Welcome to OTP Bank's First Quarter 2026 Results Conference Call. Please be advised that this event is being recorded. During the presentation, all participants will remain in a listen-only mode. Following the formal remarks, 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. Good morning or good afternoon, depending where you are, and thank you for joining us today on OTP Group's 2026 1st quarter results conference call. You have the stock exchange report, the analyst tables, and the today presentation available on the website. We are also broadcasting the slides as usual as part of this video call. As usual, I will make an attempt to summarize the main developments or events during the 1st quarter, then we will open the floor for your very good usual questions. The 1st page, it has been pretty stable for a long number of years now, which I think is a good sign, by the way.
I think it's quite good that the most important kind of headline features of OTP Group have not changed. We don't intend to change those, we are working hard for these features to continue to dominate our performance. I'm not going to elaborate too much on this because I'm sure you know it by heart. Well, talking about first quarter results, unfortunately, just like in previous last couple of years, the first quarter result is very in a way confused, and it's confused by the huge one-off or kind of the huge extra taxes we have to pay in Hungary, especially, and the fact that we have to account for all these taxes at the beginning of the year. We are not a llowed to accrue them accounting-wise.
In case of extra profit tax, the number we have to book in the 1st quarter is even bigger than the expected number for the whole year, because we, as you probably know, the system is such that if we acquire a certain amount of Hungarian government bonds, then we can reduce the tax payment. This eligibility to reduce the tax payment is measured as time goes by during the year on a monthly basis, basically. We have to fulfill that criteria month by month in order to qualify for this reduction. The full reduction actually will only be reflected in the full year results.
By the way, for you to, I think it's an important information that we have acquired those additional Hungarian government bonds. We expect the deductions or the reduction of the extra profit tax to actually happen according to our expectations. Because of these charges we booked for a whole year in the first quarter, the actual kind of representative numbers of our performance and the book numbers in our financial reports differ. On this slide, you can actually see both set of numbers. The darker green or the dark green number reflects numbers where we accrued this one-off. Over the whole year, and this probably, I mean for sure, provides you with a better representation of actual performance, whereas the gray numbers are the ones which are in the financial reports.
Then you can see the tax gray number on this slide as well, went up year-on-year by 30%. Again, this is mostly 2 factors. One is the substantial increase, in fact, doubling of the extra profit tax in Hungary and also the higher tax rate in Ukraine. You may remember last year there was a decision in Ukraine that they increased the tax on banks' profits to 50%. Last year that was only 25%. I mean, this kind of adjusted number grew 9% year-on-year. On the next slide, you will see that actually FX adjusted this number grew 13%. We can still go back, sorry, to the previous one. Yeah.
I think from now on, we will have to take into consideration the, the exchange, the HUF rate impact, especially when we compare to previous year numbers, our performance, just because the HUF has gone through quite an appreciation very recently, and that obviously has an impact on our numbers. The ratios, return on equity, again, this adjusted one, performed quite well. cost-to-income ratio, slightly better than whole year last year, but worse than first quarter last year. Most importantly, net interest margin continued to somewhat increase compared to last year, but also compared to the fourth quarter last year. Portfolio quality remained stable with a kind of normal level of risk cost on the credit risk cost rate side.
We actually wrote back part of the provisions we previously created on the Russian government bonds, almost HUF 20 billion equivalent of provisions were released after the payment of the maturing bonds at the end of last year. Therefore the other risk cost was actually a positive number and the total risk cost was also a smaller number. Now, if we go now to the following page where we actually present the FX-adjusted changes quarter-on-quarter and year-on-year on a, I mean, of the 1st quarter numbers. If you look at this, at the end of this presentation we have cross-sections for each of these lines, I mean, the most important P&L lines.
By country you can also see these numbers on, typically on an FX-adjusted level as well, at least where it's relevant, and it's most relevant obviously to Europe related countries. Maybe it makes more sense to actually elaborate on this FX-adjusted changes. year-on-year, if you compare the first quarter this year, 2026, to last year, there were no acquisitions or disposals, so it's a kind of apple to apple comparison. 13% overall profit after tax increase. Operating profit improvement 9%, and there was some moderation in the risk cost, mostly because this release of provisions on the Russian government bonds, what I just mentioned. I think in the revenue lines there are some important developments.
First of all, net interest income up 17%, this has been driven by mid-teens volume growth in the loan book, also improvement in the net interest margin overall on a group level. That's, I think, a pretty strong performance. Again, this is all organic. Now, on the other hand, on the net fee and commission line, you see only 1% year-on-year growth, which is somewhat, I mean, obviously a much lower growth rate than we would expect given the nominal GDP growth of the countries where we operate and given the overall volume growth both in deposits and in loans across the group. Now, there are 2 important factors here. One is coming from Russia. In Russia, year-on-year, net fees and commissions went down by more than 20%.
This is related to the transactional income, what we generate in transactions. There's a lower demand for typically for the corporate transactions we provide for our typically European corporate clients in Russia. There is a decline there. Those of you who wanted to see our Russian revenues declining and transactional activity declining, it actually has started to happen. This is not a unique feature to OTP. This we see if you look at the numbers of other kind of European banks operating in Russia as well. The other factor was that in Hungary, there was a moratorium in the first half of this year on the fees, so we were not allowed to adjust from the start of the year, despite the legal potential or opportunity.
There was a strong, so to say, pressure on the bank sector not to apply those increases. This is going to happen only in the second half of the year. From July, basically we do apply the CPI increase on our fees in Hungary. Hopefully the Hungarian numbers in the second half of the year will show a better performance. There's one other factor here that this very high level of mortgage lending activity generated not just higher volumes and therefore higher future revenues, but also higher commissions to third parties. This higher commission number also kind of is reflected here in this number when you look at the Hungarian growth rate, which is only 1% year-on-year.
Again, due to these two factors that we had to delay the fee increases by 6 months, and we also incurred quite sizable commission fees on the new lending on mortgages. Again, the NII line, I think that's quite strong, and that's probably the most important in this sense and the close to 10% operating profit increase as well. The next one, the next slide is rather technical. For those of you who are interested in the exact numerical details of the difference between the reported number and this kind of even recognition of special items adjusted line. Those are the differences, and most of the differences, as you can see, come from Hungary, and it's due to the windfall tax mostly, right?
Which was most booked in the first quarter, HUF 135 billion-136 billion. Again, the annual number we expect to be only HUF 110 billion, and then the actual number relevant to the first quarter was HUF 26 billion. That causes this difference. This big difference is, again, it's in Hungary, and therefore, the Hungarian numbers, which you can see on the following chart, have been even more distorted by this accounting treatment. Again, we actually had losses due to the windfall tax and the other taxes in Hungary in the first quarter. If you do this adjustment, then the number was actually positive HUF 120 billion, which is quite a sizable growth year-on-year.
Having said it, I have to highlight here that the most of this positive impact from the provision release behind the Russian government bonds happened in Hungary. There was some in Bulgaria, but bulk of this almost HUF 20 billion release happened in Hungary. There was also a pre-tax of HUF 19 billion fair value positive adjustment on the subsidized loans in Hungary due to the movements of the yield curves, basically, or the yield curve movements. There was a positive effect in the first quarter. Those two appeared in the Hungarian numbers in the first quarter, and those two may not appear in the second and subsequent quarters in Hungary. That actually resulted in this high jump in return on equity, again, using this kind of adjusted numbers.
It's unlikely that we are going to continue to have this level of earnings in Hungary for the remaining of the year. It may kind of moderate back to the previous trend line. Net interest margin, on the other hand, kept improving, that's although the improvement on a quarterly basis was quite slight, but at least positive. Again, risk cost rate overall was actually negative provision write-back. Again, this is due to this kind of Russian bonds provision release. Here in the, in the kind of right lower quarter, you can see the taxes, the actual taxes. These are our expectations related to what we are going to pay for each of these tax lines during the course of the year, those expectations have not changed.
Maybe a few deeper thoughts about Hungary and the Hungarian operations. The Subsidized Mortgage Program, which is very popular, continues. These are the new application volumes. As you can see, as expected, new applications in the first quarter were somewhat lower than the previous quarter, but still more than double the last year first quarter numbers, so it's still very strong. Our market share is also, you can see, from the contracted demands, our market share jumped up to higher than 40%. Before the introduction of this program, it was in the low 30s. By the way, this is quite typical. We tend to have much higher market share in case of subsidized programs than on the market-based structures.
That's primarily because these are typically more complicated products. The sales process, the client interaction is much more complicated, requires more resources, more skilled resources, more physical presence and overall scale in order to be able to handle the sudden dramatic increase in demand. We are typically much better positioned to provide this performance than some of the other banks. That's the reason primarily. In other products, cash loans and savings deposits, again, the market share in newly contracted cash loans somewhat decline, and that's due to basically price competition. There's increasing price competition in this segment. We try to balance or maximize future earnings by positioning our price points in a way that we again maximize the NPV of production.
That resulted in a somewhat lower market share. The kind of year-on-year growth of new production is still quite strong, 17%. In Baby Loan, as you can see, we have also quite remaining high market share. Having said that, even more important on this slide, I think probably the most important in Hungary is that we continue to increase our retail deposits market share despite of the very low rates what we provide, what all the banks provide. We consider this number extremely important because we consider that this number is probably the best gauge to suggest how deep and strong a bank's connection is with retail clients in a given country. This number going up and has been going up for quite a long time. That's very positive.
Corporate, similarly positive news in Hungary, our market share in corporate loans continued to increase. It has again reached a historic height, 21.6%. You can also see the kind of long-term development there, which is very positive. The other good news is that, in line with the, I would say, somewhat positively surprisingly high first quarter GDP number in Hungary, corporate loan growth continued. Overall, it was 2% on a quarterly level, which is somewhat a slowdown compared to the second half of last year, but still much more than what we grew altogether in 2023, 2024. Most interestingly, micro and small volumes, they continued to grow. Actually the growth rate there accelerated considerably, 6% growth in just 1 quarter. This is the micro small sector.
Again, that's quite promising, when you, when you want to have a view on the kind of fundamental activity level in the, in the local economy, in the local, corporate sector. This there because micro small are typically local. Part of the large corporates, mid corporates are obviously multinationals as well or kind of the sector which is serving multinationals. Page 10, you have an overview of the performance of the various units, the various countries across the group. It is solid performance, however, typically not better than last year, with the exception of Uzbekistan, which managed to improve profitability, and this is good. ROE is closer to 30%. That's actually quite promising, and we are, we're happy to see these numbers. We had a big decline in profitability in Russia.
Again, this is related to what I just explained, the demand for these corporate transfers and FX conversions started to decline, and that reflects in our numbers. Now if we go to page 11, where you can see the net interest margin development on a quarterly basis, 11 basis points up. As you can see, small improvements in Hungary, Bulgaria, Uzbekistan, Russia. Then a bigger chunk of this improvement actually came from the composition effect, namely higher margin countries provided higher growth rates in the first quarter. It's not just the quarter-on-quarter, but also the year-on-year number, which has grown a lot. Here, obviously, the contribution of the Hungarian business was much better.
More than half of the margin improvement, what we can see year-on-year, came from the Hungarian business. Our rate sensitivity has increased primarily because of especially in Hungary, because of very rapid growth of deposits. You will see the deposit growth rates in Hungary in the first quarter. That's obviously very, very good in terms of profitability and earnings. Somewhat increased on the HUF rate sensitivity, which now stands at HUF 24 billion annualized NII in case of the 100 basis point change, or in this case, the potential decrease in the rate environment. Likewise in the euro sensitivity, it went up to EUR 125 million euro annualized NII potential impact based on a 100 basis points. Looking at loan growth, it was 3% in the first quarter.
Was actually 3.4, but we have kind of rounded numbers here, so this was rounded down to 3%, but actually it was 3.4% FX-adjusted performing loan growth, which was quite in line with our expectations. Some countries provided actually quite remarkable performance actually in Well, I mean, the good news is that these are the three biggest countries, Hungary, Bulgaria and Slovenia in the group who had a very strong performance, 5%, 4%. Just to remind you, last year, the whole year, Hungarian loan growth was 17%, Bulgarian 18, and Slovenia was 8 for the whole year 2025. In this case, Hungary first quarter 5%, Bulgaria 5%, Slovenia 4%.
In Hungary, this was primarily, I mean, to a large extent driven by the subsidized mortgage program, there's no such program in Bulgaria or Slovenia. The other country which kind of grew quite fast was Ukraine, 9% growth. Now we actually I mean, last year we had decent growth as well. Last year there was 27% annual growth. Therefore, the base is getting bigger as well and on a higher base. Now we have an acceleration in the run rate in Ukraine, which is again, fairly good news. Deposits, 3% increase in deposit volumes just in 1 quarter, especially Hungarian retail was strong.
This is not surprising given that it was the last quarter before the elections and therefore some fiscal transfers happened to the electorate and quite part of it actually landed in bank deposits. I don't think I have to tell you that this is actually very positive for earnings, and NII specifically. I think this is the kind of biggest news on the deposit front. Portfolio quality, page 14, remains stable. Slight improvement in the Stage 3 ratio in the first quarter, down to 3.4%, 2.6 without the higher NPL ratio countries like Russia, Ukraine and Uzbekistan. Coverage remained similarly high to previous quarters, there's not much event here.
Next page is about the capital adequacy ratio, which actually decreased from 18.1 to 17.6, the Common Equity Tier 1 ratio. In this waterfall, you can see the factors which affected this ratio. The profit itself would have increased the ratio by 90 basis points. In case the one-offs, these large taxes were accounted for evenly during the year, but they were not. This kind of accounting for all the taxes in the first quarter that had a 40 basis point negative impact and then dividend, which we calculate according to the EU regulations, so this is not a guidance on the potential dividend payment.
Organic growth consumed 40 basis points and some temporary measures were phased out, so that's another 30 basis point negative, and there were some other effects. But the bottom line is if that although the reported number was 17.6, if we recalculate these one-offs and again evenly distribute over the year in Hungary this kind of adjusted profit number, and we recalculate the adequacy ratio with this restated number, then the, then the rounded number was actually at 17.9, so close to 18%. In comparison to I mean, just anticipating the discussion about how high our capital adequacy is or is not. Indeed, the 17.6 on it, even in our Tier 1 ratio level seems to be quite strong.
Here we can account for I mean, we can say that again, the real number was probably or the kind of the number which better reflects our the actual situation was closer to 17.9%. And that's quite a decent number. That created some room to again restart share buybacks. We just announced that there was another HUF 60 billion approval we received from the National Bank. We have now we can start a new program to continue to buy back shares, and the approved number was HUF 16 billion. Ultimately there's some room for more acquisitions as well, given this higher ever ratio if there was an opportunity to do so.
On page 17, you can see the liquidity and the capital markets activity of the group. Liquidity ratio is very good. We remain to be funded by deposits, right? I mean, 77 loan-to-deposit ratio, pretty stable over across last year. And Liquidity Coverage Ratio 227%. Net Stable Funding Ratio 151%, so quite strong levels. Relatively compared to the size of the profits and the size of the balance sheets, the call date profile is relatively modest. There's HUF 1.1 billion call date coming through this year. The overall share of wholesale funding in the balance sheet is still less than 10%. It's 8%, as you can see at the bottom of the chart in the right corner.
We are not really levered at all in terms of market funding. Rating, there has been no change recently. I mean, this is obviously an interesting topic. You probably have heard about the new government in Hungary and the plans, the economic policy plans of the new Hungarian government. They seem to be quite serious about targeting the preparation for eurozone accession, and they want to meet the Maastricht criteria, accession criteria they've set in four years. That obviously assumes a trajectory, a fiscal trajectory, which may open up the space for hopefully for rate improvements in the sovereign, which may hopefully reflect in our rating as well. This is to be seen, right?
We will see how it goes and how it develops. I'm going to talk a little bit about our expectations in terms of Hungarian macro later in the presentation. I mean, these are the next two slides are the ones we always include just to reinforce our message that it's not only us who consider our performance to be reasonably good, but some other external objective views as well seem to confirm that. It's research and the EBA stress test result. Then sustainability and green lending, which is our page 21, which is our strongest focus in terms of sustainability to contribute to most of our ability in terms of doing green lending.
We achieved the quite ambitious targets that we set a couple of years ago at the end of last year. Even compared to that, there was an acceleration in the growth rate. Just in one quarter, we achieved 9% growth in green lending volumes. If, if it continues like this, then we will, I'm sure, surpass the 28 targets that we set and achieve them much earlier, which is a good news. Macro. In our case, there are obviously two large developments. One is a global development, and that's the war in Iran and the situation, the closure of traffic in the Strait of Hormuz and the impact of that situation on global energy prices and the expectations regarding future energy prices.
This is obviously we don't know what the future will bring here, and its expectations change day- by -day depending on the communication primarily from the President of the United States. Our assumption or rather hope is that what we base our numbers that the strait will open soon, and in the second half of the year there will not be much disruption in the traffic across the strait. That means that we expect the gradual normalization of the energy supply globally, and therefore the gradual normalization of the energy prices over the course of the second half of the year. These numbers are based on that assumption.
Obviously there's a risk here that it's the situation is not going to ameliorate and in that case, obviously GDP growth may be lower due to higher energy prices and inflation might be higher and the rate environment might be higher as well. I mean, this is potentially true for all the countries on this page except Russia, which, I mean Russia would be the benefactor, the beneficiary, of such a high, energy price environment obviously. All the other countries would be, potentially negatively or at least marginally negatively most, and some of these countries even more negatively, impacted. Now, based on this assumption, I think here the most important numbers are the Hungarians ones. Can we go back? Sorry, sir.
The biggest number which changed the most is the expected fiscal deficit is in Hungary. It's up to 6.8%. This is the latest indication from the former government and from the new government as well. What they do now, the new government just took office this week and they are going to review the fiscal situation and come up with a new budget basically for this year during the course of the summer. This number may or may not be reinforced, but at least I don't expect a lower number than this. I think if all goes well, then it's not going to be higher than 6.8.
It seems that the previous government spending had been excessive before and going up to the election, certainly the higher energy price also not helping here. Despite all of this, I mean, actually the first quarter GDP growth in Hungary was surprisingly strong or somewhat better than most of us expected. Therefore, even with this kind of in this environment, we expect closer to 2% GDP growth, which is the highest number over the last 4 years.
Then obviously the macro expectations regarding Hungary changed considerably based on the newly elected government, which has two-third majority in the parliament, therefore they can change technically any or all the legislations and obviously in line with the EU in the EU legislative framework. That again, there seemed to be a commitment to converge to the Eurozone and to converge to kind of Western European standards and business environment, which maybe not in very short term, but mid to long term is actually quite supportive and positive for the potential growth and also for fiscal deficit decrease and also for inflation decrease and for the rate environment to go lower.
In that scenario, I mean, growth expectations probably increase in Hungary and margin expectations somewhat moderate, but that is kind of compensated by the cost of capital or expected return numbers also going lower potentially the next couple of years due to lower rate environment. What short-term potentially most important is the access to EU funds. We put here a slide to facilitate your understanding of what we are talking about when we talk about access to EU funds. There's EUR 36 billion and Hungarian GDP is like 220. That was EUR 219 billion was last year numbers. This is actually a sizable amount of money what is at stake now. There are different parts of it.
There are grants and there are loan facilities, access to loan facilities, at a much cheaper level than the Hungarian sovereign cost funding is at the moment. These are the different parts. The most urgent is the Recovery and Resilience Facility grant subsidy, EUR 5.8 billion, and the REPowerEU, again, subsidy, which those have been suspended. You know, they are subject to fulfilling 27 milestones. These are 27 requirements regarding the legislative environment, basically, and the institutional environment in Hungary. Those have to be changed according to these expectations to get access to these funds. In case of the RRF grant and the REPowerEU, the deadline is actually very close. By the end of August, actually, the payments have to happen.
That's a short timeframe, so it requires fast legislative changes, which is quite feasible. There's And, and pretty much it seems that the new government intends to make those. That's not a kind of a problem. It also requires some level of flexibility on the EU side to actually provide those funds despite the fact that these projects have not obviously been completed, and therefore, some more creative solution is needed. I think chances are good that these funds will be available. There's a loan facility as well linked to the Recovery and Resilience RRF facility. That's EUR 3.9 billion. There's the usual structural and investment funds.
That's the usual EU funds and subsidies budget and access to that. Here, it's partially again suspended because of these 27 milestones, partially suspended because of the fundamental rights chapter. That's another kind of 4 additional Hungarian legislations which are affected here. Again, it does seem to be in the intention and the interest of the new government to comply with these requirements. Here the deadline is much longer, so 2029. I think it's the I don't see much risk here to be able to actually secure those funds. Then this, there's the Security Action for Europe safe loans. This is still early stage of development.
I don't think any European country has started to actually use those funds. That's, obviously, also they are dependent on the same milestones and requirements. I think again there's no deadline. At least we are not aware of a deadline to use up those funds. This is for the defense developments, right? That can have a positive effect short term, right? If these funds open up and start to flow and generate a new investment cycle, basically. It's not just these funds, but overall investments can accelerate because, I mean, these are just kind of triggers or contributing factors to a bigger investment scheme.
Typically, what we have been seeing over the last 2 decades now that, together with EU funds, we typically have other funding facilities as well. A higher EU fund flow to the country translates to higher investments, higher GDP growth, and higher, especially corporate loan demand. This is what can be expected should all these events happen. Based on this, we don't see fundamental reason to change our guidance. The guidance remain the same. Similar to last year volume growth, similar to last year margin. Cost-to-income ratio may be somewhat worse. Similar risk profile, and maybe somewhat worse return on equity. Based on the 1st quarter numbers, I think we are pretty much on track in terms of loan growth.
Margin seems to be better, and maybe on this line there might be a positive surprise. Cost to income ratio, we'll see. I think it's too early to say that. Certainly the risk profile seem to continue to project the same features as last year, so there's no reason to believe that this guidance would not be the right one. ROE, first quarter is somewhat better than we expected, but we'll see how it's going to develop over the year. That was it. That was the formal part of the presentation.
You have the usual additional slides in this pack should you want to have more cross-section, information about NII, about margins, about volume growth, fee income, other income, and total risk cost. These are the additional slides what we have in the pack. Thank you for listening to this presentation, and please ask your questions.
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. The first question is from Gabor Kemeny, Autonomous Research.
Hello. Thank you for your thoughts. Firstly, on costs and the 17% FX-adjusted cost growth. You talked about an element of the regulatory charges going up year-over-year and some expenses like the branch rationalization presumably will drive savings down the road. How do you expect cost growth to evolve from here? I guess there's a concern out there that whilst your revenues are developing more strongly than expected, a large part of that may not drop to the bottom line given the cost inflation. Can you reassure here? That's the first topic. Secondly, on the political developments in Hungary, what do you think is the likelihood that we may see a significant banking tax cut next year?
Further on Hungary, now, since the election, we have seen a significant contraction in the sovereign spreads. Can you give us a sense of how this could impact your financials, your PNL and capital from Q2? The final thing here, has this increased your appetite to issue AT1 at all? I'll leave it there. Thank you.
Okay. Cost. 17% cost growth is high. Our biggest increase we had in Russia where we invest into more even stronger compliance and regulatory control functions, and also IT. NII growth was actually 17%. The problem in a way in our case, the first quarter was that out of the revenue lines, the total income growth was FX-adjusted 12%. The biggest chunk and the most important NII grew 17%. Fees hardly grew, and other income growth was also lower, and that's also impacted by Russia. I mean, we are also aware of this, and we carefully monitor and in a way control costs.
Having said that, we don't we still don't see a major reason to kind of start drastic cost control initiatives, right? I mean, let's take as an example Bulgaria where I mean, obviously Uzbekistan Ipoteka is where we invest into the future and especially IT and people. That's 34%. That's okay. Then if you take Russia out, then one of the highest is Bulgaria. I mean, Bulgaria, with this level of cost growth achieved in the first quarter 19%, 19% ROE, right? That's Eurozone, so that's more than two times return on equity over cost of equity. Volumes have been growing quite fast in Bulgaria last year. I mean, loan growth is 18%.
Again, in the first quarter, just in one quarter, we had 5% loan growth. These, we are growing fast organically, right? That growth involves some, I mean, cost development as well. I'm not going to tell you that we are going to reduce this over a kind of year-over-year cost growth to a 1-digit or something like that because it's not going to happen. On the other hand, this is not cost growth without any reins or just kind of being without control. All these developments are according to plan and under control actually. We are not actually concerned about these numbers.
The only concern we have in terms of cost, it's basically Hungary and the Hungarian headquarter costs, and this is where we have started to take measures, and we will continue to take measures in order to reduce the size of the HQ in Hungary and make it more efficient. Political developments. Yes. I mean, I don't think it's at all realistic that the extra taxes will be cut this year in Hungary given the budget situation and the fiscal position what the this new government inherited does not have any room to do that. I mean, again, 6.8% expected fiscal deficit this year.
If you believe, and we believe that this new government is actually committed to develop Hungary into a competitive modern economy, quite more similar to kind of successful Western European economies. That does not allow the level of sector taxes what exists today and the level of distortion they cause and certainly don't support the mid to long term higher economy growth which is expected in the country. Our expectation is that, yes, there will be a gradual decrease, especially in the extra profit tax in Hungary, which is by the windfall tax, which is the most painful number, right? This is the number which was doubled from last year to this year where the profitability of the banking sector overall actually declined.
This is completely unfounded and ridiculous, but happened nevertheless. On this line we definitely expect material improvement and in fact over a course of hopefully not too many years, the complete elimination of that line. Some level of banking tax and transaction tax I'm sure will remain and, but I think it would be at least fair to go back to the situation where we were in 2021 and before where we only had banking tax and transaction tax. The HUF rates we most of I mean our portfolio our HUF government bond portfolio is in the hold to maturity treatment in the FVOCI and HTM portfolio. There's no capital impact. We don't mark to market these bonds, therefore there's no immediate impact.
AT1 we know the situation regarding AT1 or our view AT1 has not changed. We consider as a reserve for a potential larger acquisition. We continue to be on the view that we only do AT1 if there's a larger acquisition which requires that capital.
All clear. Thank you.
Thank you. The next question is from Gulnara Saitkulova, Morgan Stanley.
Hi, good afternoon. Thank you for taking my questions. Just to follow up on the previous questions, can you comment on your headcount strategy? You referred to 1.5% increase in headcount. Which areas of business are seeing this incremental hiring, and what is driving that additional headcount demand? Another question on margins outlook. You reiterated the NIM outlook of 4.34% with potential upside. Can you provide some color on your outlook for margins across your key markets? What trends are you currently seeing on the ground, and what are the main drivers we should be considering for this year and next across your geographies? Here, can you also mention what are you observing in terms of the competitive environment evolution across loans and deposits across your markets? Thank you.
Easy question. Okay. Headcount, you mean headcount in Hungary or country by country or what or?
Overall in the group.
We don't have an overall headcount policy for the group. I mean, the different entities in the group are at different stages of development in terms of market growth, in terms of expected growth, in terms of IT maturity, and in terms of progress of implementing new technical tools, I mean AI tools. We don't have a kind of overall headcount plan. I mean we have, but that's an aggregation of the individual country numbers, and different countries are in different situation.
Again, most, we have the most focus at the moment on Hungary, we started to take measures and more specifically on the Hungarian headquarter headcount, which I mean, overall headcount in Hungary is 11,000 people in the whole group, which is I mean, it has grown a lot over the last couple of years. Here we have especially again regarding the headquarter, which is like more than 7,000 out of its kind of 8,000 people, if you take out the network, this is where we see, by the way, across the group, the biggest efficiency increase potential. This is going to come over the next year, next 1.5, 2 years.
We are not going to do any drastic measure, but this is something where we focus, and there will be results here. Net interest margin, again, I mean, this 4.29, 4.6%, this seems to be clearly higher than the last year number, which was 4.34. Already in the first quarter we are considerably higher than last year. Therefore, I think maybe we can go to page 27 here, which is about margins. Yes, this is it. There's I think a high risk here or a high potential for better performance than last year and better performance that we guided for. Just to be conservative, we decided not to change the guidance.
If we look country by country, in Hungary we have seen improvements, right, over the last couple of years. I think the bottom of the cycle was around 2.3%, something like that, back in 2023. Now we are almost 1 percentage point higher. I mean, improvement slows down, but there's still kind of especially driven by strong retail deposit growth that happened in the first quarter. This looks actually quite promising. We have the Eurozone countries, Bulgaria, Slovenia, Croatia, and I would include here Montenegro as well, which uses the euro, where we had seen margin compression. Recently, margins kind of stabilized. This is what you can see.
I mean, Bulgaria quarter-on-quarter, Slovenia, Croatia, and Montenegro reasonably stable levels, right? There we don't expect much change unless there's a rate hike. Rate hike can happen. The euro rate again most likely to be increased. That can be positive for these countries. This was certainly not expected when we made the budget for this year. This is related to the war in Iran and the closure of the Strait and higher energy prices. That can If indeed it happens the euro rate will be increased, it will bolster up the margin in these countries. Serbia, some decline, that's mostly due to regulatory kind of changes.
There are limits on the margins and rates we can apply for retail lending in Serbia, and that is reflected in the margin. Uzbekistan started to improve, and that's a good news. I mean, it's primarily because of the cost of funding kind of optimization and the kind of deposit pricing optimization. Basically that's it. These are the parts. We are already in the first quarter higher than what we guided for. Based on this, there's some chance that there's a fair chance that we will remain at this higher level. Yeah. That's it.
Thank you. Can I just follow up, which markets would you characterize as facing the greatest competitive pressure, and where do you see competitive dynamics remaining relatively benign?
I mean, Bulgaria, Croatia, Slovenia, quite price competitive. It's basically the Eurozone countries are the most price competitive, especially in lending, especially in corporate lending. I don't think any of these markets are benign unfortunately.
Thank you.
Thank you.
Thank you. The next question is from Simon Nellis, Citigroup.
Thanks very much, László, for the opportunity. I may not have caught everything in the presentation. My question's around fees, which were quite weak in, I mean, Russia in particular, but also Hungary and Bulgaria. I think you probably touched on this. What's the outlook for fees going forward? It seems the run rate has slowed quite significantly. I think there are a number of reasons behind this, but what's the outlook going forward from here?
That'd be my first question. Also on risk costs, just wondering if what the exact change is to your FLI forward-looking macro assumptions were, if any, because of this U.S.-Iran situation. Yeah, if you used any overlays to top up provisions without hitting the risk cost this quarter. Thank you.
Okay. I think growth being modest year-on-year was driven by 2 countries. One, Russia where they actually declined. By the way, Russia also had a negative year-on-year contribution to other income. It's basically transactional fees, transfers, and FX conversion margins. That's the next slide, page 31. It's not just the fee income, it's also, if you can go to the next slide, please, 31, you can see that there was quite a negative growth year-on-year in terms of other income as well, which is basically the FX conversion margin. There's just less demand for these from our corporate clients. And this we observe in the numbers of other banks being active in those fields.
I mean, namely the other European banks still active in Russia. This seems to be systemic and I don't think this is going to change dramatically over the course of the year. There might be some seasonality here, but I think our assumption is that these kind of special revenues, so to say, which are not so much related to our core activity, which is consumer lending and then, and deposit taking, may be at a lower level this year than last year, considerably lower, and this is actually worse than what we planned for this year. That's the case.
Some of you might be happy to see that our revenues started to decrease in Russia. We have a more balanced view on this. We are not particularly happy about this, but anyway, this is what's happening. In terms of Hungarian fee income, yeah, indeed, I said it at the beginning of the presentation that it's mostly because we were not able to increase the fees in line with inflation, because we voluntarily had to, as all the other banks, delay the usual January fee adjustments. We are going to do this at the end of the first quarter. That means that the second half of the year might be better.
The other factor which negatively impacted Hungary was that it's fees and commissions, right? Commissions is typically an expenditure, and the higher mortgage lending involved higher commissions for a third party, and that's also accounted for in this line. These are the two countries where we had lower levels. In Russia, this is probably the new normal. In Hungary it is not. In Hungary we should recover growth rate as we in the second half of the year of the fee income.
Thank you. I guess Bulgaria, it seems that it's currency-driven. I guess would you assume that the underlying fee will actually still be growing at around 6% in euro terms?
Bulgaria we had 6%. It's FX. I mean, you have to I mean, the HUF rate especially to the euro rate changed. Now, now from now on we will have to be conscious of the FX impact, especially for the euro countries. It's, it's better to look at the FX-adjusted changes, right? 6% is kind of okay, right?
Yeah. Thank you. Then just on the provisioning.
Provisioning. Oh, sorry, yes. We didn't do extra provisions. We don't expect that, I mean, what we, I mean, in line with what we expect in terms of the macro environment, and that is kind of slight increase in some increase in inflation and some decrease in potential GDP growth and maybe a higher rate environment. These are the numbers what we, I mean, these expectations are included in the numbers what we had on this chart in terms of the macro. That macro scenario does not warrant or require extra additional provisions. We seem to be quite conservatively provisioned already. You know, whether this is optimistic or not, it's hard to tell, right?
There's a, there's an extreme scenario where the strait will be closed for the next, I don't know, 3 years, and the oil prices will remain much higher than 100 for the next couple of years, and so on and so on. In which case there will be much more serious, kind of, real economy adjustments, and supply chain adjustments and demand adjustments, across industries. That, that is not factored in in our current expectations. Again, we don't think that this is the expected scenario either.
Understood. Thank you.
Thank you.
Thank you so much. The next question is from Máté Nemes, UBS.
Good afternoon, thank you for the presentation. I have 3 questions please. The first one would be on Uzbekistan. It's clear that you're seeing really good bottom line profit growth and also seeing good core revenue growth in the country. What struck out to me was a quite muted loan growth on a sequential basis in the quarter, which is surprising from a clear growth market. Seems like consumer was fine. Corporates went backwards. Any color you can share on that. What do you see on the ground? What is the expectation?
For the remainder? The second question would be on inorganic growth. Could you share any updates on M&A? I think at the time of the AGM or on the AGM, your chairman mentioned that you're hopeful that you could announce an acquisition this year. Any color on that? Anything you can add? Also just in this context, tying back to your earlier comments on capital, what is the level of or amount of excess capital that you're seeing at the moment, just considering you want to be at the top end of the peer group in Tier 1 ratios. The last question would be just one on Hungary. You talked about sector taxes.
I was wondering, are there any sector-specific policy changes apart from taxation that you would like to see policy changes that would be beneficial in your view for the economy and the sector? Anything on that front would be appreciated. Thank you.
Mm-hmm. Okay. Indeed, the volume growth in Uzbekistan was disappointing. I can confirm that. It came from two angles. One was another kind of wave of IT issues regarding the core system. The core system had serious operational issues and stopped working for meaningful amounts of time, which quite seriously disrupted our ability to sell. Those have been fixed. We insourced the development of this system, and we are buying the source code. Now we are getting full control over the development of the core system, and we are scaling up the development capacities. The good news is that in April, there were no further mishaps in terms of availability of the core system.
I mean, this sounds like a very basic problem, these are the problems which we faced. That was one. The other one is conservative. We still remain conservative, especially in corporate. In corporate lending, we still don't feel very confident to be more aggressive or to be more active, right? We are exploring this, we are careful, we don't want to make moves which we regret in the future. There's no reason for that. As you rightly pointed out, profitability improved. Earnings are getting to a level where we want to see them, we definitely want to keep that situation in the future. We don't want to grow just for the sake of growth, right?
We want to grow profitably and in corporate this we still don't feel 100% confident that we can even achieve the returns what we expect after risk costs with strong volume changes. This is the reason behind corporate kind of inactivity in a way. Retail growth, the consumer lending growth, we wanted that to be stronger, but that was hindered by IT problems in the 1st quarter, which we solved. They don't seem to be problems anymore in the 2nd quarter. In fact, we are putting live our in operation our new mobile app solution. We had a very not more than one.
The new development is now going live, and we expect a very positive impact on retail activities as well coming for that. Yeah, I mean, the first quarter was somewhat difficult operationally again, but we're quite optimistic and we believe that the rest of the year will be better in terms of growth. I think we're actually quite happy to see that returns are closer to the levels what we expect them to be than were last year. There's no news I can share with you regarding M&A. We are obviously very restricted in terms of what we can just informally share. Whenever there will be whenever there's an information we important to share, we are sharing it immediately. We continue to look at various opportunities.
Yeah, it would be good to close it, to make an agreement this year where we are sure that we create value. If we are not sure that we create value, then we are not going to make a deal, right? This is, given the strong organic growth trajectory, there's no pressure on us to deliver deals if we are not convinced that we create value for shareholders by doing those deals. I know it's very general and doesn't really answer your question, and I'm sorry for that, but I'm not in a position to say more. Tier 1 capital, your question. Again, effectively, the ratio was higher than reported, so we have to talk about kind of 17.9.
17.9 is certainly higher, definitely higher than the highest on this slide. Again, we restarted share buyback, and we just got an approval for another HUF 60 billion, and we continue buybacks. This I mean, probably, I mean some kind of 16.5, something like that. I mean, between 16.5-17, that's the range, I think, which would still allow us to be at the higher end of this group. That's the potential kind of opportunity to do more buybacks or do an acquisition or more acquisitions, more than one. Yeah. That's the magnitude on the tier on that level.
Obviously there's the alternative Tier 1 instrument, which is a dedicated reserve for us, so issuing an AT1. That's the other thing which we may consider. Other policy changes than sector taxes. I mean, if we could achieve a major improvement or material improvement on the sector taxes, we would already be quite happy. I mean, other changes, a path which leads to fulfilling the Maastricht criteria in 4 years, what the new government started to talk about means swift fiscal consolidation and a decrease in inflation and actually quite a swift convergence of the rate environment to the euro rate. In itself, that's a big change, right?
I would put the trajectory of a country on a very different path than what we had been for quite a long time, the last 10 years, I would say. Other than this, I don't know what policy change would. In that scenario, in a kind of lower budget deficit and lower rate environment scenario, and plus availability of EU funds, that means that there will be much less need for these subsidized programs, right? If EU funds are available and coming, and if the rate environment is lower, then market-based lending and substantial demand at those rate levels can be more than enough. I think the necessity of these subsidized products in retail and corporate will diminish.
That can be another kind of subsequent policy change if that trajectory actually manifests.
Thank you. That makes a lot of sense. Appreciate it.
Thank you.
Thank you. The next question is from Gábor Bukta, Concorde Securities.
Hi. Thank you for your presentation. I have a couple of question. Look, the first is regarding the forint sensitivity. You touched on this on slide 11, and if you could clarify the rate sensitivity because I'm not sure I got it. Does it mean that if rates drop by 100 basis points in Hungary it is net positive or negative for the bank? Does it include the fair value adjustments as well? If you move forward, I have a couple of questions related to Q2 because I think that Q2 will be distorted by a couple of things. First, the forint has significantly strengthened following the elections and will be heavily impacted.
Just wondering if you hedged part of your euro exposure. The next one is that, I think, due to the share swap agreement with MOL you are eligible for dividend of HUF 13 billion. I guess MOL will postpone it to Q3, could you clarify that, you are expecting it in Q3 or will you book as a receivable in Q4 or what will happen? Yeah, that's all. Thank you.
Yeah. The HUF rate sensitivity, I mean, the sensitivity is negative, so a lower rate means lower NII. The sensitivity what you can see on this slide means if the HUF rate goes 100 bips lower, then we are going to have, ceteris paribus, HUF 24 billion less NII in 1 year, in the following year.
Yeah. Thanks. Yeah, I didn't get that. Is it relevant or consistent with the euro sensitivity? It was mentioned that for a 100 basis points change in euro rates, stood at around EUR 125 million. Yeah. Okay. It's clear. Thanks. What about Q2?
These two are kind of independent, right?
Yeah. Yeah. Okay. Now what about Q2?
Q2, a stronger HUF, if the exchange rate appreciates that a stronger HUF translates into lower nominal HUF group level profits. If you have assumption on the other currencies as well. For instance, the ruble just strengthened towards the HUF. There can be other movements, and the Uzbek currency can strengthen as well. There are different currency movements across the group. If you assume a kind of 10 forint appreciation in the HUF euro rate. If you assume a parallel appreciation of the HUF to all the other currencies in the group, then this 10 forint rate appreciation translates roughly HUF 20 billion profit after tax per year.
I mean, if you divide it by a quarter then it's HUF 5 billion. That's a quarterly impact by 10 HUF, and there is more than 10 HUF. I mean, you can do the math, and you can do whatever scenario you assume. Hedging, we don't have an open I mean, we have a strategic open position, but other than that we don't have a HUF position. We don't hedge the revenue from the non-Hungarian businesses. In fact, hedging is we hedge the capital ratio, the group level capital adequacy ratio. That means that when the HUF appreciates then or weakens it changes the risk-weighted assets of the non-Hungarian businesses, right?
It also changes the equity of the non-Hungarian businesses. We want these two to move reasonably close to each other, and therefore, we want to have a situation where the exchange rate changes don't have a material impact on the group level capital adequacy. That actually requires not to hedge the equities in the different group members. Having said that, I mean, quite majority of our investors are actually coming from other currencies than Hungarian forint, right? Typically dollar, euro, British pounds. They may look at the share price in their own currency as well. I mean, that I don't know. The dividends, it has an impact that MOL Group decided to pay the dividends later.
It does have an impact on the cash flow, on our liquidity plan, so to say, but it doesn't have impact on the earnings, right? We are going to accrue those expected dividends.
Okay. In Q2 or in Q3?
Q2.
Okay.
Decision was made.
Okay, thank you.
Thank you. Ladies and gentlemen, if you wish to ask a question, please use the raise hand icon. The next question is from Gábor Bukta again.
Yeah, thanks. I have another question related to others. I mean, the fair value adjustment in Q1 was very significant. Given that the Hungarian government yields came down significantly in the last couple of weeks, where do you see the fair value adjustment in Q2 if you take into account the current yield curve?
Indeed, the fair value adjustment on subsidized loan was quite positive in the first quarter, close to HUF 20 billion. It is going to be not the same amount. We don't know how much it is going to be, but the current situation means that it is going to be negative in the second quarter.
Thank you.
Sure.
Thank you. 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. May I ask your name?
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Please. Thank you.
Sure. Good afternoon. Jovan Sikimic from ODDO BHF. I have kind of follow-up on Uzbekistan. If you look at the loans to deposits, they were basically flat-ish or stable over the last couple of quarters. Do you have any plans to, let's say, normalize it back to, I don't know, 100, 150? If yes, what would be approximately impact on the margins? If it comes to the dividends, are you paying out the dividend from Uzbekistan unit? If you maybe can share what the current capital adequacy there. I don't think that you report it, but maybe you can share it with us. A minor question on Serbia, I think you mentioned that you expect a kind of recovery, but we know that, I mean, politically, it's also quite turbulent there.
I mean, FDIs are kind of definitely negatively affected by this. In which segments would you expect the recovery, especially in the lending activity there? Thanks a lot.
Dividends we have not taken out so far. No, we haven't attempted it or haven't tried. Capital adequacy, just a second. Looking at if we have this number here. I'm sure it's somewhere in the analyst tables, we are going to check. Recovery in terms of lending activity, I mean, 1%. We had like 1% growth in the first quarter. Compared to that growth rate, I think there should be some, I mean, we expect improvement for the rest of the year, huh, compared to the first quarter. Loan-to-deposit ratio target per se, we don't have.
We are quite okay to operate over 100%. We issued a very successful bond last year, which was a double currency bond local currency and dollar, and there's further demand. We feel comfortable to be able to fund on a standalone basis, if there were higher growth of loan demand and loan growth. No, we don't feel constrained by funding and we certainly don't have a loan to deposit ratio target per se.
There is no pressure from the regulator, from the central bank, right? Because the sector is such in total has quite high loan to deposit, right?
No.
Okay. On Serbia?
I mean, banks. I mean, in normal environments, banks should have leverage. They should provide leverage in an economy. There's nothing wrong with higher than 100% loan-to-deposit ratio. That used to be the norm in a way. In Europe, we have developed into a situation where banks are expected to have lower than 100%, I mean, typically, or it kind of became.
a new norm that because of there's so much liquidity in Europe and because banks have been so conservative in lending. I don't think that's actually optimal for the kind of long-term development of economies. I don't see any problem having a bank having more than a 100% loan-to-deposit ratio. In the meantime, I have the capital adequacy ratio number. It's 19%.
Okay
19.1 In Ipoteka. The minimum requirement is 13. In Serbia we expect a double-digit growth in retail and corporate lending. We have seen on the market, I mean, I'm talking about market figures here because, I mean, we haven't given guidance on the entity itself. Yeah, we expect acceleration in demand.
Okay. Thank you very much. Appreciate it.
Sure.
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