Ladies and gentlemen, welcome to the Fourth Quarter 2024 Conference Call of OTP Bank. Please note that 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 László Bencsik, Chief Financial and Strategic Officer? László, you may begin.
Thank you. Good morning, or good afternoon, depending where you are. And thank you for joining us today on OTP Bank's 2024 Annual Results Presentation. We are going to follow the usual format. So you have the presentation available on the website, which you can download, or alternatively, we are also showing it parallel to the Chorus Call. And I'm going to do a hopefully short presentation, and then you will have a chance to ask your very valuable questions. So let's start on page two. The highlights have not changed so much. We updated them. So dominant position in Central Eastern Europe, leading position in five countries, or kind of second position, and four times four-fold increase during the last 10 years through organic growth, and altogether 14 acquisitions, actually 13 bank acquisitions and one portfolio purchase during the last 10 years.
This resulted in a portfolio which is 44% Eurozone plus ERM II, which is Bulgaria. By the way, the good news about Bulgaria is that there seems to be now an unequivocal commitment from both sides, it seems, to introduce the Euro from the 1st of January. This is our strong assumption now that it's going to happen, and we are preparing heavily for that event. 76% within the EU. A pretty well-diversified, and I think from a risk-return perspective, optimal group setup. Profitability continued to be strong. A kind of minor decrease year on year, if we adjust the 2023 numbers. Nevertheless, I think there has been a much bigger adjustment in the cost of capital, given the expected return, given the normalization of the rate environments across the group.
Very strong liquidity position, very stable and strong capital position, as you can see from these numbers. And portfolio quality continued to improve. So Stage 3 ratio year-on-year decline by 70 basis points to 3.6%. And we remain committed to ESG goals. On page three, you can see some more details regarding our financial performance. So the total profit exceeded HUF 1.5 trillion . So it's HUF 1,076.5 billion . And if we adjust 2023, with the clearly one-off impact of the two acquisitions we made, which had positive contribution, and the planned sale of the Romanian bank, which had a negative contribution in 2023. And then compared to that basis, the year-on-year improvement was 19%. And that resulted in this 23.5% return on equity, which is slightly less than the adjusted 24.9% in 2023. But that's mostly because our leverage decreased.
I think we are one of the least levered banks in Europe. Our leverage ratio is well above, actually, 10%. And as you can obviously, this is also reflected by, or in the very high capital adequacy ratio. So I mean, this decline in return on equity is attributable mostly to the denominator, the increase in equity and the decrease in leverage. Net interest margin improved. So that was kind of one of the biggest improvements during 2024. And this is, you will see later in the presentation, that this is almost exclusively due to the improvement in the Hungarian, the core Hungarian net interest margin. On top of the margin improvement, we also had loan growth of 9%. And these together contributed to roughly 17% increase in revenues. And total cost growth is 11%.
Operating ratios improved, and the cost-to-income ratio therefore actually decreased to 41.3%, which is in a way a record low in our kind of recent, or not even so recent history. Risk cost rates were pretty much similar to the 2023 level in the same ballpark. And as I said, the Stage 3 ratio actually decreased, went down to 3.6%. Now, these good numbers, again, Hungary last year, there's kind of increasing contribution coming from the improved margin. But overall, the structure of the group is such that most of the profit is coming from outside the country. So almost 70% was attributable to outside Hungary operations this year. Next page, you can see page four, the kind of P&L lines. And again, in 2023, we acquired two banks, but one was in January. So that doesn't disturb so much the numbers.
The Ipoteka acquisition was actually at the end of the first half. Plus in 2024, August, we sold one of our businesses, namely Romania. Therefore, there's some noise in these unadjusted numbers. If you adjust them, if you take out Uzbekistan from 2023 and 2024, so two years, and Romania from 2023 and 2024, then you actually have this year-on-year organic, so to say, FX-adjusted growth rates. And that is slightly less revenue growth, 15% compared to 17%, which is the unadjusted growth. And the profit after tax growth was only 10% in this. If we look at the numbers from this perspective, as opposed to almost 20% when we take into consideration the Uzbekistan acquisition, Ipoteka Bank, and also the sale of our business in Romania.
If you look on a quarterly basis on our numbers, which were not so much affected by acquisitions or divestitures, then kind of good 5% growth in terms of revenues. And I think the cost growth was seasonally, as usually, high, but maybe not as high seasonally than it used to be. And therefore, the cost-to-income ratio in the fourth quarter went up only to 42%. And in the previous quarter, third quarter, it was only 38%. So that shows that, I mean, the kind of level of improvement in our efficiency ratios due to the last couple of years' strong organic and inorganic growth rates. A few words about Hungary specifically and our core operations there on page five. Again, I think the most notable improvement here is in the net interest margin went up, kind of yearly average from 2.3%- 2.9%. That's a huge improvement.
But two important factors here. One is that the rate environment went back to the range for which we kind of optimized the balance sheet, so to say, or the asset liability position. You may remember that at the beginning of 2023, first half, the rate environment in Hungary was above 18%. And a few years ago, maybe four years ago, it was more like 30, 50 basis points. So it almost increased. But now we are back to this 6.5%, which is well within our kind of the range for which we optimized the balance sheet, in fact. So this is a convenient rate environment in a sense for us. And therefore, the net interest margin kind of went back to the levels where it used to be before this extreme rate hike.
The other kind of very unique and actually very negative development was between mid-2022 to mid-2023. You might remember in that period, retail deposits actually declined in Hungary, which was unheard of. It has been unheard of for the last 35 years in Hungary. And in just one year on the market, there was more than 10% decline. Our market share went up, but nevertheless, our volumes went down as well. And that was obviously very negative for us in Hungary. But that also recovered. So starting from the second half of 2023 and actually 2024, we saw a quite healthy Hungarian retail deposit growth. So that factor as well kind of recovered and contributed to improved margins in Hungary. Unfortunately, these special levies and policy costs, so to say, in Hungary remained quite elevated.
And the even worse news is that, which we already talked about, that this year we are going to pay even more than last year. These numbers, we were informed, I mean, the transaction tax was increased. The tax rates were increased last summer, 2024 summer. And the windfall tax was also extended last year into this year. So unfortunately, we have to increase our contributions, extra contributions to the budget this year. There was this kind of other one-off, this HUF 112 billion, which only appeared in Hungary. This is really an accounting kind of number. When we finalized the merger, when we concluded the merger in Slovenia, we had to mark to market, increase the book value of the investment of the previous, the first acquisition, SKB Banka in Slovenia.
That increase in the value, the valuation of that asset trade to the one-off result, which only appeared in the Hungarian book. That was obviously during the consolidation, it cancels out. This is something you have to correct, I think, the Hungarian numbers in order to have a clear picture. Two more important kind of items to understand the Hungarian profitability development were the fair value adjustments on the subsidized products in Hungary and the impairment on the Russian bonds, which we have in the Hungarian books. We have not implemented corrections. This adjustment or adjustments, so the adjustments adjusted number is 270, doesn't include these two items, the 23 + and the - 34. But nevertheless, these were kind of meaningfully material numbers.
This mark to market kind of value adjustment, fair value adjustment on the subsidized loans, in 2024, it was HUF 23+ billion , which was actually a much lower number, as you can see, than what we did in 2023. Again, in 2023, it did not appear as an adjustment either. The kind of uplift coming from this fair value adjustment was much less in 2024 than in 2023. Plus, we had this negative item due to the encouragement of our supervisor in Hungary, which we agreed with because we always like to be more conservative on provisioning than less conservative. We increased provisions for the Russian bonds. The impact of that was HUF -34 billion l ast year. Two words about the segment's performance in Hungary. Retail did very well. Especially retail lending was strong. So mortgages, contractual amounts more than doubled compared to 2023.
I mean, obviously, 2023 was a rather kind of low number, but nevertheless, the recovery was faster and potentially stronger than we originally expected. And the other good news was that despite actually quite high basis in 2023, there was a further 65% growth in the contractual amounts of cash loans. And this is a quite profitable product. And the good news is that we managed to increase our market share in this cash loan segment close to 50%, which is, I think, a very formidable achievement. And in the meantime, we continued to increase our market share in retail deposits. And again, in Hungary, that's the other quite profitable product, retail deposits, because the interest rates are actually quite low on these. Corporate, I mean, this was one of the issues back in 2023 that there was not much corporate loan demand.
Loan volumes actually declined in 2023. Now, 2024, and especially the last quarter, as you will see in the detailed volume dynamics pages, started to increase. It seems that we have a trend, a changing point of turnaround in the overall trend of this segment. The total Hungarian numbers did not increase last year because we had one loan which we paid back, that the client actually paid back, which was not to Hungarian clients. It was a Slovenian one, a quite large exposure, which was paid back. But if we adjust with that, then actually we had 5% growth last year in corporate loans, which is, again, a very positive development and hopefully will continue into next year. This positive trend will last. At the same time, we managed to slightly improve our market share in corporate in loans to Hungarian corporates.
As you can see, it was 19.5%, the second highest closing level ever. After this short summary about the Hungarian situation, let's have a look at the foreign outside Hungary operations and their results, and as you can see, in terms of profit contribution improvement and most importantly, ROEs tend to be quite positive, so we have the Eurozone or quasi-Eurozone countries at the top, Bulgaria, Slovenia, Croatia, and given the cost of capital in the kind of Eurozone countries and the risk profile is quite admirable levels of return on equity. Serbia did again very well after 2023. 2024 was a very strong year, so we have strong growth and the new kind of strategic focus on deposit collections and transactions and so on and so on, so this seems to pay out. Uzbekistan, 30% return on equity.
Obviously, the rate environment here is much higher and the cost of equity is much higher. But nevertheless, this from our perspective is a quite good number, given that this was the first full year after the acquisition. And already in the first year after the acquisition, we made 30% ROE. Despite the fact that we had strong operational challenges, we had to work very hard to improve the operational, especially IT environment in the bank in order to make it capable to service the very high level volumes, which are potentially possible given the strong demand on the market, especially consumer loans.
These results we achieved despite the fact that we had to kind of rein in or kind of limit in a way our lending activities in consumer loans because of these operational weaknesses, which we managed to improve after a lot of extra costs and extra investments, actually. We are starting this year with a much better level of operational capabilities. I expect a kind of step up in our ability to sell new consumer loans. Hopefully, there will be another step up somewhere at the second half of this year. Then I think we will fully, by then we will have fully caught up with the kind of service leaders on the market. Ukraine, again, did very well despite the 50% corporate rate.
Just like in 2023, in 2024, the corporate tax rate was doubled from 25% to 50% at the end of the year. By the way, if you look at the quarterly numbers, you will see that due to this, and only due to this, actually Ukraine was negative because we had to book this additional tax for the entire year in the last quarter, fourth quarter. And even our smaller businesses have been doing reasonably well, or actually quite well, close to or above 20% ROEs, Montenegro, Albania, Moldova. Well, if we look into NII improvements, again, 20% FX adjusted, very strong growth in Hungary, as you can see. But potentially more interesting is the NIM, the net interest margin development, as you can see on the following page.
In fact, if you compare the quarters, so the last period from 2023 with the last period of 2024, the margins are remarkably similar. So this year-on-year improvement actually happened back during 2023. So most of the margin improvement actually happened between the first quarter and the last quarter of 2023. And during 2024, the margin has been pretty stable with some kind of internal changes. Some of the factors changed or the different margins. There were some further improvement in Hungary, as you can see. Whereas primarily in the European countries, Bulgaria, Slovenia, Croatia, but I would add here kind of Montenegro as well to some extent, and even Serbia, where quite sizable shares of the volumes are in euro denomination, we see a margin erosion. And that's due to the lower euro rate environment. So these are the kind of two major factors.
One is kind of a gradual improvement in Hungary in margins, and on the other hand, a headwind and pressure on the euro-related part of the business, and the two and a kind of favorable composition effect given the higher growth rates in the higher margin countries, so all these kind of three factors together resulted in a pretty flat year kind of fourth quarter year-on-year group margin level of 427. The following page further illustrates this. On page 11, you can see that if we compare the 2023 average margin to the 2024 average margin, almost all of the improvement came from Hungary, the Hungarian core, but again, that improvement actually happened between the first quarter and the last quarter, the fourth quarter in Hungary in 2023, so, in fact, during the 2024, there was quite much smaller change as we saw on the previous page.
In terms of sensitivity to rates, there was a further small decline in the euro sensitivity. So now it's around EUR 90 million annual NII in case of 100 basis point decline in the euro rate. Now, technically, this number will probably not go so much lower. So it's likely that it's going to stabilize at this level. Also because we are less concerned given the last few weeks' developments, especially the last week developments about the risk of the euro rate to drastically collapse. I think that risk has decreased given the new initiatives while we see across Europe. And we believe that's fundamentally a good thing. The HUF rate sensitivity remains quite low. So it's almost it's kind of immaterial around this 6.5% level. But I mean, structurally, obviously, higher is marginally better than lower at these levels. Based on, you can see the performing loan development, 9%.
2023, we had 6%. So considerable improvement compared to last year. And I think almost each country is a very positive story. In fact, it's Slovenia where the loan portfolio didn't grow. But to be honest, the most profitable consumer loans actually grew 10%. And the much, much less profitable corporate portfolio declined. Corporate margins are very, very, very tight in Slovenia. And in Uzbekistan, still at the beginning of the year, we had some corporate loan migration to Stage 3 bucket. And therefore, the performing loan volume declined. So therefore, overall, we have a decline here. And despite some growth in consumer loans, again, this is not the full potential of the market. We had to somewhat limit our growth, organic growth in consumer loans in Uzbekistan. Having said that, mortgage growth was reasonably strong.
But going back to the kind of higher growth market, Hungary mortgages, especially 13%, very strong dynamics. Again, year-on-year, new production growth was more than two times. Consumer grew 10%. That's also okay. And then we have Bulgaria, very strong on the retail front. Croatia, again, very strong on the retail front. Serbia, very strong. Montenegro, very strong. And in fact, we kind of restarted lending or refocused our activities to lending in Ukraine. And then from, albeit from a low basis, but already last year, we achieved 20% loan growth. And in consumer in retail, it was 50%. And Albania, after the merger, which was completed at the end of 2023, in 2024, we kind of 100% refocused on our kind of business activities, clients and sales. And that resulted in this close to 20% growth.
If we look at the quarterly growth rates, then it's actually we see that in one quarter, loan volumes grew 3%. So that means that there was some acceleration in the rate of growth. So this kind of 9% annual growth accelerated during the course of the year. And the fourth quarter was actually 3% just quarterly growth. If we look at deposits, page 14, you can see that overall deposit growth was 6%. And that pretty much kept our net loan to deposit ratio flat year-on-year. So overall, for the whole group, it's 74%, as you can see at the bottom of the table. And while from a profitability point of view on a group level, probably the single most important driver was this 10% growth in Hungary. So this is potentially the most important indicator across all the numbers where we have this drive profitability within the group.
That was a very welcomed return to the previous overall trend after, again, this dip in second half of 2022 and first half of 2023. I think it's worth mentioning Serbia, 17%, and Uzbekistan, Ipoteca, 48%. Both of these countries, I mean, in Serbia, back in 2021, year-end, the net loan to deposit ratio was 135%. This has gone down to 96%. At the same time, profitability improved considerably. That, again, is the strategic refocusing there, which I mentioned, more on transactional transactions, account, salary clients, and fee revenues, which resulted in a much healthier balance of deposits and loans and made this a self-sustaining business and also actually contributed positively to profitability. In Uzbekistan, close to 50% growth. You probably remember that when we acquired this bank, then even kind of end of the first quarter last year.
Just a year ago, the loan to deposit ratio was closer to 300%, more than 280, and this has come down to 178. Again, this is a healthy and very much welcome development, not so much on a quarterly basis here, but if you go to page 16, fee income, above 10% growth, actually 13%, strong across the board. I think that's a very healthy in general trend we're quite happy about. Other income, not much growth. In fact, page 17, flat year-on-year. Again, this is mostly to this fair value adjustment. As I mentioned, when I talked about the Hungarian business, the fair value adjustment in Hungary on the subsidized loan was considerably less in 2024 and 2023. And that resulted in other income decrease, as you can see, quite substantial decrease in Hungary.
But all the other kind of units in the group managed to almost counterbalance that, including the one-off impact coming from the sale of our business in Romania. Operating costs, 11% growth, which is, I think, a pretty good achievement, actually, given that inflation is still strong. But more importantly, wage inflation was last year still strong. And obviously, we have been growing also fast. And in some countries, like Uzbekistan mainly, we have strong investments into the operations of the bank. So that was another factor which increased somewhat the costs. But this cost, page 19, somewhat potentially higher. And certainly, the fourth quarter was higher than what was expected by market participants. But this was not so much the credit risk. It was more the other risk. So the credit risk cost and the credit risk cost rate was, as you can see, almost flat last year.
But the increase came from this kind of other risk cost, namely the provisioning for the Russian bonds, which in 2024, altogether in Hungary and in Bulgaria, was HUF 43 billion. I mean, and that actually increased the amount of provisions behind these loans to almost HUF 100 billion . So it's HUF 98 billion provisions. I mean, this is, I mean, in a good scenario, if sanctions are lifted and Russia grows, and the Russian sovereign debt, then potentially these provisions could be partially or entirely released. So that's a potential upside. But obviously, that's a big if. And there was another kind of larger one-off provisioning in Serbia to one specific client at the end of the year. Close to HUF 14 billion risk cost was attributed to this exposure.
Other than that, more or less kind of stable environment, obviously, in countries where we have strong growth, like in Russia, we had to increase provisions. And likewise, Bulgaria, strong volume growth resulted in a kind of meaningful level, I would say, of provisioning 40 basis points. I wouldn't say it's high, but it's certainly higher than the previous years, rather negative levels. All in all, if we look at portfolio quality for the whole group, there was improvement. So the Stage 3 ratio went down from 4.3% to 3.6%, which is positive. And if you take out the kind of high provisioning level and high Stage 3 ratio level countries, Ukraine, Russia, Uzbekistan, then the ratio year-end was actually lower than 3% without these three countries. There's one negative trend, negative event, so to say. It's not a trend. It's just an event.
On the fourth quarter, last quarter, there was an increase in the Stage 2 ratio, primarily driven by Slovenia and Bulgaria. In both of these countries, we adjusted the IFRS 9 models and the methodologies to somewhat more conservative. The expectation of our colleagues is that these increases in Stage 2 volumes are not going to migrate or are not expected to migrate into Stage 3. So that's more a kind of more conservative view on the existing level of risk in the portfolio. Coverage ratios remain strong, as you can see, where the biggest differences can be observed between the different banks. It's the performing loans, right? So Stage 1 and Stage 2 loans provisioning and coverage levels, that's close to 2% for us. And some of our competitors are much, much lower levels.
And even if you take out provisions from this, the countries where we have higher level of coverage, like Russia, Ukraine, Uzbekistan, the remaining part of the group, which is just Central Eastern Europe, 1.4% on performing loans coverage is typically two times or even much more than our typical competitors. Capital, page 21. We closed the year with 18.9% Common Equity Tier 1 and Tier 1 ratio. And the MREL ratio went up to 30%. So I think very comfortable levels of capital. Having said that, there are some items we have to consider in order to have the full picture. As you can read on this page, the last bullet point in the right lower corner explains the impact of Basel IV implementation starting from January 1, 2025. And as you can see, the impact was 85 basis points.
That's the decline in the Common Equity Tier 1 and Tier 1 ratios from end of December to 1st of January due to regulatory changes, namely the implementation of Basel IV. So this is going to be reflected in the first quarter numbers. There's another expected remaining Basel IV impact, another 1.7% potential increase in these traded assets. But this is going to impact our numbers only in 2030, so five years from now. Having said that, if we had to implement everything now on 1st of January, there would have been an additional 1.7% increase in our RWA, which translates into 30 basis points potential decline in Common Equity Tier 1. So that would be the kind of fully loaded immediate Basel IV impact, 85, which we actually realized, and plus 30.
There's another element here, which may not be on the page, but you can see in our reports that we still have a transitional factor here, an uplift coming from the transitional measures. That's 40 basis points. These transitional measures will phase out during this year. The year-end numbers this year will include another 40 basis points negative. I'm sorry if it's too complicated, but what I wanted to say that the kind of fully loaded impact of the Basel IV, what happened 1st of January, and additional one, which is going to happen 2030, plus the existing transitional measures phasing out during this year, this kind of fully loaded effect would be 155 basis points negative. The kind of fully loaded number year-end last year was 17.35 compared to the 18.9, which was actually the reported fact.
We can also see here on this page. It's probably better explained in a way, visually, the drivers behind the increase last year. And by far, the biggest impact was coming from the profit, eligible profit. And obviously, that includes the proposed dividend payments. So those are deducted from these numbers. And 3.2 percentage points coming from profit. And then there was this uplift from the selling of the Romanian business. We are more or less hedged from a capital perspective on the FX impact. So net impact was zero. And then risk-weighted assets, it's 9%. Performing loan volume growth year-on-year consumed 1.1 percentage points of the Common Equity Tier 1 ratio. And then some other smaller impacts. So that's the total kind of decomposition of the change. Liquidity. We can see our liquidity ratios here. 270% Liquidity Coverage Ratio.
That basically technically means EUR 19 billion equivalent of liquidity buffer above the 100% minimum LCR requirement, so quite comfortable, and you see the call date profile, so the remaining calls, we have done actually calls already during the year, quite moderate 276 coming and 1.1 billion coming next year, so it's a relatively modest maturity profile of what we have. We issued in January a very successful Tier 2 instrument in USD, as you can see on this page, and we may issue in the second half of the year further MREL eligible, potentially senior preferred bonds, but this is not yet decided. I'm sure it will depend on the business dynamics and other numerical factors, so after talking about the past, maybe a few words about what we expect in the future. Overall, our expectations tend to be optimistic.
And in almost all of the countries where we operate, we expect GDP growth to accelerate. For Hungary, we put the government expectation, which is 3.4%. Typically, market participants expect and project less, around 2.5%. But even if it's 2.5%, it's considerably more than the 0.5% what we had last year and the actual recession what we had in 2023. No matter whom you look at and listen to, the expectation is that economic activity is going to accelerate. Bulgaria. Actually, we got just today, the latest number came out, the official number came out for 2024. And that was much more than market expectations. The Bulgarian GDP growth last year was 2.8%. The fourth quarter was actually very strong. We probably had to upgrade our expectations and probably to the range of 3.5%-4%.
And again, Bulgaria finally firmly expected to join the Eurozone, which we believe is going to be very positive for the country beginning of next year. And in all the other markets, we see potential improvements, maybe except Uzbekistan, which is a slight slowdown. But the slowdown is to 5.8%, which is still a very admirable level of growth rate. So overall, we expect improvements in the operating environment. And this expectation does not include major changes in the environment. And I think the kind of major changes we expect to be, if they happen, to be definitely positive. In fact, our expectation is that much sooner than later, we expect to see an end to the war in Ukraine and settlement there.
And that overall can have a very, very substantial positive impact, primarily on Ukraine, obviously, but also in the countries in Central Eastern Europe, which would be close and potentially participating in the strong expected developments and investments in Ukraine. And I mean, most likely as well, the kind of war discount, which was priced into our valuation when the war started in 2022, would also considerably further decline. So in any case, that would be a very positive development. And there's another potential positive impact here, which started to accelerate, actually, during this week. And that is finally, at last, the realization.
We see some signs, or actually, our interpretation of the development in Europe is that it seems that Europe is finding its way back to realizing and recognizing its own interests and maybe even act upon its own interests, which is certainly a very positive development and can fundamentally turn around the expectations and the story about core Europe, so that's a potential third positive impact from a resolution and settlement in Ukraine. Page 24, our former guidance. As you can see, again, we expect a somewhat better operating environment and therefore, the expectation regarding loan growth is that it's going to be somewhat higher than what we had in 2024, so we expect higher performing loan growth than 9%. I think it's fair to expect more or less stable margin. It has been quite stable, actually, during the course of 2024, and we have same expectations for 2025.
Cost-to-income ratio might somewhat decline. I mean, we still expect strong kind of, especially wage inflation, to continue. Portfolio quality, again, especially if we talk about the loan portfolio quality, seems to be stable. And we don't expect strong deterioration here or worsening compared to what we saw last year. And altogether, again, we seem to be on a higher leverage this year than last year and certainly increasing equity volume. So this may lead to somewhat lower return on equity numbers. And our current proposal for dividends is HUF 270 billion, which is a substantial increase compared to what we paid last year. Last year, may remember, we paid HUF 150 billion. But there will be a board of directors meeting in March, which is going to, and that forum is going to decide about the formal proposal to the shareholders who are AGM.
That formal proposal will appear with all the other AGM materials on the 3rd of April. Finally, we included some specific language regarding capital matters. The first one is related to buybacks. We did two, we have done actually three rounds of buybacks starting from beginning of last year to last year and already one this year. Each of them were HUF 60 billion . This process may continue. It's also subject to regulatory approval, obviously. This is what we kind of can say about this or want to say about this. We will continue to announce these specific buyback packages once they are approved by the National Bank of Hungary. Since we have still, despite these buybacks, the accumulated amount of shares is still quite low.
We decided not to formally address the issue of or the opportunity to call or not call back these shares or cancel or not cancel these shares. So that remains open. And we are not making a proposal on this this time. In terms of capital adequacy targets, I mean, it's a difficult kind of topic because we operate on a much higher level than the regulatory requirements. And from a modeling perspective or a fact-based analysis perspective, there's no real reason to keep these high levels, right? The reason we are tempted to have these somewhat higher buffers or much more higher buffers than would be warranted is due to the fact that we want to be considered, continue to be considered well capitalized. And that consideration is typically established on comparison with others, with our peers.
We think that the best way to approach the optimal level of capital adequacy is not so much compared to the actual regulatory requirements, but more to the comparable banks to us. So compared to them, we want to look or be considered as well capitalized and strongly capitalized. And that usually is established on a Common Equity Tier 1 and Tier 1 ratio basis. So that's a kind of anchor for us where others are. In terms of allocation of capital, clearly first priority is organic growth, profitable organic growth, where we continue to explore potential value-creating M&A opportunities. There's nothing new about this. We have been doing this for the last 35 years. And we have altogether 25 years, sorry, last 25 years. And altogether, we acquired actually 25 banks during this period, 14 during the last 10 years.
But in this 25-year period, there was almost we had nine years where we didn't buy anything between 2006 and 2015. So it can easily happen that despite our efforts to find these value-creating opportunities for a number of years, we may not find any. And that's perfectly fine and okay from our perspective. So we don't feel to be pressured to do acquisitions just for the sake of acquisitions. In terms of utilization of Additional Tier 1, this is structurally, we haven't used this instrument for a long time. And this is what we label as a kind of reserve for potential higher or bigger acquisition opportunities. So the size of the bucket at the moment is now roughly, it's close to HUF 500 billion . And the unfilled part of the Tier 2 bucket is another HUF 100 billion .
So altogether, these HUF 2,600 billion, that's EUR 1.5 billion. That's our kind of fundamental reserve for potential larger acquisitions. So should there be a larger opportunity where we could only pay with using these instruments, we would use these instruments to the full extent. So these are some thoughts on capital and capital strategy as such. And with this, and final space, disclaimers, and I think it's particularly important given that we actually shared with you on page 26, we shared with you our expectations regarding this year. So with the disclaimers. And with this, I'd like to finish the presentation and invite you to ask your questions.
Thank you, ladies and gentlemen. We begin our question and answer session. If you have a question for our speaker, please click on the raise hand icon or press star nine on your phone's dial pad.
The first question is from Máté Nemes, UBS.
Hi, good afternoon, László. And thank you for the presentation. I have a couple of questions. The first one would be on interest. Can you hear me?
Yes, we can hear you well.
Excellent. I have three questions, please. The first one is on rate sensitivity, specifically in the Euro businesses. It's helpful to get your estimate on the short-dated sensitivity. I was wondering if you could talk a little bit about the Euro businesses' sensitivity to higher long-end yields by a steeper yield curve just on the back of what we are witnessing in the past couple of days. Is that mainly through the longer-dated part of your rate hedges or fixed rate securities portfolios? And secondly, if you can in any way quantify this for us. That's the first question. The second one.
Sorry, excuse me. I'm sorry. I had to log out and in because my speaker was not working. So may I ask you to repeat the question? I'm sorry.
Absolutely.
Thank you.
Absolutely. So I was asking about the Euro business and specifically the interest rate sensitivity to the higher long-end yields, a steeper yield curve in a sense, just really on back of what we are witnessing in the past couple of days. First of all, is there any way for you to quantify this for us? And secondly, what is this mainly through the longer-dated part of your Euro rate hedges or fixed rate securities portfolio? If you can talk a little bit about the channel here. The second question would be on potential tariffs. I wanted to check whether potential tariffs are impacted or reflected in any way in your GDP growth scenarios or your Stage 2 provisioning as of today.
And if not, is there any way to get the sensitivities on this one? And the last question is on dividends and capital allocation. It's very helpful to get this additional slide, slide 25. You also mentioned that it is possible that you will not find suitable M&A targets for an extended period. In that case, how long are you willing to tolerate quite elevated CET1 ratios even after a Basel IV impact, just given the fact that you're generating something around 400 basis points excess-capital build organically before distributions? And even on a net basis, you're looking at roughly a good 50-100 basis point build just based on your targets. So it seems like you're building capital organically quite fast. How long are you willing to wait for M&A? And what would be your decision process around higher distributions? Thank you.
Yeah. Steeper Euro curve.
I mean, yes, obviously, we can model this. I don't know the kind of sensitivity of the, I don't know, 5- and 10-year point moves up by, I don't know, 50 basis points and what exactly the impact, and it's a kind of, it's complex because then obviously the short, I mean, there's an immediate potential impact if you reprice the entire portfolio, but we have typically the Euro assets, fixed assets, what we've borrowed, they are in the held-to-maturity portfolio. So we are not going to market them, right? So the kind of P&L impact in case of yield curve steepening is not going to manifest in the short-term profits. Obviously, you could still recalculate if you were to buy or replace the entire portfolio, what would be the immediate negative impact and the potential positive.
But given that we also have that the sensitivity is directionally different, right? If the long end goes up, then the immediate effect is potentially negative, but our earning expectations are positive, right? Because the long end goes up because we expect the rate environment in the future to be higher, right? Than our previous expectation. So if we were to do actually a modeling of our earnings for the next 10 years, then I'm not so sure whether the impact would be positive or negative. I would rather say positive, right? So in general, in a higher rate environment within given boundaries, we tend to do better long-term than in the lower rate environment. So if you look at the long enough time frame, then we do better in a higher rate environment.
That's very clear. Tariffs, that's an incredibly difficult question that you asked.
A relevant one, but incredibly difficult. Even keeping track of just the actual tariff rates and customs rates in different countries, U.S. customs rates, is difficult. The potential impact, again, very difficult. And I mean, historically, the experience is obviously very negative with tariffs. And we certainly don't believe that you can increase wealth overall by increasing tariffs. It's quite the opposite. So therefore, we still struggle actually to fully believe that we are going to live in a world where tariffs between strong trading partners and strong politically aligned, geopolitically aligned strong trading partners are going to be very high. It is still a difficult thing to digest.
So in a way, yes, they include in general terms, but technically, this is not a doomsday scenario, right, where we're going to have 25% tariffs on all global trade, which would result in an overall global GDP downward adjustment and potential other very, very negative ramifications. So this is clearly not the kind of worst-case scenario of what we showed here. This is our likely; these are our expectations for this year, assuming certain level of impact coming from the higher tariffs with not kind of fully destructive scenario. And now, our clients are typically not exporters to the U.S. We are typically not financing the large European multinationals. And therefore, on a client level, specific client level, actually, the potential exposure to these tariffs is reasonably low. The trade links, and especially in our client base, are fundamentally domestic or related to core Europe.
Your third question, the targeted level of Common Equity Tier 1 and Tier 1, and how much dividends we're going to pay. The intention is not to kind of pile up large reserves, capital reserves, other than what needed is to, again, to be considered well capitalized. So I think if you just look at our comparable kind of regionally active banking groups, I don't know, Erste, Raiffeisen, UniCredit, Intesa, KBC, look at their Tier 1 ratio, we potentially want to look better in higher somewhat in Tier 1 ratio terms. We don't know how much, I mean, this Basel IV impact, we don't know how much they're going to be impacted.
But even at the end of this year, we don't want to keep much more capital than what needed is for that level of Tier 1 , right, which fulfills this kind of target or desire to remain to be considered very well capitalized. And the specific reserves for potential larger acquisitions, as again, we said on this page, they are the unutilized alternative Tier 1 and Tier 2 buckets.
Thank you, László. I appreciate the detailed answers.
Thank you. The next question is from Gábor Kemény, Autonomous.
Hi, László. A few questions from me, please. The first one is on your net interest margin guidance. Would it be possible to split this out, how you expect the NIM to develop in Hungary, and how you expect in the foreign businesses? And specifically in Hungary, you point out that the developments of retail deposits is a big lever of the NIM.
We actually saw the retail deposits going up in the fourth quarter. So what is the chance that we will see further NIM expansion at OTP Core? And my other set of questions would be around, again, around capital deployment. Just staying with the buybacks, I mean, you managed to complete the first buyback of the year, actually, yeah, what was approved early in the year very quickly. Can you help us size the scope for share buybacks for this year? And maybe you can touch on what was the logic around paying a premium for a relatively larger block of shares back in February. My last is a broader question and actually a follow-up to your previous comments on running with a higher capital ratio for possibly longer. Shall we think about this as an ROE drag longer term?
So in other words, is it a kind of base case that we will see a lower ROE again next year because of leverage falling, or do you see any different scenarios? Thank you.
Yeah. Again, the NIM, and I think in the sense, the last year was again interesting and a kind of good guidance for what can happen during this year. So again, if you compare the margin, the fourth quarter 2023, which was on page 10 actually, to fourth quarter 2024, on the group level, it was stable. Hungarian margin improved somewhat. Not a lot, right? 19 basis points. And in most of the other banks, and especially the euro-driven banks, there was some decline. And in fact, this can continue. So something like that, we expect to continue into this year.
So maybe some further improvement in Hungary, just I mean, based on what you just mentioned, increasing retail deposits and potentially further compression in the euro-related margins across the group. And these two, plus the composition effect, maybe higher growth in countries with higher margins, for instance, Uzbekistan or Ukraine, potentially, can further contribute positively to the NIM. Buyback, I mean, we decided to provide you with this guidance, and really, I don't feel comfortable telling more because we kind of carefully worded these sentences. So what we can say is that we may continue to buy back during the course of this year. And if we do, and if we receive an approval from the National Bank, we announce that tranche on the day when we receive the approval. And excuse me not to elaborate on the potential size and so on and so on.
We were not prepared to give numeric guidance on the potential size of the scope of potential future buybacks, but I mean, maybe you can infer something from what we have done, right? But that's just a sort of guidance. It's just a yeah. No, thanks. Okay. Again, our leverage ratio is above 10%, and it's, I mean, double the European requirements, so this is not optimal, certainly, and we don't want to, so the intention is not to, again, sit on unnecessary levels of capital, and once we see how others cope with Basel IV and the impact on them is, then I think we will have a clear picture, and then we will, again, follow our competitors. I mean, in an ideal environment, our competitors should go down by a couple of percentage points.
To be honest, I don't understand this why European banks tend to have a competition who has a higher capital ratio. We are still kind of small compared to the large banking groups in Europe, especially in terms of size, where profit is getting there, and we are labeled as potentially higher risk, which may or may not be true, but therefore, we are certainly not the anchors, right? So we don't believe that we are the benchmarks for other European groups when they consider where to position their capital ratios. We may get there in a few years, but today, we are clearly not a benchmark, so we have to kind of adopt and adjust to others, and to be honest, I struggle to understand why the European banking sector is so much above the regulatory expectations. I don't understand this.
No, that's all fair. Thanks for the color.
Yes.
If you have a question for our speaker, please click on the raise hand icon or press star nine on your phone's dial pad. The ne xt question is from Simon Nellis, Citigroup.
Hi, László. Thanks for the opportunity. I was hoping you could just help me out with the capital walk in the fourth quarter. Did you deduct the new buyback, I think the HUF 60 billion, from CET1? And also, I guess there was a large dividend deduction in the quarter. But it seems that your quarter one went up more than earnings once adjusted for these items. So just wondering what's driving that. And then also on the risk-weighted asset growth, it was 5% in the quarter. Why was it so strong? I think loan growth was below that. That's my first question.
Wow. No, the buyback, the recent buyback was approved in January, so that was certainly not deducted. The dividend deduction increased because previously, we used a much lower number, which was this European regulation. If a bank doesn't have a formal approved dividend policy, then you have to deduct the previous whatever years. So there was the increase in the expected dividend payments, and therefore, the deduction from capital due to the fact that now we have a management proposal, actually, which is formal. Risk-weighted assets growth, I mean, loan growth was actually 3%, right, in one quarter. And this is like FX adjusted. And so maybe the FX component was contributing to somewhat higher than the performing loan growth. And other than that, I don't know. I don't know other factors.
FX was probably the difference between the HUF. I think the HUF rate weakened pretty much like 3-4% during the last quarter. And that obviously translates into higher HUF-denominated risk-weighted assets. So I think the difference between the 3% loan growth and the 5% was probably coming from this.
Okay. My other question is on Serbian risk cost. You flagged some issues with, I think, a large corporate client. If you could elaborate a bit on that.
I mean, due to bank secrecy, I obviously cannot name the client.
So this is not linked, I guess, to the political unrest there or the protests.
No, it's not related at all to the political risks, but it's related to other more geo political considerations, I would say.
So do you think you'll have to continue provisioning on that exposure?
Fundamentally, no.
And then just maybe last on M&A. So the transaction in the Baltic markets, is that pretty much off the table now, or what's the latest on that?
Yeah, I think enough time has passed since the actually more than that. It's fair to say. I think your asses sment is fair.
Okay. Thanks very much.
Sure.
Thank you. The next question is from Gábor Bukta, Concorde Securities.
Hi, László. Thank you for the presentation. I have a question regarding the windfall tax in Hungary for 2025. So you're guiding around HUF 54 billion in windfall tax. So another HUF 54 billion may be deductible this year. And I'm just wondering how much Hungarian government bonds have been purchased so far to.
Yeah, by now, we believe we have fulfilled the criteria to qualify for this for the reduction in the windfall tax. So this number, HUF 54 billion expected payment, reflects the current situation.
So does it mean that the bond portfolio was lifted by around HUF 500 billion in notional value?
Yes.
Thank you.
Thank you. The next question is from Mehmet Sevim, J.P. Morgan.
Hi, good afternoon, László. Thanks very much for your time. I have a couple of questions, but it's just on Hungary. Do you see risk for any additional government measures this year, considering this is the re-election year or anything else, any signals that you can share with us? Secondly, just on Bulgaria, you mentioned the Eurozone entry, hopefully from the 1st of January next year. What sort of impact should we expect from that? I think maybe a bit positive on the liquidity side because of reserve requirements, maybe, I don't know, negative on fees. How would you see the developments there next year following the Eurozone entry?
Maybe thirdly, just the buyback that you did earlier this year. This is already completed. Is that fair to assume? So it seems like it went a lot faster than the other two that you did earlier in the year. So could you give us any color on that front? Policy measures? We hope not. Having said that, this is not something where that's not in our hands, right? There are two initiatives, what we heard about, or potential proposals from the government. One is that they want to consolidate the deposits of the municipalities, and they want the Treasury to keep those. And that can potentially reduce our municipality deposits in Hungary. There are discussions at the moment about this proposal between the Banking Association and the Ministry of Finance.
If it happens, it is negative. It is marginally negative.
It wouldn't be a huge impact, but it is clearly negative. The other one is the Ministry of Finance started to talk about last two days that the fee levels are potentially high for banking in Hungary, which is, I mean, yes, but transaction tax is also uniquely high. So there's some obviously truth in that that compared to other countries in the region, the clients pay more for transactional services, but there are these excessive, huge, especially transactions-related levies that we have to pay. So that's the reason, obviously. So there might be some discussion about that as well. And again, this is potentially a negative risk, but there's nothing concrete. So it's really fresh. The last two days, there was just a comment from the minister. There might be some discussions, again, in the Banking Association regarding this.
Indeed, I mean, I don't want to deny that this is a risk. Policy risk is potentially one of the biggest risks across the group. And it's, I think, specific to Hungary or specifically concentrated around Hungary, I would say. Eurozone entry in Bulgaria. I mean, the primary impact, as you just said, the reserve requirement is going to go down to the European level to 1%, which is that's going to be a kind of one-off positive. But I think we expect a more fundamental positive impact here. And that is related to the overall business climate and business development. If you take the Croatian example, I mean, the impact of the Eurozone and the Euro accession was quite positive. And we are talking, I mean, really accelerated the growth. The risk profile improved considerably. Investments increased. Market sentiment improved.
So I think people still don't see the potential upside here. And we are certainly fundamentally more optimistic on the impact than people in Bulgaria, to be honest. So I mean, yeah, that will be a one-off positive, which will be mitigated by somewhat lower revenues because we lose the FX conversion margin. But the positive impact from the lower reserve requirement will be bigger. But beyond that, the overall expectation, which should kind of manifest over a number of years, is a much higher and more positive trajectory for the country overall. Don't forget that the leverage in Bulgaria is extremely low. Debt-to-GDP ratio is around 25%. And once they are in the Eurozone, I think they can start developments, which should have been done, infrastructural developments in the country, which should have been done during the last 20 years and has not been done.
So, I see a big upside there next three to five years. Yeah, the buyback was completed. We did one bigger transaction. Plus, I mean, to be honest, we are very happy to see the share price much higher than a year ago, but that also means that the same amount we spent much faster than we spent last year. So that actually creates more in nominal volume, nominal kind of value-wise, more buyback potential, so to say, or opportunity, right? Because we don't so much want to move the market. So a kind of neutral buyback amount can be a much bigger one than a year ago when the share price was lower.
Okay, thank you. Can I just ask if you have an indication of the size of those municipality deposits in your balance sheet? And can I assume these are all in current account?
No, no. No, no, no, no. These are not very cheap deposits. So these are not like Hungarian retail deposits. That's actually a very competitive market. There are few competitors, but they are very fierce. So the total amount is close to HUF 500 billion, but they are not kind of taking away the entire amount. So again, this is kind of fluid, and there's a discussion on this at the moment, actually, between the Banking Association and the government. So in a bad case scenario, and it's going to be implemented only in the last quarter, in the first quarter. So they kind of announced this now, but it's going to be implemented from October. Therefore, the impact, if any, will be relatively modest on this year. And we may potentially lose by the end of this year, if fully implemented, HUF 250-300 billion of municipality deposits.
Okay. Very clear. Thanks very much.
Thank you. Thank you. If you have a question, please click on the raise hand icon or press star nine. Yes. The next question is from an attendee joined via phone. I open the line. You will receive an automatic message about it. Please press star six to unmute.
Okay. Sorry. That's me, Johan from ODDO BHF. If you can hear me, just a question maybe on long-term outlook breakdown by country for 2025. I mean, you mentioned 9%, the targeted level. So what would you expect, maybe particularly from key countries' perspective, like Slovenia, Hungary, but also Bulgaria, Croatia, Serbia? And which kind of outlook for corporate business have you picked in your target? Thank yo u.
Okay. So last year, we had 9% growth, and the guidance is that this year might be somewhat higher.
I mean, certainly corporate, we expect to be stronger this year than last year, and some countries like Hungary, Slovenia, even Bulgaria, were not very strong or rather weak in terms of corporate demand, and in Hungary, in the last quarter, the fourth quarter, started to show some signs of demand, so certainly in these markets, some improvement we expect. Having said that, we don't expect major improvements, so I don't think so, don't expect to double our last year 9% growth, so we are not talking about that, right? There can be marginal improvement compared to the 9% that we had last year, and indeed, this is our expectation, but this is more kind of across the board and includes, for instance, Uzbekistan, where consumer lending should grow much more than the 8% last year, so definitely in Uzbekistan, we expect acceleration.
Also in Ukraine, we expect continuous stronger growth. It's from a low base and on the group level, these are small amounts, but in terms of growth rate, there's some acceleration expected there. Overall, certainly Slovenia. Slovenia was not strong last year. Again, corporate margins low, and we were busy with the merger. We finished the merger at the end of August, and we have a new CEO joining us in a month. So in a way, we were busy last year with the merger, which was very, very successful on time, on budget, approved by ECB, so on. And we are waiting for a very talented new CEO to join us quite soon. So I mean, it's not just a market. It's also from our perspective, we expect more agility and business focus this year than what we projected last year.
But the rest of the countries should either continue as they have done last year or kind of marginally somewhat improved, given the marginally somewhat better operating environment expectations that we have.
Okay. Appreciate your answer. Thanks a lot. Thank you.
Thank you.
Thank you so much. If you have further questions, please indicate it. The next question is from Beata Fojcik. May I ask the company, please?
Sorry. Can you hear me now?
Yes.
This is Beata Fojcik from S&P Global Market Intelligence. Thank you for taking my question. I wanted to ask for your update on your Russian business because I saw in the presentation that Russia did really well in terms of ROE, lending growth, deposits. And if the sanctions - and I know this is a big if - but if the sanctions are lifted, do you expect further strong growth in the country?
Also, my other question would be, if the sanctions are lifted in Russia, would you consider adjusting your business model in the country, for example, going back to corporate lending or maybe increasing the number of branches and basically bolstering up your business in the country? Thank you.
We don't speculate on this, to be honest. That's not in our focus at the moment. We are trying to do the best what we can do in the current very difficult environment in a way. That is basically a threefold kind of strategy. Primary, most important one is to fulfill every rule and regulation, especially sanctions. Then, again, we stop a number of activities, among them corporate lending. So we reduce the scope. Then we try to reduce our exposure as much as we can.
In our understanding, the only way to reduce your exposure is by taking money out. Our bank has been paying dividends, and altogether, 42 billion RUB has been paid during the last two years in RUB. This we try to continue to do. If the environment changes, then we will look around and assess that environment. I don't want to fantasize, right? Because this is something we don't know. I think it's too early to think about that. In a way, I think we are doing now what this bank has been always strong doing. That is basically consumer lending. The fact that we discontinued corporate lending actually helped the institution to focus its resources and activities and management attention to 100% to consumer lending. That is doing actually very well.
I don't feel particular urgency to, even if sanctions are lifted, to go back to corporate lending. I don't think we will ever be a major bank in Russia. That's not—and there are—so it is consumer lending business. That's what the bank is good at and has been good at and serving retail clients. And I mean, we are actually very happy that during these difficult years, the last couple of years, the bank achieved remarkable advancement and improvement in digital services. Now, I don't know, 70%-80% of the sales are purely digital. And they really caught up with the rest of the market, which is quite advanced in terms of digital services to retail. I think this is, if anything, this is probably the most strategic development there to fast improve digital capabilities and retail banking service levels.
And really, we don't spend our time and energy on figuring out what to do in a scenario which we don't know. But hopefully, I mean, the situation will improve, and then we will have more options and more possibilities. And the valuation of the business that we have there might improve. And in itself, those are good things, right? Is that okay as an answer?
Yes. Thank you. Thank you.
Thank you. Thank you.
Thank you. Please feel free to ask if you have any questions. As there are no further questions, I hand back to the speaker.
Okay. Thank you very much. Thank you for your interest. Thank you for participating on this call. And thank you for your very good questions. I hope you will join us during our next occasion in early May when we present the first quarter results.
And until then, I wish you all the best and goodbye.
Thank you for your participation. The fourth quarter 2024 conference call is closed now.