retail deposit rates are not going to change on the market in the future.
So these are potentially much more important factors. And then the other thing is that again, there's a lot of noise in the Hungarian net interest margin coming from the fact that it's not just a bank, it's also the holding entity of the entire group. Therefore, a lot of kind of liquidity, which is related to operating the group, is flowing through the Hungarian entity. That's one thing. The other thing is that all the investments into the whole group are all held at the Hungarian bank, and those are not interest bearing. And if you have another big acquisition, that's going to very naturally have another negative impact on the Hungarian NIM. And then recently, this large issuance of, from our perspective, very expensive bonds, MREL-eligible bonds.
Again, most of the negative impact of those bonds manifested in the Hungarian entity. So those are the other factors which need to be taken into consideration, and that makes the whole picture rather more complicated. That it's not just the Hungarian activities and business related impact, what we have included in the Hungarian margin, but all everything else, which comes from the fact that we are the holding entity as well for the entire group, and now the entire group is much bigger size than the Hungarian entity itself. Yeah, so that was a rather long answer.
No, that's very helpful. Yeah, my technical questions are, you mentioned the expectation for a financial transaction tax next year. Can you give us some hints on what you think the windfall profit tax will be? I guess it's difficult because we don't know the exact calculation, but I guess you have some preliminary kind of ideas of what the government's thinking.
As you rightly said, it's difficult.
Mm.
The only indication would be which was actually communicated by the government, that they want to collect at least as much as they collect this year. And after the assuming this 50% discount, that everyone can apply that, then this year they will collect roughly HUF 130 billion from the whole sector in terms of the extra profit tax. That's what that's their expectation, the government's expectation. So all in all, maybe a similar number for next year. And this year, we I mean, our extra profit tax payments are quite volatile. So to say in 2022, we paid HUF 75 billion. By the way, 2022 was the year when the Hungarian operation was loss-making. So due to all the impact of the war, right?
I mean, all the extra provisions we had to make and the write-offs we had to make. So the tax base of this extra profit tax, actually, 2022 was a big negative number, right? And despite that, we paid HUF 75 billion, and then 2023, we paid 41, and this year, if you assume the 50% discount, then we're going to pay 6.5. Due to the fact that this year, corporate extra profit tax is actually calculated based on the 2022 before tax numbers, which in our case, were actually negative. So OTP Bank was a big negative, and then there are other entities which pay this extra profit tax, like the mortgage bank, our workout unit factoring, Merkantil Bank, our car leasing company, and they pay.
So the reason we are paying at all this year is that these entities are paying, so that's where the HUF 6.5 billion comes from, assuming that we can reduce the HUF 13 billion to HUF 6.5 billion by buying government bonds, which we have, right? And then the other thing, they said that they will move the tax base from 2022 to 2023 profits. Now, the total banking sector profits from 2022 to 2023, before tax, without dividends, grew four times. So they will have to change something in the ratio as well, and, as you said, I mean, we just don't know how they're gonna calculate the actual payment. What we know that all in all, they want to collect at least a similar amount, and they co-- than they plan to collect this year....
and that in order to have this 50% discount or reduction in the tax payment we will have to increase not just the long duration government bond volumes but the overall Hungarian government bond volumes as well. And it's going to be the first 11 months or average volume year-on-year growth. And for both the total volume and for the kind of longer maturity volumes as well we have to demonstrate growth, and 10% of that average volume growth we can deduct from the tax payment. That's and it can be maximum 50% deduction. And this 160 is assuming 130 for the whole sector, assumes this 50% deduction or discount for the for the tax payment for the whole sector. So I don't know.
I don't know how much we are going to pay from this HUF 130 for the whole sector next year.
Okay.
Probably more than this.
Probably more than this year. Yeah, that's what I'm going to say.
6.5. That's, that's very, very likely. Mm-hmm.
Okay. And then just one last quick one on the Financial Transaction Tax. The numbers you're giving, that's gross before any mitigation, right? So you could mitigate that through passing it on some of it to-
Yes
... corporate, corporate clients. Yeah, yeah. Okay. Thank you.
This is tax payment. Yes.
Yeah. Thanks. Thanks very much. That's all for me.
Thank you. The next question is from an attendee joined via phone. Please press star six to unmute. May I ask the name and the company, please?
Hello. This is Robert Joseph from PKO BP Securities. Thanks for taking up my question. I have two, actually. One on the cost of risk. From what I recall, OTP Factoring usually contributed positively, in the amount of between HUF 15 billion-HUF 20 billion per quarter, positively in terms of provisioning releases. Has there been such positive contribution in the second quarter as well? Or if not, has anything changed with regard to the second half of 2024? So that's question number one. The other one is related to, migration out of Stage 2, into Stage 3 exposures in Hungary in the corporate segment. Could you please, give us possibly more color, whether it was concentrated in a specific sector or it was more coincident spread among, different sectors? Thank you.
There hasn't been any kind of change in terms of one-off change or any extraordinary change in the contribution of the factoring entity to the workout entity in Hungary, to the group in terms of recoveries. The only difference is that this is an ever-decreasing number due to the fact that there's not much new production in terms of non-performing loans. So, and this is a very good situation, that quarter-over-quarter they have less and less work to do, so to say, in a way of at least in terms of new inflows. Therefore, this is a structurally declining amount.
But this kind of, you might say, unusually high risk cost in Hungary was not due to the fact that the contribution of factoring in Hungary, our workout unit, was less than originally expected or anything like that, right? I mean, it basically comes from the fact that we continue typically to recover more from stage 3 loans, non-performing loans, than what we provision when they become stage 3. And again, this reflects our conservative approach and the very good work what our colleagues in the workout unit do. Indeed, this increase in stage 3 in Hungary or migration from stage two it happened due to four companies.
One was in the construction sector, and other one is in an agricultural one. The other two, I don't even know. So no, it doesn't seem to be concentrated to a specific sector, and it's not... We don't interpret this as a sign of some structural change in the quality of the Hungarian loan book or the underlying economic situations of our clients or a kind of systemic deterioration. I mean, it's more like if you don't have any defaults for years, then, I mean...
and statistically, sometimes they do happen, and one of these four was actually a more sizable one, but it was already in stage two, so we followed the situation kind of closely, and it was a known kind of quote-unquote "problem." So it was not something which kind of jumped out of the cupboard or something like that, surprisingly. So this was a situation we have identified some time ago as a potentially problematic one.
Understood. Thank you.
Thank you.
Thank you. The next question is from Mehmet Sevim, the analyst of J.P. Morgan. If you have a question for our speaker, please press nine. The next question is from Mehmet Sevim, J.P. Morgan.
Good afternoon, László. I hope you can hear me now. Apologies.
Yeah, I can.
Perfect. Thank you. I had just three questions, please. One, coming back to the Russian government bond coverage. I just wanted to understand what has triggered that increase in coverage at this point exactly? Was it just the central bank asking you? And if yes, on what grounds? Given from what I understood from your comments, not much has changed in the expectations for the quality of that portfolio. Secondly, also continuing with Russia, it seems the business is growing at an accelerated rate now. Loans are up 13% there quarter-on-quarter, almost 40% year-on-year.
So I was just trying to understand the strategy there a bit better, and how you're balancing the business opportunities with the wider concerns of growing so fast, and where you would see the growth in the second half of the year, and maybe next year. If there is anything you can share on that, that would be very helpful. And one final follow-up also on the buyback, and specifically, you obviously said that you'd like to update us once you have the approval by the central bank, if you ask for a new one. And I would assume you'd apply for a new one once the current one concludes. So could you share any qualitative information on the approval process by the Hungarian Central Bank? Specifically, how long does the process usually take?
What's their view on buybacks in general now, especially if you ask for a bigger one? That would be very helpful. Thanks very much.
Why now? I think this is a relevant question, and indeed, if you just look at the specific situation of these bonds, nothing has changed, other than they kind of paid another quarter of coupons. I mean, I think there are different ways to interpret the situation and the potential future risk of the situation becoming better or worse. Our supervisor took a particularly conservative approach regarding this, and they may be right. So we are not against conservative provisioning approaches. So we understood their position, and we agreed with their position, and therefore we provision more.
But you are right, that I mean, nothing new and especially nothing negative new information appeared specifically related to these bonds. And the overall developments in the geopolitical global situation, and the war itself, and the potential outcomes and ramifications to what extent they change for whom, that's another topic. But again, we basically discussed it with the supervisor again, and we agreed that their more conservative approach was something we could completely accept, and therefore we provision more. Having said that, in a reasonably good scenario, it might happen that we will be able to release these provisions, which will be a good news, but again, we might have to provision more.
So this is difficult to—I mean, there's no scientific method kind of to exactly calculate the right level of provisions. It's not like having a big, I don't know, mortgage volume, which you have observed for 20 years, and then you can pretty much reasonably well forecast the credit quality development. Russian strategy. First of all, I mean, our first goal and our first priority to comply with every rule and regulation which is applicable to this entity in Russia and to our activities in Russia. So that's by far the most important strategic goal, so to say, including all the compliance and the ALM related requirements.
Beyond that, when the war started, we decided to limit the scope of our activities to activities which are potentially the least problematic in a geopolitical situation like this. So we immediately stopped corporate lending, and since the beginning of the war, our corporate loan volumes have gone down by 85%, and they will continue to amortize. We are not giving new corporate loans. And then, more than a year ago, we stopped all dollar transactions. Other banks continued to provide to their clients dollar transactions, and they just, as far as I know, they very recently started to talk about stopping them, so we did that more than a year ago. Last year, we also limited euro denominated transactions to counterparties within Europe.
We reduced the number of branches by almost 40%. We reduced the number, the headcount by 25%. And then overall, we tried to reduce our exposure. And the most relevant measure of exposure is the equity, the assets, the financial assets, what gets stuck in Russia, because there are capital controls and the altogether, the foreign-owned banks still have like EUR 9.5 billion equivalent of, or something like that, equivalent of equity in Russia, we have EUR 800 million out of that, so ours is like 8% or of the total equity, stock, stock in Russia. So one of our kind of business objectives is to reduce the exposure.
That first we did in 2022, we managed to pay back all the funding, which we used to provide to our Russian entities. So RUB 11 billion ruble group funding was paid back back in 2022. And then last year, the bank paid RUB 13.5 billion ruble dividend, and this year, RUB 13.6 billion has been approved. And strategically, this is probably, from our perspective, the third important element. So fulfill all requirements, limit the scope of activities to the kind of least sensitive ones. And then in our case, this is just doing very basic plain vanilla consumer lending, and even within that, the kind of most plain vanilla point of sales loans.
So this is kind of low mass market activity, and we are tiny in Russia. Our loan market share is 18 basis points. So from any perspective, we are not important. So on the lending side, we do this, and then on the deposit side, we collect, we allow deposit placements. I mean, there's no legal way to limit deposit placement of clients in Russia. And this is actually quite profitable business given the rate environment in the country. I mean, it was just the central bank rate was recently increased from 16%-18%. And deposits are actually exposure to us, I mean, towards us, right? Not for us to clients in Russia.
So, again, kind of limit the scope of activities and then, and then kind of get back as much equity as possible. And so far, again, we managed to pay from Russia, RUB 27 billion ruble. That's close to 50% of the equity what we had when the war started, actually. Obviously, we pay a withholding tax. There's 15% withholding tax on that, so this is the gross amount, and we receive 15% less... So, that's more or less the approach what we have, right? Trying to reduce exposure by taking money out from the bank. And in order to do that, we obviously need to have a level of activity in the country.
We need to remain active as a bank in order to get approval for these dividends. And that activity, we limit a lot in terms of scope. We don't do corporate lending, we don't do mortgages, we only do this kind of mass market consumer lending, and even that is a very small size compared to the Russian market itself. Buyback. Again, the only thing I said about future buybacks is that it's part of our kind of capital management tool set, and it's something we have considered before, and we did, and we will continue to consider.
But there's no guarantee that we do that or not do that, and obviously there's no guarantee whether we get an approval or we don't get an approval, should we apply for them, right? I mean, when we last time applied in January for this HUF 60 billion buyback, that was approved. Obviously, whenever we apply, we have to provide a detailed business plan, a detailed capital plan, and answer questions. So there's usually quite a thorough kind of analysis by the central bank before they give any approval for a buyback or a similar equity transaction. But they are very kind of rational and sensible, so usually we have a similar understanding of situations.
That's great. Thanks very much, László.
Thank you.
If you have a question for our speaker, please click on Raise Hand icon or press star nine on your phone. As there are no further questions, I hand back to the speaker.
Thank you very much. Thank you for joining us again on this warm summer Friday afternoon. I'm sure many of us are before holidays, so if you are like that, I wish you a very happy holidays. Have a good rest. And if not, then anyway, just enjoy the rest of the summer, and I invite you back to join us when we present our third quarter results. It should be, I think, on the eighth of November. So hope to see you or hear you back then. Thank you again. Goodbye.
Thank you for your participation. The second quarter 2024 conference call is closed.