Please be advised that this event is being recorded. Kindly note that all participants will remain in a listen only mode throughout the presentation. Following the presentation, there will be an opportunity to ask questions. At this point, I would like to hand over the floor to Mr. László Bencsik, Chief Financial and Strategic Officer. László, the stage is yours.
Thank you very much. Good morning or good afternoon depending where you are. Thank you for joining us today. The conference for following the first half results presentation. As usual, you can have access to the presentation that we are going to use today on the website that we are also showing you while I'm talking, and the setup is the usual. I will attempt to give you a short summary presentation following this deck, and after that you can ask your questions. The key highlights regarding OTP G roup have not changed so much. There's nothing substantially new on this slide. On page three, you can see the recent results, and there's some noise in the first half results. We already faced this problem during the first quarter. I will show you the details.
Fundamentally, the situation is that there are certain expenses, namely the extra profit tax in Hungary, the bank tax in Hungary, and then other supervisory and deposit insurance fee charges, typically in Bulgaria, which, accounting wise, we have to account for at the beginning of the year. They appear in the full amount in the first quarter, and in this regard, they are not accrued. Now it's even more complicated with the windfall tax, the extra profit tax, because it is first booked as the initial maximum amount, and then as the year goes by and we fulfill the requirements month by month, which are required to reduce this amount due to the level of Hungarian government bonds increase in our portfolio, we can over the year reduce this amount.
In case of the windfall tax, it's not just the accrual problem, it's also the magnitude of this expense which reduces over time as we go along the year. In order to better understand what's going on, we provided you with the numbers which are more in a pro rata or accrual basis and reflect these expenses based related to the periods we consider and therefore probably reflect better the actual performance. I'm pretty sure they reflect better the actual performance. On this slide and some of the following slides, you can see two sets of numbers. The one on the top are this kind of with adjustment or pro rata or accrued numbers. On the lower part, you see in gray the kind of raw numbers which we're reporting. If you allow me, I will try to explain performance following these adjusted numbers.
Based on this, if we compare the first half result of this year to last year, profit after tax grew 10%. The biggest driver of this growth was operating profit. Operating profit actually increased 20% year on year. The reason why we did not have a 20% increase in profit after tax was that risk cost also increased compared to the first half of last year. I'm going to elaborate on this change and the major drivers of this risk cost increase, which is also reflected in the ratios. You can see on this page the four potentially most important categories: return on equity, first half of this year. Again, this prorated return on equity, 23.2%, is actually pretty close to the number we had for the whole year last year, 23.5%. Net interest margin is rather flat, and it has been so for almost two years now.
This is in line with what we expected, in line with the management guidance. Where we see improvement is the cost-to-income ratio, less than 39%. So far, this is clearly better than what we guided for. If you remember, the original management guidance was that maybe cost-to-income ratio can be somewhat larger, higher than last year. So far, so good. It's actually somewhat lower. On the portfolio quality side, there are kind of mixed messages because if you just look at the quality of the portfolio per se, it's actually quite stable. This gradual decline of the stage three ratio has very nicely continued into the first half of 2025. However, we did provision more, so we had a higher credit cost risk post than in previous periods.
Especially, the credit risk cost rate ended up being somewhat higher than last year and definitely higher than the first half of last year. I'm going to elaborate more on this phenomenon during the remaining pages of the presentation. Maybe the more technical details on page four, trying to explain this difference between the reported and the prorated numbers. If you look at the first six months, the difference between the HUF 519 billion which was reported and HUF 592 billion, the number which we explained when we tried to understand the business performance. Here you see line by line, I'm not going to go into details. It's basically reflecting what I just told about this difference. Now let's see a bit more detail. What happened in Hungary in our core business on page five. Again, the similar problem appears in the Hungarian numbers and we adjusted these.
We looked at this prorated number and it's probably better to explain performance following these numbers. Year on year, 4% improvement in profit after tax. Basically, the overall charges increased, especially the windfall tax. Last year it was HUF 7 billion. This year we expect HUF 54 billion. That's a big increase in this regulatory charge. We managed to compensate that with higher operating income and also risk cost increase. Basically, a good growth in operating income counterbalanced the fact that the operating profit counterbalanced the increase of risk costs and the higher regulatory charges. This was contributed by the net interest margin improvement. As you can see, this gradual kind of normalization or improvement of the net interest margin continued. We hit a low level three years ago and since then we have been gradually improving.
The expectation is that some minor marginal improvement can continue to happen in the future. If we follow the next page, page six, there's some further information regarding Hungarian retail. It's going well. Contractual amounts increased 11% in mortgages, 40% in cash flows in the kind of stable market share in deposits, somewhat declining market share in mortgage contractual amounts. That's due to the fact that there's a very fierce price competition. Some of our competitors are pricing the fixed new mortgages below the sovereign yields. That's hard to understand how they can make profits on that. We are not doing this and therefore there's some erosion in our market share, but a pretty small one. Certainly, we believe that we maximize the value potential in this portfolio by doing this.
On the corporate side in Hungary, you probably remember that we had two long years, 2023 and 2024, with very limited or no growth at all. Maybe page seven. The portfolio did not grow and this trend seems to turn around, at least in the micro small segment. As you can see, micro small corporate loans increased 9% in the first six months of the year. These are typically the Hungarian companies and apparently there's some growth in demand, which is definitely a good sign. On the large corporate side of the coin, we also saw 2% growth. This is not yet, I believe, the sign of a major turnaround in the trend there. We still experience rather muted demand from large corporates for new growth. On the back of this increase in the micro small segments, our market share actually improved quite considerably.
We are again almost reached the previous highest number, close to 20%. If we look at the performance of the foreign banks in the group in general, I think we can characterize this as stable in the euro or quasi euro countries, Bulgaria, Slovenia, Croatia, and Montenegro. Certainly, we are facing a kind of margin headwind due to the rather sharp decrease in the euro rate which we have seen the last one and a half years. This obviously created the pressure on margins and this is what we are seeing in these countries, margin erosion, and that to some extent reflects in the return on equity numbers as well. All in all, we are rather satisfied with the performance of our non-Hungarian subsidiaries abroad , maybe just a short detour to the net interest margin story on page nine.
It's pretty flat and you can see the major drivers do not. Hungary is somewhat improving and then some erosion in our Bulgaria . Basically, that's the overall kind of breakdown of the NIM development. In terms of sensitivity, rate sensitivity, the half rate sensitivity continues to be very small, at least in this kind of one, one and a half percentage point range around the current rate which is 6.5% by the way. We expect this level more or less to continue to the end of the year. We don't expect rate cuts in the half rate. There is quite little sensitivity around this level. However, on the euro rate there has been a sensitivity and then we have actually soft loved this. Most of this sensitivity has already manifested because the euro rate has gone down. We are down to 2% and that's already reflected in our numbers.
From now on, the kind of forward-looking sensitivity is EUR 125 million per 100 basis point decline. It's asymmetric actually, so it's somewhat bigger loss if it goes down than the gain when it goes up. This is less than it was at the peak, but certainly not at the kind of historic minimum either. What we have now is basically growing deposits and also now that we are down to 2%, the probability of a further cut is much less than when we were up at 3.5%. Obviously, when we adjust the sensitivity, the rate sensitivity, we do that by modeling the expected outcomes and trying to maximize profits given the different scenarios and their probabilities. Obviously, now another 100 basis point decline in the euro rate is less probable than it used to be two years ago.
We take a somewhat bigger kind of interest rate risk, but it's not that big. I think the minimum was around HUF 9,500 million in terms of volume developments the first six months, 7% total for the group. This is FX adjusted and that's certainly an acceleration compared to last year. Last year the whole year was 9% altogether and this year during the first six months we are at 7%. These numbers are not annualized, so that's the actual growth in six months. The guidance was potentially higher than last year growth rate and last year was 9% for HUF 617 billion. I think we are doing pretty well to fulfill that guidance. If you look into the interesting stories within this, certainly the biggest turnaround happened in Uzbekistan in Ipoteka. You may remember last year the consumer loan growth, which is the most profitable in the market.
This segment was exploding last year. There was an explosion in volume growth last year, but unfortunately we were not in a technical physical state of operations to follow that market growth due to the lack of IT capabilities. Now, due to the very hard diligent work of our colleagues there, we managed to fix the IT infrastructure. It's not complete yet, but it reached the state as a level of development where now we can safely increase new production volumes. It's not just increasing volumes, but it's also opening up to a broader scale of client segments. As you can see, this 4% six months gross doesn't look very high, but if you look at the bottom of the page, first quarter was 0%, second quarter 4%, and actually June was 2%. It's pretty much backloaded, so there's a strong acceleration in volume growth.
I will have some more information on the following page. First, let me just mention one worry about the Ukrainian consumer loan growth, which is another segment. When the war started, most of the banks, including us, slowed down loan production. Somewhere a year ago, beginning of last year, we decided to rekindle, reinvigorate our lending activity and that strategy continues. We are actually growing the consumer loan portfolio and also the corporate and leasing portfolios quite dynamically in Ukraine, obviously still from a low base. The growth rate, I think, kind of reflects our trust in the future of the market there and a certain level of optimism.
Now, page 11, there's some more detail on what happened in Uzbekistan at the Ipoteka bank, more specifically in the cash flow and segment, which again has been the last two years the highest growing and most profitable segment on the market. As you can see, unfortunately our market share declined, stock market share. The good news is that the last monthly figure, June, already showed some improvements. In June, our stock market share actually grew, improved. Here you can see the volume. In June this year, we sold 3x as much as June last year. That's the kind of increased capacity. As I said, it's not just kind of volume and number of loans. It's also our ability to cover potentially higher risk segments or segments where risk management is not straightforward.
You actually need more data, you need more analytical capacity, ability to establish whether you want to or are willing to give a loan to a client or not and at what rate. That capacity to differentiate and to run sophisticated models based on data we managed to develop to the level where we can open up to other segments. Obviously, this development has not ended. There's still a lot to do and this is a continuous effort on this front. The kind of promise from the management team is that market share will continue to grow in this segment for the remaining part of the year. This is not yet just a promise. We already saw that in the numbers at the end of June, the first month after two years or one and a half years when our market share increased.
Regarding deposits, 5% overall growth in the group. Given that we have an 80% loan to deposit ratio, 75%. Nominally, this is quite similar to the loan growth. We had almost, it's like HUF 50 billion higher in nominal terms, the increase in deposits in one year than the increase in loans, despite the growth rate being lower in deposits than loans. Here again, two very important segments on this chart: retail in Hungary and retail in Bulgaria, but especially in Hungary, where in these two countries we pay very low or close to zero deposit rates, interest rates and deposits. Therefore, from a kind of profit generation perspective, these are extremely important segments. Here, 7% growth in the first six months, Hungarian retail deposits. That's a very strong number.
If it continues like this, then further contribute to the net interest margin in Hungary, the red number in the middle of the page, Uzbekistan. Again, I think it requires some explanation. As you can see, this decline. I mean, if you look at the last three quarters, fourth quarter was strong, first quarter was negative, and the second quarter was flat. Basically, last year we increased liquidity. We were quite kind of aggressive in deposit collection in order to create the liquidity base for the local currency lending growth this year. That lending growth actually manifested somewhat later than we had expected last year where we didn't want to sit so much on these quite expensive retail and corporate deposits.
We let some of the volumes go out, and once retail, especially retail loan, but in general loan growth started to accelerate in the second quarter, we kind of stabilized the deposit volumes. This is again somewhat deliberate what happened and follows kind of profit maximization strategy execution. As a result of that, now a bit going to the portfolio quality and risk cost story, page 13. The good thing is that portfolio quality again stable across the group as the history ratio continues to decline. That's very good news and that's in line with the guidance we made that portfolio quality this year may be similar to last year. In terms of the actual quality of the portfolio, we see that now what happened is that we actually provisioned more and increased the coverage on especially underperforming stage one and stage two portfolios.
As you can see, a coverage ratio on performing stage one and two, 1.9%, that's close to like HUF 500 billion provisions on performing loans, which is like, I don't know, three, four normal years of provisions. That's why we have provision for the performing portfolio. This level is, I mean, 3x of Raiffeisen and, I don't know, almost 10 x of KBC. That's quite a conservative approach. Even on this stage three portfolio, you can see that we have been rather conservative in provisioning, which has always been the case for us. We kind of like to be more conservative than less. On page 14 you can see some further detail why the actual risk cost was higher and where this additional provisioning went. We had two lines, two items which were not related to credit risk. One, that the rate cap in Hungary was extended.
That was a HUF 4.4 billion other provision in Hungary and we continue to provision for the Russian bonds in Hungary and in Bulgaria, roughly HUF 5.1 billion additional provisions. With these additional provisions we went up to 79% coverage. Nominally that's HUF 99 billion. If the war was over tomorrow, sanctions lifted, probably this provision would be released. I wish that was the case and the war ended today or tomorrow. That's just short term potential positive impact if this terrible war ends. On top of that we provisioned in Hungary risk on the credit risk on a granular basis on a client by client, corporate client by client basis. The colleagues looked at the portfolio and made an assessment which are the clients who might be negatively impacted by potentially higher tariffs and put additional provisions for the performing and for the non-performing part as well.
This increase in Hungary reflects actually not the general provision increase or not a model-based increase, but a detailed review of the portfolio in terms of potential risk coming from higher tariffs. You probably know that Hungary out of the CEE countries is one of the highest direct export to the U.S. plus obviously together with other CEE countries there's a kind of secondary impact here, especially through the German companies exporting to the U.S. It has a kind of potential spillover effect on many CEE countries including Hungary as well. On top of that in Serbia we had IFRS 9 impairment. In Serbia we adjusted the macro expectations negatively due to the recent kind of domestic political tensions which on top of the global geopolitical and tariff disputes in case of Serbia resulted in a somewhat bigger adjustment. That immediately translated into higher IFRS 9 provisioning.
In Russia as well, it's partially the IFRS 9 provisioning, partially just the increase of the volumes of the consumer loan growth and the kind of relatively high normal level of risk for state on this portfolio which generates an increase in provisioning. Higher risk cost, yes, and potentially higher risk cost rate for the whole year than last year. In this sense we are changing the guidance. Most importantly, we don't see deterioration trends in the underlying portfolio quality. This higher risk cost is not coming from portfolio deterioration; it's coming from extra conservatism and potential forward-looking provisioning for somewhat worsened macro expectations in the region, which I'm going to talk about later on page 15, with some information about the capital situation. 18% common equity Tier 1 and Tier 1 ratios, as you can see in this chart, are well above requirements.
In this water flow, you can see what happened since the end of last year. Eligible profit minus the potential dividends, which are a calculation based on the E.U. directives and do not reflect our intentions for how much to pay. It's not a deliberate number; it's just a result of this calculation. Nevertheless, it includes HUF 132 billion dividend deduction, so 1.4 percentage point uplift. We had Basel IV at the beginning of the year. We talked about this after the first quarter results. FX result in the capital itself and in the risk-weighted asset are more or less hedged, so they cancel each other out. This 7% growth in the total loan portfolio consumed 0.6 percentage point, 60 basis points, of capital. The share buyback, which we accelerated, was HUF 60 billion in the first quarter, and then we received approval for another HUF 150 billion buyback.
We have to deduct this from capital on the day when we receive the approval from the central banks. Altogether, for this year so far, HUF 210 billion deduction from regulatory capital due to share buybacks. There is always this discussion about how high this number is. To facilitate that discussion, we have the following page 16. Here you see some of our peers. As we always say, the most important thing is to be well above regulatory requirements. All banks are above regulatory requirements across Europe. Just saying that is not very informative, and therefore, more or less what we follow is that we want to look good, we want to look well capitalized compared to our peers. Here are some of our peers which we consider relevant. They are the multi-country banking groups who are active in our region where we are active.
Since we don't have alternative Tier 1 paper, for us, common equity Tier 1 and Tier 1 ratios are the same. This comparison we tend to do on the level of Tier 1 ratio, which was 18%. Now if we include the transitional adjustments which are going to disappear by the end of the year, that's 30 basis points. If you load the 18% number with these transitional adjustments, then it's 17.7%. Maybe the 17.7% is the right number to compare on the Tier 1 capital adequacy ratio to these other banks. We look okay, right? I mean, UniCredit is exactly at the same level. Raiffeisen with that Russia after deconsolidating Russia is somewhat higher, Erste is somewhat higher. Obviously, this number does not include the expected decline due to the acquisition they are doing. After acquisition, probably they will go lower than we are.
I mean, KBC and Erste are somewhat lower. This looks okay, right? It's clear that we are kind of at the top of this range, around the top of this range of comparable banks, which is okay. There's still room if we were to acquire a meaningful target to go somewhat lower or somewhat more lower temporarily if it is justified. We like to show some external perspective as well, or we like to look at external perspectives, and the more objective the better. There are two examples here. Page 17. These are the results of the recent EBA stress test. On the previous one, we ranked number four. On this one, we ranked number 13. The ranking we typically look at in terms of the reduction in the common equity Tier 1 ratio in case of stress test scenario. The larger the decline, the worse the performance, obviously.
Here you see how we compare to the same regional comparable peers or regionally active banking groups. We compare well, but the result was the ranking is somewhat lower than last year. It's not because our stress handling capacity declined, it's because others improved. Certainly, as the euro rate is higher than it was when the previous stress test was done, margins are better for Eurozone banks. They have higher profits, so the starting point of a stress test is higher. They have more risk and loss absorption potential because of higher earnings and margins, which is a good sign. In general, our interpretation is that it's good the European banking sector is stronger, more able to absorb losses in case they happen in a stress scenario. The other external kind of source we started to look at, especially last year, is S&P Global Market Intelligence.
They compare the 50 largest listed European banks based on actually a quite broad and relevant list of KPIs. Last year, based on the 2024 performance, we were number one in this list. This year we are number two based on the 2024 annual performance. That's pretty good. I think this is another objective external view on our relative performance compared to some other banks in Europe in terms of liquidity and DCM activity. Liquidity situation strong. As you can see, the ratios: liquidity coverage ratio 230%, net stable funding ratio under 152%, net loan to deposit 75%, leverage 10.3%, very low leverage. These numbers compare quite well and quite conservatively to some of these other banks in the region. Quite modest call date profile as you can see if you compare it to total assets being at HUF 100 billion, well above HUF 100 billion now.
It's much less than a yearly earning what we have to pay back in the following years. Our activity was somewhat muted during the second quarter. We did at the beginning of the year the Tier 2 and then we did basically an offshore Chinese yuan bond. This is not in million euro, this is in million yuan, so it's somewhat confusing but it's in the current. The numbers are in the currency denomination. What you can see there, they are not in the same currency but in euro terms it's around EUR 100 million. It wasn't big. We are trying to divest our kind of funding source and explore potential investors in the Asian markets as well. This is a kind of important step, a few words about the future and what we expect. If we look at the macro forecast, it's somewhat deteriorated due to uncertainty and the tariffs.
That's clearly negative, marginally negative. As you can see, it's typically around 50 basis point adjustment due to the expected somewhat lower growth given by the new global tariffs environment. That has happened basically across all the countries where we operate except Uzbekistan. Uzbekistan doesn't seem to be directly affected negatively by it and growth is by far the strongest there. We're very happy that we are present on that market and started to do very well in terms of performance as well. Hungary 0.6% that's probably the biggest decline. Not too long ago and before seeing the first quarter GDP growth numbers, we expected even close to 2.5% GDP growth this year. Now that's not going to happen for sure. Our best guess today, or best, it's not a guess. It's actually based on very detailed modeling. Our best estimate for the potential is 0.6% GDP growth in Hungary.
I mean, Hungary and Slovenia are not very, kind of, rather slowing down. The rest of the countries, Bulgaria 2.5%, Croatia 2.9%, Serbia 2.8%, Montenegro 2.8%, Albania 3.5%. These are still quite robust growth rates and GDP growth numbers in a number of countries where we operate in the CEE. Finally, a few words about the guidance. I think going through the spec, it's obvious where we had to make some kind of smaller changes to our guidance. The first one related to loan growth, but it may be higher than 9% last year. I think it still strongly stands. After this good 7% performance in the first half, this is a very valid guidance. Flat margins, again, almost exactly flat. This continues to be what we expect. Cost-to-income ratio, we were somewhat pessimistic apparently when we made the guidance and the original budget.
We originally expected somewhat higher number than last year. Last year, 41.3%. Now, given the first half year performance, less than 39%. We modestly put this wording that we expect the cost-to-income ratio to be close to 41.3%. Portfolio quality, I mean, the previous guidance was that portfolio quality or indicators or portfolio quality trends might be similar to last year. Now, we have to clarify and actually break it down into two. In terms of the underlying portfolio quality, we still expect the previous trend to continue and more or less stable quality. Whereas in terms of risk cost and in terms of coverage, we expect somewhat higher risk cost rate than last year. Last year, 38 basis points. Pretty much, this was it, what I wanted to present. I hope it was useful and please ask your questions and try to answer them.
Thank you, ladies and gentlemen. We will now proceed with the question and answer session. If you wish to ask a question, please use the raise hand icon or press star nine on your phone's keypad. Yes, the first question is from Mate Nemes UBS.
Yes, good afternoon and thank you for the presentation. I have two questions please. The first one would be on the Hungarian net interest margin. It's clear we are seeing a quite consistent upward convergence in the margin there, and they're also seeing quite strong inflows on the deposit side, especially retail deposits. Could you talk about your expectations around those deposit inflows, how long those inflows could continue, and what those inflows and perhaps some other factors could mean for net interest margin again specifically in Hungary? The second question would be on loan growth. We are seeing really good loan growth pretty much across the board on the retail side, consumer and also mortgages. What seems to be lagging in some of your larger markets, I guess notably Hungary and Bulgaria, is stronger growth in corporate lending.
I'm just wondering if you could give us a sense what do you see in terms of the pipeline and when could we see more meaningful growth also in the large corporate segment? Thank you.
Yeah, I’m here on NIM again , especially on the back of the retail deposit growth improves and that, I mean we don't see a major reason why this could change. Certainly not short term. Elections are coming, next year is election year. If anything, I think further loosening is possible. I don't see consumer kind of tightening coming in the next 12 months. I think labor market is still okay, not as hot as it used to be but still quite solid, and inflation has kind of moderated. I don't see why this should change next 12 months. If all goes well, this can continue at this rate, but at least somewhat similar. In this sense, we are quite optimistic long and obviously that should translate into kind of marginally, slowly, slowly improving margins in Hungary as well.
Now, long or large corporate in Hungary, again as I presented it, we have this, maybe not this slide but the one which shows the Hungarian corporate growth. If you go back, this 1%, so this 2% in the first half, that's not a turnaround in the trend. It's just noise pretty much. We don't yet see, especially Hungary, this turnaround in large corporate. A very kind of positivity is the micro and small which started to grow, and then these are primarily Hungarians who, yeah, the micro and small companies are not the multinationals. That's probably also driven by services and retail and trade flows and things like that. On that side, I think we can say that something started to grow and happen. Now the question is where the bottom of the investment cycle is and have we already reached that or not?
I wish I could say that I believe that the situation radically changed in Hungary. Not yet. Bulgaria is somewhat different. In Bulgaria, the pipeline is actually strong. The Eurozone accession is going to happen first of January next year. That usually coincides with upgrades and increased investor confidence and higher FDI. In Bulgaria, there's something happening. In Bulgaria, we do see on the ground quite some excitement and potential. I'm more optimistic about Bulgarian large corporate growth in next 12 months than Hungarian.
Thank you very much.
Thank you.
Thank you. The next question is from an attendee joined by a phone. I open the line, you will receive an autosmatic message about it. Please press star six to unmute. May I ask your name and the company please?
Yes, hi, good afternoon, it's Jovan Sikimic from ODDO BHF . I hope you hear me right.
Yes, loud and clear.
Good, thanks a lot. I have a question on this. Recently presented this home loan program in Hungary. What do you see the benefits for the bank? Where do you see, let's say, mortgage or housing lending picking up? What's your, let's say, first take on that? Have you also considered this in your guidance for loan growth this year? I think, I mean, I don't know whether it is rather story for this year or maybe for next year, but maybe would like to have your thoughts on that. Another one, question also linked to loan growth. You were clearly saying that you downgraded economic assumptions for almost entire footprint. Right. Still, after 7% year to date, 9% seems to me rather conservative. Right. Do you see already some kind of slowdown in some market or is it just, let's say, conservative assumption? Thanks a lot.
The guidance was more than last year. Last year was 9%. We didn't say how much more.
Okay.
Maybe I wasn't clear. I wasn't suggesting 9% expected this year. I said that the previous guidance, which was more than last year, more than 9%, seems very likely. Right. It can be much more. I mean, we don't see slowdown certainly coming. It's more than 9% now in terms of this specific program. It starts in September. It's very attractive for potential eligible clients. It's 3% fixed rate in HUF. It can be used for kind of new development and buying an existing property. The price of the properties, there's a cap on that, HUF 100 million. There are some restrictions on who can take the loan, but it's pretty broad. I think demand will be strong.
Obviously, the pickup will be relatively slow because I don't expect September numbers to skyrocket, but it will take a few months, maybe two, three months to reach a kind of full potential in terms of volume growth of this. It's certainly going to push prices up because supply is not going to increase in such a short notice. It is a profitable product for us, so we are very happy to distribute it and we will put a big effort in order to make it successful and to reach every interested eligible client. This is certainly a plus for volume growth and it's a plus for earnings. Yeah.
Yes, super. Great. If I may add just maybe one on margin outside Hungary, particularly in euro area. I mean there was some, of course, some erosion as you stressed. At what point would you see kind of stabilization maybe thanks to deposit repricing and so on?
It depends. If there are no further rate cuts in the euro, then I think not much further erosion is expected.
Okay.
Okay.
Okay, thank you.
Pretty clear. Thanks a lot. Thank you.
Sure. Thank you.
Thank you. The next question is from Gabor Kemeny, Autonomous Research.
A few brief questions for me, please. Apologies if I missed anything. I joined a little late. Firstly, on provisioning, would you be able to share any views, any sensitivities to this possibility of the U.S. introducing secondary sanctions against Russia? I believe Hungary's exports could be potentially impacted here. Not sure if you've done some provisioning already or if you could share some sensitivities around this. Secondly, a very solid 18% capital adequacy ratio. I would be interested to hear your latest thoughts on the M&A pipeline, please. Finally, on András Sebők's appointment to Deputy CEO, can you talk a bit about his role and what his responsibilities are going to look like? Péter Csányi talked about your increased focus on digital banking. I would be interested to hear your views on his appointment. Thank you.
Secondary sanctions in terms of provisioning, where, I mean, your first question?
I mean Hungary's macro being potentially impacted by the secondary sanctions against Russia. That's, I mean, the indirect impact. That would be the question. I believe the way I understand this would impact Hungary's exports. That's why that was the origin of the question.
I don't think we export much into Russia, so I mean.
Not to Russia. To the U.S., sorry. Maybe I misunderstood, but that's my.
Yeah, there's again the tariff problem. We actually dwelled very deeply into it, our risk people did, and in this case we went through the Hungarian corporate clients and assessed the potential impact coming from primary or secondary tariff effects. Hungary has actually, out of these CEE countries, one of the highest direct export to the U.S. as a percentage of GDP, plus there's a secondary impact through the kind of core European exports to the U.S. and supplying that. The risk colleagues have gone through the portfolios and put extra provisions on a case-by-case basis. This is the reason why you see most of the credit risk increase in Hungary. That's exactly the result of this exercise. We did that to our best knowledge and it's already reflected in the second quarter numbers. Indeed, that's why Hungarian risk cost was higher in the second quarter than usual.
M&A, I mean obviously I'm not allowed to say anything other than the usual stuff that we are active, we are interested, and we are engaged in discussions, parallel discussions, and we are hopeful that we can find somewhat a situation where we strongly believe that we create value for shareholders and then we do that. There's nothing concrete we can report on at this stage. Now, under András Sebők and his all, he's the successor of Péter Csányi in the role of Head of Digital and IT division. He has inherited exactly the same organization unit, which is digital banking in Hungary. Part of it's actually a mix of IT operations, development, and also digital banking, retail digital banking, part of the payments are there. It's actually a combination of classic IT and digital plus some business responsibility as well. If this is what you wanted to hear.
Yeah, maybe anything on his objectives, near-term objectives like your objectives in the areas of IT operations development in the near future. Anything new and noteworthy.
We are in the middle of a huge IT transformation in anger. We are changing the core system, we are changing the security core security system. We are changing the card back office system. We in-house developed the digital channels. It's quite a transitional, development-heavy period. That's clearly potentially the primary. The first focus is just to deliver on these initiatives and deliver them on time, on budget, and with good results. These are huge, huge IT changes. The last time this happened was 30 years ago when the core system was replaced in Hungary. He has to continue and finish those large initiatives. On top of that, obviously digital, digital, digital, AI, better service levels for the digitally transacting clients, and higher penetration in that segment.
Yeah, yeah, sounds like a busy agenda. Thank you.
It's a very experienced, very motivated, and a very, very kind and good person. I didn't know him before, despite our common shared kind of McKinsey. He was much later at McKinsey than myself, obviously potentially more than 10 or 15 years difference, but nevertheless, I didn't know him before and he's a very, very positive person. I think we will do very well with him.
Thanks for the color. Good luck.
Thank you.
Thank you. The next question is from David Taranto, Bank of America Securities.
Good afternoon. Thanks for taking my question regarding Russia. Could you elaborate on your strategy there? Year to date loan growth has reached 20% in FX adjusted terms, and in half terms it's much higher. While Russia accounts for 6% of loans, its contribution to bottom line is significantly stronger, even surpassing Bulgaria. How's your lending appetite in this market, and where do you see the sustainable profitability levels in this market? Thank you.
I mean in a sense we are in Russia, we are kind of hostage of the war and the situation, and in this very difficult and strange environment we try to do our best to adapt to the situation. Strategically, since the war started, we have focused on three agendas or three pillars, and that has not changed. I don't see why this should change until the war is over and the situation changes fundamentally. First of all, the most important objective is to fulfill every rule and regulation applicable to the activities there. This is by far the most important. Second, we voluntarily reduced the scope of our activities, and that was a strategic decision. We completely discontinued corporate lending, so we have, and that continues to be the case. We have zero appetite to finance any corporate or any state entity in Russia.
We also limited the scope of transactional activity, especially cross-border. We only do euro to European counterparties. We were the first one who stopped altogether dollar transactions more than two years ago. The third is that we want to reduce our exposure as much as possible. Our definition to reduce the exposure is that we want to take as much money out of Russia to get back the equity which got stuck there and the group funding which got stuck there when the war started. We have been doing that, I think, to a relatively successful level. We have been able to repatriate dividends. The group funding was paid back as early as 2022. In that context, in that framework, again, compliance, regulatory compliance, avoid potentially controversial activities, and limiting the scope of activities, and try to take out as much money from the country as possible.
In that context, we allow the bank to grow, and that means consumer lending, which has been historically the profile of this bank. This is a kind of subprime, mass market, retail, point of sales loan, credit cards, cash loans, lending. We don't do any mortgages. This segment is growing, and we are competitive and profitable. On top of that, we do transactional banking, retail and corporate deposits. This has been the strategy for the last three years, three and a half years. There's no change in that.
Okay, thank you.
Thank you.
Thank you. The next question is from Marta Wasilewska, WOOD & Company .
Hi, can you hear me?
Yes. Lound and clear.
Thank you. Thank you for the presentation. I have two questions. One, to elaborate a bit more about Russia and maybe a direct question, have you been able to get the dividend from Russia this year as well, or are there any plans of that for the second half of the year? The second question is about the comment of the CEO that I have seen probably mid July about the potential acquisition being executed until the end of 2025. I wanted to ask if there is any color on how you may be looking at the potential acquisition. Obviously, I'm trying to hint towards sustainability of return on equity given how much Tier 1 capital we are producing. Just a final question, how should we think about the dividend payments from OTP if you don't succeed with any acquisition until the end of the year?
This capital adequacy ratio, Tier 1, 20%, seems to be rich and very comfortable.
Yeah, the Russian entities paid dividends this year so far, RUB 10 billion. We expect further payments coming basically on a quarterly basis. We can take out around 50% of the quarterly earnings. That means that so far the total payment was close to RUB 52 billion since the start of the war, which practically started two years ago. In two years this is what we did. Potential acquisitions, I cannot say anything regarding concrete progress because if I could, we would have already done an announcement. I am not in a position to make any comment other than what I have. We continue to work on possible deals and once any of these deals come to the stage where we should report about them, we will. Actually closing an acquisition this year, I think that's rather aggressive.
Announcing a new deal means that we have a signed share purchase agreement with the seller, that is possible. Closing a deal in six months without having an agreement, usually regulatory approval procedures take much longer than that. I think it's not likely that we can finalize and close an acquisition this year, but hopefully we can announce a deal which will be value creating for the whole group. That's what we try to do. Dividends, there's no communication regarding dividends at this stage. We make the dividend payment suggestion decision typically where our board makes it, typically in February after the financial year. That's when the proposal to the shareholders will be decided and then we will share those numbers with you when we report the full year results somewhere in March next year. Obviously, if there's no acquisition then naturally there's more room to return more to shareholders.
If we have a large acquisition then there's less room to return to shareholders. To some extent it has implications on dividend payment, potentially paid dividends as well, obviously. That's kind of stating the obvious I guess. Other than that there's not much I can share with you at this stage.
Thank you.
Thank you.
Thank you. The next question is from Gábor Bukta, Concorde Securities .
Hi, thank you for your presentation. I have a follow-up question regarding Russia. The equity was hovering around HUF 300 billion at the end of 2024 and it was up 34% year to date. Is there a plan or how much after profit is expected to be brought out to OTP core this year? The second question is also regarding Russia. On the 25th of July, the Central Bank of Russia cut interest rates to 18% from 20%. We also experienced that the net interest margin in Russia declined by around 30 bps in this quarter. What is the sensitivity for further rate cuts in Russia?
Thank you.
Yeah, certainly our margin in Russia is sensitive to the rate. Part of the earnings revenue made there is based on just spreads on deposits or kind of risk-free earning, and that depends on the central bank rate. I don't have, off the top of my head, the actual number-wise sensitivity, but it is sensitive. The lower the rate, the less the earnings in Russia. That's very clear. Each dividend payment is subject to central bank approval. It's not particularly the dividend payment; what is subject to approval is the repatriation of the dividend to Hungary from Russia. That requires paying out the dividends, and because you can pay dividends in Russia, the normal procedure is that the proceeds go to a special lock, the C account . In order to do it, that's not to fade to the C account, you need approval.
There's no guarantee that we are going to get these approvals, but so far we got them. Our understanding is that until we maintain this scope of activities, primarily the consumer lending, this we can continue to do. I think the kind of rule of thumb is that it's a fair expectation to say that 50% of the earnings in Russia can be paid out in terms of dividends to the Hungarian entity.
Thank you.
If I may have one more. Today the Russian court has lifted the temporary freeze of shares held by Raiffeisen. I'm just wondering if you could make a bid for Raiffeisen Russia.
If you can.
We have not thought about this. I don't know.
Okay, thanks.
Thank you. The next question is from Simon Nellis of Citigroup . The floor is open.
Hi László. Thanks for the opportunity. I still can't. I don't take mute four years after COVID or whatever. Thank you. Just a quick follow up on capital return. I know you probably not going to say much, but can you give us any steer on further buybacks? What's the plan there? Thank you.
We have this recent approval of HUF 150 billion equivalent of share buybacks. I think Friday last week we were at, in the presentation, one last page.
HUF 32 billion.
Yeah, yeah, HUF 32 billion exactly. You are really good. Right?
Yeah.
Not with muting, but with.
Not with muting. Exactly.
That's the important part. Okay, we have done so far HUF 32 billion. I mean, we obviously continue as long as this, and then we'll see once this rounds out, again subject to money we make, subject to acquisitions, and so on. We may or may not continue or apply for another round of buybacks.
Got it. Okay, thank you.
Thank you.
Thank you. If you have a question to our speaker, please do not hesitate to indicate.
As t here are no further questions. I hand back to the speaker.
Thank you. Thank you very much for joining us today on this early August day, which is usually you should be on holiday, and I hope you will be on holiday and you can take a good rest before the autumn intensity starts again. Thank you again for joining. Thank you for your very good questions and hope for your participation on the next conf call. In the meantime, I hope you can see each other and talk. We are going to New York, to the States, to London Road Church, so we'll be quite active in September and October. Hope to see you personally. Thank you. Bye bye.
Thank you for your participation. The first half 2025 conference call is closed now.