Ladies and gentlemen, thank you for standing by. I am Gayle, your Chorus Call operator. Welcome, and thank you for joining the Banca Transilvania conference call to present and discuss the first half 2022 financial results. At this time, I would like to turn the conference over to Mr. Ömer Tetik, CEO, Mr. George Călinescu, CFO, Ms. Luminița Runcan , CRO, and Ms. Diana Mazurchievici, Head of ESG and Investor Relations. Mr. Tetik, you may now proceed.
Okay, thank you. Thank you very much for joining us. I hope obviously the sound quality is also good. Thank you for the operator helping us to set up because now we are in a part of us, we are in Bucharest, part of the team is in Cluj. We will try to briefly speak about the first six months of Romania, Romanian banking system and give you some insight about our numbers, what we have done, what we managed to do or we couldn't. Then we would like to how to say, proceed as usual with the Q&A. On the other hand, if there will be other questions after you see the presentation, which is already on the website of BT. If there are further questions, you can always address our investor relations site.
Diana, Vlad, and their colleagues will try to help and answer as soon as possible. First six months of 2022, I don't think it was easy for anyone, any business, any country, because of all the geopolitical and financial and commercial changes. Huge impact of the war just after the pandemic. Still, Romania, a small economy from Europe, I would say, but on the other hand, with large population and with natural resources, is slightly better positioned, if you can say so, in the existing macro environment. The first quarter was very much supported by the momentum brought by the post-pandemic spending and investments and government programs.
In the second quarter, we have seen that this momentum started to fade and actually partially reversed because there are investments being canceled or postponed or production couldn't keep up due to supply chain issues, due to high energy costs and other challenges which came through the war. We have seen the industrial production contracting almost 1% year-on-year in the first months. Still consumption has kept the economy functioning. Our macroeconomic scenario, by BT's chief economist Andrei Rădulescu, is still on the brighter side of the expectations. We think that the GDP will grow around 3.8% this year and over 4% next year.
We are trying to refrain from doing a very long-term forecast now because many things are changing drastically. It depends on how the war, energy crisis and other supply chain issues will prevail or fade away. But on the other hand, we see a good momentum of this post-pandemic investment cycle supported by the European Union funds in Romania. When we look at the loan numbers, we have to also keep in mind that Romania was also under inflationary pressures. The consumer inflation in June year on year was 13%, up from 12.4% in May.
This was also inducing National Bank of Romania to update and adapt monetary policy at the end of May, June. Actually, we have seen the first increases and then, as you know, we are already at 5.5% of benchmark rate. The high, let's say, inflation on the other hand is helping the budget deficit GDP ratio because taxes are collected if consumption is keeping up, and the budget deficits decreased by 1.7%. This is also related with the investment spending, but slightly better collection, tax collection rate of the Ministry of Public Finance. The impact of macroeconomic and geopolitical changes on the interest rates was definitely by lifting the yield curve.
Although we see in the third quarter already some, let's say, relaxation or normalization maybe. In the first six months of the year, increases in the bond yields, ROBOR benchmark had been quite significant. The 10-year bonds of Romania has reached record levels after following years of declining trend. Bucharest Stock Exchange, the BET index especially couldn't avoid sufferings, although as compared to regional peers, it's had a better performance by losing less of shareholders value. The banking sector entered 2022 with good capitalization and liquidity. Despite several adverse effects and forecast, lending activity didn't decrease.
Actually, the non-governmental loans had increased as they did for the last two years, for the 25th month in a row in June, reaching RON 353 billion. On the other hand, the increase of deposits wasn't as fast as the lending, which has seen its impact on the loan to deposit ratio by pushing it slightly higher. Still, Romania is below par in terms of loans to deposit ratio at comfortable liquidity levels as compared to regional peers, maybe. We see that the growth has been supported in all segments. Also, we see corporate loans increasing 14% year-to-date, household loans increasing over 4%.
We see that also the good balance between lei and euro lending continues to keep up. Meanwhile, NPL ratio is quite low. Romanian banking system had 3.2% NPL ratio, non-performing loan ratio at the end of June. This ratio is now actually as of end of July, it's even below 3%. I would like to switch to BT's numbers about first half. In the first half, we continued the remnants of governmental programs, IMM Invest, SME Invest, Agro IMM Invest, Garant Construct, Rural Invest type of programs, where we have seen in IMM Invest, in SME Invest program, 37% of the allocated funds were intermediated through Banca Transilvania.
This shows our strength and good foothold definitely in the SME segment, as we always claim to be the bank of choice in SMEs. Banca Transilvania was very active in all programs in cooperation with SME guarantee funds and the guarantee and contra guarantee fund. We see that Agro IMM is also had been very useful for our customers, Agro IMM Invest. We have a strong market share, sorry. A strong market share in agri business finance in Romania, and also in Agro IMM Invest, Rural Invest programs, we were the bank of choice intermediating over RON 2 billion. We will definitely continue this.
Our investments in digital banking, digitalization of our internal activities, but also customer-facing activities is continuing. We have over 3 million customers uniquely digitalized, as we call, so that they use at least one of the digital channels quite frequently of BT. These are both how do I say, company customers, but also retail customers. We have seen the digitalization of customers grow almost 16% in the first 6 months. We are already enrolling customers online. We are opening accounts online and servicing basic needs, payments, some of the loan products, lending products online.
We also have a Annex project with Idea Bank that we are soon going to be rebranding, where we are creating the first 100% digital, fully licensed bank in Romania. We have moved, I would say that the key person of our retail banking, Ms. Gabriela Nistor, our Deputy CEO in retail banking and cards, is the CEO of Idea Bank. We're looking forward to receive her accreditation approval by National Bank of Romania. Then we will focus in full steam to the development of Idea Bank as well. It is a complementary product. It is more of a fintech approach to banking. It will be a simpler bank. It will not be a bank of doing everything to everyone and not addressing like BT, everyone, any segment.
We are more universal or we will remain more universal as compared to Idea Bank or with the new name that we will announce soon. In terms of the financial performance, our net interest income, definitely supported by the structure of our loan book with variable interest rates, has increased almost 25% in the first six months of this year. We are seeing that due to the pressure on the funding side, the growth might not be as spectacular in the second half of the year. We are also happy to see another six months of over 20% growth in our net fee and commission income. This is a very, let's say, strong focus for us.
We are trying to, how do I say, grow our interaction and definitely fee and commission income earned with the customers. So far our focus and efforts have been fruitful and this is being seen in the numbers. Operating expenses definitely under high pressure due to inflation, due to salary adjustments. I would like to mention that actually in 2022, we have for some of the loyalty programs for the non-executives of the banks, we were due some payments which had been postponed from previous years which had been done. We have adjusted the salaries of our employees at the beginning of the year, in the first quarter of the year, to the inflation.
On the other hand, everything that we consume, we do, is becoming more and more expensive. Still, our net profit was above last year, similar period. We have maintained a good return on equity with 23.7%. The increase in the cost income ratio will be very, let's say attentively, tackled in the next month to come. Management is pursuing several cost control projects. We are not planning to do restructurings or I'll say any decrease in the number of network or personnel, but we are willing to increase our, let's say operational efficiency and optimize some of the things we do. The loan book had grown almost 15% and the deposits by 5%.
This brought the loan-to-deposit ratio closer to 60%. We are still below 60% in the first six months with a quite comfortable NPL ratio below 2%. As we've mentioned a couple of times, our Tier 1 capital ratio or total capital ratio are well above the minimum required levels and at around 22% for each. Our loan book maintains the previous structure, although we see more growth in the corporate side. We still are lending in local currency. We don't sustain or promote necessarily foreign currency risk for our customers. Seventy-five percent of company loans or eighty-seven percent of the individual loans are in local currency.
NPL ratio, as I mentioned, is below 2%, which is coming down from much higher levels, as you may remember from the previous crisis. I guess for everyone it was lesson learned and good management of also collection and recovery activities. We are slightly below banking system average as well. This shows our prudent approach and our deposits as we are as main salary payer banks in Romania and also strong SME banks. Our deposits from companies and households were also growing despite the negative impact of initial, let's say, reactions to war or higher consumption, increase in the installments. Customers have been increasing their deposits with us.
This is making us happy to see that we are still their preference because in the banking system in general, we didn't see much of an increase in the deposits, deposit amounts. Retail banking loan portfolio is over RON 28 billion with 3.3 million active customers. We are being active on, let's say several streams, several activities, projects now to develop packages of new packages of product services relevant for our customer base. In SME banking, we have reached RON 8 billion. Our SME banking definition is a bit different from our competitors or European Union definitions. We are more on the smaller tickets, smaller size, but I'll say RON 8 billion is quite significant.
Besides, the very strong foothold of, let's say, BT Mic, our micro-lending company in the same segment or even global segment. We are growing also well in corporate banking, larger tickets. We have reached almost RON 20 billion in the first six months of the year. In terms of ESG and sustainability, which is quite hot topic from regulatory perspective, from the questions and attention that we receive from our shareholders, but also as responsible citizens because of our responsibility. We are glad that we have managed to announce.
Here I would like to thank our colleagues from Diana and Diana's team, but also risk and finance teams to explain our stance so that from Sustainalytics we received a score of seventeen which puts us at the top-notch of global banks in top 15% of Sustainalytics universe. In top 8% of the regional banks in terms of governance, exclusion list of polluting sectors, responsible marketing and sales policies, and initiatives that we have implemented for human capital development and gender diversity. We have signed the first ever blue loan agreement with IFC. This is the loan targets better use, efficient use of water resources, fighting with droughts, and also improving the wastewater treatments in Romania.
We already have discussions with our customer base, and we think that this will be just first of its kind among many loans. Also, as you see in the presentation, one out of five mortgage loans are green mortgages with Grade A energy certificates that we have granted in 2022. This is something that we want to grow, as the Romanian construction sector, development sector is more focused on this. We have RON 784 million value of corporate green loans assessed by the Climate Assessment for Financial Institutions Platform methodology in the first six months. This is a 130% increase as compared to previous years. It shows percentages are too high, maybe because the numbers were small.
We think that in the next periods, our focus fully and mainly will be on green responsible lending. Our group, the BT Financial Group, has also been offering good results. Now we are in the middle of integrating three leasing companies, I mean, BT Leasing that we have, Idea Leasing and Țiriac Leasing . In asset management, BT Asset Management became leaders, market leaders in terms of assets under management and number of customers. We see that all our subsidiaries are having a positive contribution to the bottom line.
It's one of the businesses that for us, at our size, at our dimension and market share, BT Group is still small, but we want to develop is BT Pensii, the Pillar 3 pension fund that we want to grow further. Here, we see huge potential to grow profitably and operationally. I would like to leave it here as for the presentation and switch to Q&A. As I mentioned that we will try to answer your questions now on the spot, but in case we cannot, we will come back by updating our presentation or directly to you. Please do not hesitate to approach us through Investor Relations address. Thank you very much. We can start the Q&A.
The first question is from the line of Hai Thanh Le Phuong with Concorde Securities. Please go ahead.
Yes, thank you. Thanks for your presentation. Just a quick question from my side on loan growth. I think you mentioned during the presentation you may expect somewhat of a slowdown on the dynamics, and I was wondering, like, what should we expect in the second half of the year or maybe moving to 2023, maybe if you could share your view on that. Also another question from my side is on other expenses. I think it increased significantly in the first half and also in the Q2 , and I was wondering if there was any one-offs to those other expenses. Thanks.
I don't want to be misinterpreted or maybe I misguided you. We think that the increase will decelerate, but we don't expect lower returns or lower income. It's definitely cost of funding is getting higher. But on the other hand, our loan book will continue growing, especially on the company segment. Romania, although has reached over 60%, almost 65% actually, absorption of European Union funds. Still, we have upside potential there. That's why we think that there will be growth both on the SME mid-corporate and large corporate segment. We may see a small tempering of the consumer demand, but it will come back next year with the adjustment of salaries.
Romania has also almost zero technical unemployment ratio. It's not a, how say, besides the GDP numbers, which are very statistical and high level, on the other hand, the impact on the household incomes is not there, and we are not expecting, I mean, to be there. That's why, we will continue delivering strong, NII, net interest income, but the growth might not be as fast as the first six months. As regards to the other expenses, I will ask George Călinescu to answer.
Hello. In terms of other expenses evolution, the growth in the year 2022 was driven primarily by the increase in terms of utilities expenses. I think that we have had a growth there in terms of increase in line with what happened in the economy. However, what I can say is that we have noticed that this growth is in accordance with what we have budgeted for the year 2022. It's not a surprise.
We think that media were a little bit below the budget that we had for the same period of the year. Other areas that increased, in addition to utilities, is related to the IT licenses, where we continue our investment into IT and in both in terms of infrastructure and also in terms of development of software solutions for the bank.
Okay, thank you very much.
The next question is from the line of Marta Czajkowska-Bałdyga with Ipopema Securities. Please go ahead. Ms. Czajkowska-Bałdyga, can you hear us? Mrs. Marta?
Yes. Hi. Hello. It's Marta Czajkowska-Bałdyga from Ipopema here speaking. Do you hear me?
Yes, we can hear you. Please proceed with your question.
Okay. Perfect. Thank you very much. Thank you for the presentation. I have a question regarding the monetary policy rate. Where do you expect this to go by the end of 2022 and maybe in 2023? Connected with that, if you could remind us, Banca Transilvania sensitivity to the 100 bps increase in the monetary policy rate. That would be really useful. The second question is on your cost of risk expectations for 2020. Well, with CPI going higher with the utility prices going higher, is that concerning you with regards to the asset quality of the retail and maybe corporate segment with regards to utilities?
Yeah, any thoughts on that? Thank you very much.
Hello. I hope I will remember well the question rightly. Please remind me if I skip anything. As regards to the monetary policy rates, we are foreseeing maybe another between 50-100 basis points increase this year. On the other hand, with the deceleration of the consumption, I mean, or the lower growth of consumer spending and some precautions, I think NBR will be more careful about not inducing well recession through the monetary policy. We are estimating monetary policy as I said, maybe ±75% higher. Very generally, as most of our I mean, heavily actually our loan book is with variable interest rates.
Being repriced between 3-6 months period. The impact usually is, well, the higher net interest income. It depends very much on the change in the deposit rates or funding costs, how much of it will be impacted. As we have seen in the first 6 months, there was a big, let's say, desire of the customers, maybe, especially retail customers, to convert into euro, but it didn't create pressures on the exchange rates. On the contrary, as you may see in the last couple of days, actually, exchange rate is even decreasing because this money and also remittances of Romanians abroad is entering economy back again.
In terms of asset quality, I'll say we think that the impact, as long as employment and economic activity will continue, it will not be very significant. Most of the companies, larger companies, as everywhere in the world, they manage to reflect partially or fully the cost increases in their prices. For the retail customers, yes, they are paying higher installments. On the other hand, salaries are being adjusted all around the sectors, not only at BT or banking sector. Romania is actually catching up in terms of labor costs and still relatively a cheap country.
That's why, although I wouldn't expect asset quality to continue decreasing or to maintain here, we don't see that the deterioration of the asset quality would dilute the impact of higher income. It's obviously still on the positive side. Let's say the bottom line will be on the positive side. As regards to a 100 basis points increase, what will be the impact will depend very much again on the liquidity structure that we have and because we also can invest in higher interest rates, bills and bonds, we can give loans at higher rates. It will be. I just assume I will ask my colleagues to calculate and maybe put it in the presentation later.
It should be one hundred and fifty basis points of equity. Anything that I missed, please, ask again.
No, thank you. I think, it's all.
Thank you.
The next question is from the line of Roman Foyalov with Prince Street Capital. Thank you.
Hello. Hi, can you hear me?
We do.
Yes, Mr. Fojailov, we can hear you. Please proceed with your questions. Thank you.
Hi. Great. Thank you. Thank you very much for the presentation, and congrats on the good numbers. I was wondering about the announcement about converting the Idea Bank license to be a digital bank in Romania. Can you talk more about the timeline for when the digital bank is going to be launched? I guess more broadly, what you hope to be able to achieve with this project, how it might supplement what you're doing with BT already and how impactful, how meaningful it can be financially for the company longer term. Thank you.
Thank you for the question. This is, I'll say among all the challenges, this is an interesting challenge that we pursue. I don't want to be again, for clarification purposes, we are not changing the license. Idea Bank is an operational, fully licensed bank already. We purchased it from Polish Getin Holding. We are converting their business model. We already closed the branches of Idea Bank. They do at a very low, small level, I would say, some digital lending, but the purpose of this bank and, this digital bank is, both to go focused on a segment where we see as BT, with legacy systems, legacy services, and with millions of customers, we cannot really allocate full focus. That's why the creators of our most successful digital banking product, BT Pay, Ms.
Gabriela Nistor is running the new bank now, this smaller bank. It will be also, if we may say so, an A/B testing environment because any product service platform, API, from cloud services to core banking, anything that functions well at Idea Bank that we consider that we can escalate, we will be moving, transferring as a know-how, as a platform also to BT. Some of those things is quite expensive or delicate to do at BT because, I'll say, switching systems, switching platforms, when we are doing 35% of the daily payments, when you have a significant market share in online payments, POS payments, acquiring, ATMs and so on, we cannot risk anything. We want to.
This is our bank, our subsidiary that, where we will learn by doing things. We will be opening up also to new resources. As you know, our head office is in Cluj, and we are very much focused on our very talented IT technical, let's say, pool of people from Cluj. Idea Bank with head offices in Bucharest will be also attracting talent from Bucharest. It's a bit of increasing our foothold, learning, doing new things, learning, doing things more agile for a niche customer base. I mean, these are the customers of several Fintechs who are not necessarily willing to do a Western Union transaction with a mobile phone from an ATM type of things.
It will be a very basic product package addressing 95% of customers' needs, as many other fintechs in Romania are doing, and we see their numbers. We appreciate what they do. It will be, I'll say, once it will reach a certain maturity. I don't know if it is seven, eight or 10 years. We don't have necessarily decided there, but most probably it will be merged with the mothership, with the mother bank.
Understood. It sounds like it's as much a desire to make this a kind of experimental lab for BT rather than have the bank itself make a huge difference financially. The idea is to help improve how BT functions?
It has also this. Our, I'll say, one of the scopes. List of scopes is definitely this. I mean, one thing, this lab of bringing new people, getting used to working this, let's say, profile of personnel, but also addressing a certain segment where the competition is very high and sometimes as a universal bank like BT doesn't have enough focus to tap that niche which is being well utilized by even external competition. I wouldn't mind saying it's a lab, although it was not necessarily risking neither shareholders' money or our, let's say, focus on doing responsible banking.
Yeah. Okay. Makes sense. Thank you. Appreciate it.
The next question is from the line of Mihai Bratvălean with Aegon Pensii. Please go ahead.
Yes. Hello. Can you hear me?
Hello. We hear you.
Okay. My question, actually my set of questions are related to a section of your financial results. Basically, we want to understand more about the reclassification of your fixed income portfolio debt on the financial results at consolidated income part. Basically produced a RON 3.5 billion profit should have been a loss. Overall you can say that now, Banca Transilvania, at least on paper, looks at the first view, looks more attractive than BRD. For example, from our calculations, if you haven't done the reclassification of your fixed income portfolio, your capital ratio would have decreased to around 7%. Obviously Banca Transilvania would not have been that attractive to potential investors. Could you please elaborate on this?
Sorry, can you repeat the last phrase Banca Transilvania has been or has not been? I didn't understand.
Okay. We have
The last sentence.
From our calculations, your capital ratio should have decreased with about 7%. That basically would have made it quite difficult for you to offer, from our point of view, to offer dividends for the current year. I mean, at around 15 or 16%, the capital ratio doesn't look that good anymore. Any more details regarding the reclassification? We've read the financial results, your comments regarding this, but from our point of view things, it seems strange and yeah.
It's definitely also, and the first non-technical discussion I would leave a bit later to our CRO, Luminița and CFO, George Călinescu to answer that. First of all, our profitability is not impacted. I mean, the numbers that we have shown is not impacted in terms of the bottom line we have generated by this reclassification. The idea is that due to changes in the portfolio structure of the bank after several acquisitions, moving deposit and loan customers from several banks with different, also, how to say, currencies or conversions. Plus, our business model is very much in the last, as you have seen in the numbers, getting more and more stronger.
Yes.
On the higher segment of SMEs or mid corporates or large corporates. There is a business model change that we are assuming, and also we think that this is the relevant for the current market and economic conditions. On the other hand, the reclassification although it has, as you said also, a significant impact indeed, it doesn't change our lending capacity, our business growth capacity. Nor, I wouldn't enter into a dividend discussion now because I know as long as you don't, you know something that we don't know, dividends we are paying based on the prudential calculations and the profitability that we generate.
Mm-hmm. Okay.
I mean, we have seen. I'm trying to select my words very carefully here not to give a misguidance, because we have seen in the past periods due to pandemics or due to several changes, regulatory bodies.
Yeah.
Be it EBA or ECB or locally can give certain recommendations or directions. There is no such discussion or recommendation yet. That's why I don't want to commit to a certain amount of dividend payment or not. On the other hand, how to say, as long as the bank is profitable and prudential ratios permit, we will definitely give back to our shareholders as we did in the recent past period as well. This is something that I think we will have more clarity when we discuss in end of October, beginning of November about our September results. We'll see market trend, macroeconomic trend. On the other hand, as I said, I would like if they want to add anything, George or Luminița to contribute here.
With respect to what's permitted or not permitted under the standards, reclassification of the financial instrument is permitted. Even though it's considered to be a rare occasion. This is allowed in the case there is a change in the business model of those assets that are being reclassified. This is driven by the bank management. Of course, this is properly documented by the bank and this is explained in the notes to the financials. As Ömer mentioned.
We can try to take another question or continue.
Mr. Bratvaleán, are you finished with your questions?
Yes. We wanted some clarifications regarding this. We understand that basically as a conclusion the reclassification is permitted. Nonetheless, we'll have to take into consideration the fact that now Banca Transilvania and BRD basically the competitor of the closest competitor of Banca Transilvania are reporting differently. My question was from an analyst from a portfolio manager point of view and the potential investor. Okay, great. Thank you.
I don't want to comment on our competition, and they are all very reputable, responsible institutions. Our model of, how to say, operating model, business model had been always almost different. From customer segment to currency structures, to variable versus fixed portfolios. That's why I don't want to. I cannot comment on behalf of them, but as we have explained that we have some underlying reasons of changing of the operating model. Still, again, a big variable, the parenthesis, even without reclassification, our business development wouldn't be hindered.
Okay. Thank you.
Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Tetik for any closing comments. Thank you.
Thank you very much. Thank you very much for your active participation. Your questions either now or during the our daily course of business helps us also to redress or address certain things which we might not see as clear as you see from outside. On the other hand, looking forward to how to say, meet you, hear you again. We will be participating to a couple of investor conferences in September and in October, in Romania and out of Romania. If we will have chance to meet you then face-to-face, it will be good after years of only teleconferences and Zoom meetings.
Again, I repeat that if you have any further questions, please address our investor relations address, and my colleagues will revert to you as soon as possible. Until then, stay safe, take care of yourselves, and hopefully we will speak less of economic challenges, social challenges and war, and more on business challenges and how we do things better. Thank you.