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Edited Transcript of OTP.BU earnings conference call or presentation 8-Nov-19 2:00pm GMT

Q3 2019 OTP Bank Nyrt Earnings Call

Budapest Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of OTP Bank Nyrt earnings conference call or presentation Friday, November 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* László Bencsik

OTP Bank Nyrt. - Chief Strategy & Finance Officer of Strategy and Finance Division

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Conference Call Participants

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* Andrzej Nowaczek

HSBC, Research Division - Analyst

* Anna V. Marshall

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Gabor Zoltan Kemeny

Autonomous Research LLP - Research Analyst

* Máté Nemes

UBS Investment Bank, Research Division - Associate Director and Analyst - European Banks Research

* Olga Veselova

BofA Merrill Lynch, Research Division - Equity Banking Analyst

* Samuel Magnum Goodacre

JP Morgan Chase & Co, Research Division - Executive Director and Head of Emerging Market Europe, Middle East and Africa (CEEMEA) Banks

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Presentation

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Operator [1]

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Dear, ladies and gentlemen, welcome to the OTP Bank Q3 2019 Conference Call. At our customers' request, this conference will be recorded. (Operators Instructions). May I now hand you over to László Bencsik, Chief Financial and Strategic Officer, who will lead you through this conference. Please go ahead.

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László Bencsik, OTP Bank Nyrt. - Chief Strategy & Finance Officer of Strategy and Finance Division [2]

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Thank you very much. Good morning, or good afternoon, depending on where you are, and welcome you on OTP Bank's 2019 Third Quarter Interim Report Conference Call. I suggest to follow the usual procedures, so you have the presentation available on the website. And I hope you had the chance to download it. And I'd try to briefly go through this presentation, and then obviously, open up the floor for your questions.

So starting in Page 2. After a relatively good second quarter this year, I think we are having another decent quarter in the third quarter, the adjusted profit was HUF 110.5 billion and that's basically added up to HUF 313.1 billion adjusted profit after the tax for the 9 -- first 9 months. And in fact, the quarterly accounting profit was somewhat higher than the adjusted one I'm going to -- and this is obviously related to acquisitions and mergers, and there will be a slide about this.

So all in all, in the first 9 months, we have been growing 19% in terms of profits and this growth, has come from 2 sources, one is the new acquisitions already started to contribute positively to earnings. And the second one as is the organic nature of the business without the acquisitions, also your earnings growth.

So out of this 19% growth basically, [5]% percent was organic and the rest was the positive effect of the new acquisitions, which we did this year, which is primarily the bank, which we acquired back in January in Bulgaria because the other 3 were rather small, and the next big one, which came at the end of September, the Serbian one was only included in terms of its balance sheet.

The P&L was not yet included, that is going to come in the last quarter this year. So hopefully, there will be fourth -- I mean, there has to be a boost to our earnings in the fourth quarter coming from the positive contribution of the earnings of the recent acquired Serbian Bank.

On Page 3, you see the one-offs and especially, I think it's important to talk about the third quarter. You see here, this relatively big number, HUF 21.4 billion, altogether, effect of acquisitions.

In this quarter, it's a combination of different factors. Basically, we had bad will in the 3 acquired companies, which we -- when we closed the transactions in the third quarter. So -- in the Montenegro, the Moldovan and the Serbian banks. So these were positive contributors. And on the negative side, we had the usual expenses and costs of the mergers and acquisitions, which we continue to do and what you see here is basically the net amount of all of these -- so it doesn't mean that one of the transactions have exactly this bad will. It's basically a compounded number.

On Page 4, you see the overall kind of adjusted profit after tax breakdown by entities. And this is the first 9 months year-on-year performance. And as you can see, most of the growth actually came from outside Hungary. The OTP Hungarian banking core operation grew 4%. Leasing grew 2%, and then actually the -- our asset management business was somewhat negative. This is due to the fact this new retail government bond was introduced by the National Asset Management company. And that is so attractive that it [carded] out pretty much a lot of other types of investments, including our funds and therefore, asset under management decreased somewhat.

But or otherwise, if you look at the foreign or outside Hungary businesses and in our group, and they -- some of them actually achieved remarkable year-on-year growth. I mean, in some cases, this was obviously attributable to acquisitions like in Bulgaria, 40%. But also organically, in Russia, Croatia, and Ukraine made quite -- and also, I would say, Romania and Serbia made quite a large improvement.

And part of it, especially Ukraine came, obviously, from the strengthening of the currency the Hryvnia versus the ForEx. The 40% growth in Ukraine was partially due to this FX change, but even 26% in itself was quite strong. And in Russia, local currency, 14% growth. And then in Croatia, with other leasing company's inclusion impact 20% growth year-on-year. That's obviously, mostly due to the fact that we started to realize in a big way, cost synergies after the merge, which was completed, and this is the first kind of full year after the merger, '19.

Romania does also remarkably well. Organically, we see growth here, and you will see also in the volume numbers that is that they started to -- they have a new management team, actually, from the beginning of the year, and they managed to kind of reignite growth there invigorate the organization, and they're doing very good headway. So all in all, all markets seem to be doing reasonably well. And this is, by the way, not surprising, we are operating in a very supportive economic environment, I would say in all the markets we represent. That means we have decent demand growth and we have quite subdued recent levels of fixed costs and the only kind of headwind we have is that in most of these cases, we have margin pressure, as you will see in further slides.

So going to another perspective on our earnings. This is the P&L perspective of the group results. And I think this is potentially this kind of gray header columns are the most interesting, the (inaudible) acquisition numbers, which are obviously the ones largely comparable to last year's figures. And we talk about quarter-on-quarter, we even included an FX-adjusted column because primarily the Greek and the ruble move a lot, strengthen a lot towards our reporting currency, which is the Hungarian Forint. So the good news is without acquisitions, organically, our operating profits grew 16% year-on-year if you compare the first 9 months. And even on a quarterly basis, we have 7% growth. So this, I think this shows a relatively strong dynamics in earnings improvement.

A few words about and facts, basically about the 3 banks, which we consolidated where we closed the transactions and [attached] the assets. The biggest one at the end of September was the Serbian Bank [consortium] and that's, as you can see on this slide, is a sizable bank and has a meaningful visible material contribution, first to our balance sheet, basically because the transaction was closed very close to the end of September. So actually, the P&L was not consolidated, only the balance sheet and the balance sheet was consolidated at the end of the third quarter only.

That obviously introduced some noise into the net interest margin number, as you will see later on. But most importantly, with this acquisition, the pro forma combined entity, 2 entities we have in Serbia, the combined one would be #2 in terms of market share, which is already a strong position and provides us the scale required in order to achieve the earnings and the return progress which we typically have for the group. So we're quite very happy that this transaction was closed, and now we are preparing to start our well second merge process in a not very long period of time, which is finished.

You might remember that the previous merger in Serbia back in the second quarter this year, and we are about to start a new process and as we are getting exceedingly efficient at merging entities very much further. This is going to work as smoothly at least as smoothly as the previous one did.

Now there's another markets where we boosted our presence, and this is Montenegro where we already used to be #1 before the acquisition. Now we acquired the #4 bank and then the combined entity together market share pro forma is actually close to 30%. So this, we believe, is a meaningful position and I think if we are present in a small country, then this is the type of presence, which can actually, we could actually argue, makes sense because if you are so much a market leader even in a small country, it still can generate earnings, which are sufficiently high.

But obviously, we have a long road to (inaudible), we have to combine the 2 entities as well. And the fact that they are 2 smaller entities, doesn't mean that it's so much easier to merge them efficiently because pretty much the IT developments and the IT technicality of the merger are almost the same, regardless of the size of the 2 entities we merge.

And then finally, on Page 8, which shows the numbers for our new acquisition in Moldova. That is somehow in itself, I think it's not tremendously obvious why we have this bank in a small market, being #4 but again, this was part of this overall consideration of [certain] assets in the region, and we believe that, overall, considering the inside transactions or the number of transactions we have taken, it actually fits very well. It's a, it's a bank which actually makes money and makes decent return on it, I mean, compared to its size, but certainly, in a small market like this, having 13.2% market share and being #4 is not exactly the right strategic positioning for us.

So firstly, I mean, obviously, we have to start learning the market and adapting the bank to our group standards and incorporating it into our group purchases, but we keep our eyes open, in case we find the environment attractive for potentially even increasing in the future our presence there. And then the next section is a cross-section about volume growth in loans and deposits, and we have slides about quarterly, year-to-date and year-on-year, first 9 months growth rates. Now this is a part which where we seem to do actually better than we originally expected. And no, I'm obviously talking about organic growth putting aside acquisitions. So just in the third quarter, we grew 4% just quarter-on-quarter, and the year-to-date growth was, as you can see on Page 10, for first 9 months for the whole group, 10%.

And year-on-year 14%. So our kind of momentum is a speed we are growing with is 14%. And in the first 9 months, we already grew as much as we indicated at the beginning of the year as our potential growth for the entire year. So it's not surprising that we actually corrected somewhat upward the guidance we made at the beginning of the year. And it's pretty obvious that we are going to grow more than 10%. And obviously, to have different views, but it's not just going to be a little bit more but material more, given that in the third quarter, we were growing 4%.

So let's have a look a little bit into this kind of deeper into the third quarter growth is 4%, FX-adjusted performing loan growth, which is new definition stage 1 and 2, IFRS 9.

So Hungary, as you can see, was extremely strong. Only one quarter it grew 8%. And if you look at these numbers here, the specially consumer was very strong. There will be a separate slide on this, but there's a new phenomenon in Hungary, and that is the subsidized scheme. Actually, that's a subsidy which the banking sector passes through to retail clients, more or less. And this is a baby [shower] loan structure.

I'm going to somewhat explain it in more detail. But actually, we have put on the website, a long time ago, a description of this structure. And this is not something the banks invented, this is a regulated product, 100% regulated, actually not 100% regulated because of pricing, the banks can differentiate, obviously in the pricing, but the structure itself is -- and there's a cap on the pricing and then the whole structure is actually regulated, so it's most available as a regulation for you if you want to understand it more deeply. So this is a volume which is -- it's already big, and it's going to continue to grow. And just an indication, so we actually grew 43% quarterly -- on a quarterly basis. And I'll suggest only 6% growth was attributable to our normal cash loan. It's a good thing.

Actually, this is quite good because it means that despite this very strong and attractive product for customers, it actually, despite the popularity of this, our core product, our very own product, also continued to grow. So the cannibalization of the crowding assets, the demand for consumer loans did not fully happen. And if you look into housing loans actually, housing loans, we had [3%] growth on a quarterly basis, which actually means some acceleration. So in this period, we had -- actually, it's somewhat higher than that. Corporate will remain strong, 4%. So across the board, this will suggest a relatively strong demand and lending activity in Hungary.

But if you look at other markets, it's also promising. Bulgaria, 2% quarterly; Russia, 2%. Obviously, Russia is seasonal. So the third quarter, typically, if you look back the last 10, 15 years, typically, the third quarter was when we started to grow somewhat, and the fourth quarter was -- has always been highest growth. So we could expect some positive seasonality in the first quarter coming regarding our Russian consumer loan volumes.

And then the other markets, Ukraine, very strong FX-adjusted 7%. Romania 7%. I think this is a very important number. You may remember that we had a kind of sales acquisition [attempt] if I can put it that way, last year in Romania. And then afterwards, we decided to refocus our efforts on organic growth again and renewed part of the management team, defined a new strategy, started new projects, and we were actually quite early. We did started to see results of these efforts, and our volume growth accelerated substantially, started to accelerate substantially in Romania. In Serbia, organically, we did quite well in the third quarter and the rest of the markets for other uses.

So that's about the kind of overall loan growth across the group. A few words about deposits. Obviously, deposit growth is much less strategic and drives lots of earnings, but nevertheless, very important and a very important indicator of our ability to affect clients and to retain the client base that we have. So -- and again, one number I think is very interesting on this page, and it's the Hungarian retail deposit growth. In the third quarter, it was positive 2%. Just let me remind you that in the second quarter, the National Asset Management business introduced a new structure, a very, very attractive retail bond structure where the yield, if it's holds -- held for 5 years, then actually, the yield gets close to 5%, tax-free.

So this is a product which is very attractive for retail customers, and it's hard to compete to it. And in this environment where this retail volume is growing extremely fast, actually, our deposits, our retail deposits continue to grow, despite the fact that we don't pay much interest on these deposits. And that, for us, shows that the -- from a transactional point of view, we provide attractive value proposition to our clients, and they keep coming to us and coming to bank with us.

So you can see the more detailed figures in the year-to-date and year-on-year growth rates as well. This is the deposits.

Now we have few slides, actually quite a few, 4 slides about the [main] story. And this is clearly an area where compared to our original expectations we had at the end of last year where we made the budget for this year and even at the beginning of the year, had to be changed. And that is because the rate environment turned out to be very different from what we originally expected. We originally expected an increasing reference rate environment and more or less stable but even somewhat increasing kind of longer -- the longer end of the year, of course, as well. As opposed to this original expectations which we used to have, in fact, the short end is not moved so much.

It's very close to the point where we started the year, around [70 basis points] reference rate. That's the 3 months into bank rating, Hungary, and this is the reference rate so far of our loan book, the variable loan, typically. And the long end of the yield curve has collapsed pretty much. So -- and that does have a -- and has had an impact on our margins. And the first time it became visible, clearly, was the third quarter. And the overall group margin, net interest margin, declined to 3.99%. I'm going to explain in detail the different kind of levers which affected this. And if you take out the effect of all the acquisitions which we did this year, that was a 4.17% so even that is lower.

Now I have this slide here on Page 15, just to put the whole story into perspective. But it says, what happens is, margin decline in itself doesn't mean that profits go down or interest income goes down or the ROE goes down. So in fact, during -- on Page 15, you see the net interest margin for the last 7 quarters. And it has the trend -- I mean, it has decreased, right, for the overall group, very clearly, partially due to acquisitions.

But very recently, it also started to decrease even without acquisitions. And during this time, we actually maintained around slightly above 20% return on equity. Obviously, including acquisitions. And the adjusted profits even without acquisitions kept growing, and net interest income kept growing. So the only other thing I want to suggest here that -- I mean, markets are growing so fast and when there are acquisitions, margins are important but have to be taken into consideration as a whole. And the focus probably should be more in net interest income dynamics than in the margin. So on Page 16, we've tried to explain more or less why this decline happened from the second to the third quarter.

So we'll start at the top with the reported number for the second quarter. We see supply adjustments, what we have for the 2 acquisitions, and we get to the 4.33% number, which was the number which I was, representing the without acquisitions [mergers]. And then compared to those, we had certain elements, which we highlighted on this page, which had sizable individual impact on the margin.

There are 2 of them, the first 2, which are -- which are actually long term. So there's, obviously, will stay with us and are not going to turn around or recover. And it's the -- we have maturing bonds in the first half of the year, but especially in the second quarter. And the reinvestment yield of these bonds was lower. And that is the direct effect of the march -- of the decline of the long end of the year curve what we had experienced during this year. And the other one is, which is obviously (inaudible) end of the second quarter, we issued a Tier 2 bond.

And from now, and we have to pay the coupons. And therefore, we have an increased interest expense. And to tell you the truth, we find very little meaningful yielding euro investments where we could put this euro liquidity. And then we have 2 more lines here, which had -- even on a consolidated day-to-day, strong impact. But those will then come from the Hungarian core. The one is that we, in the third quarter, decided to repo. I mean, this might be strange to hear given the level of liquidity what we have. But this was the most efficient way to provide a short-term liquidity, it was actually cheaper than swapping from euro back to HUF. Therefore, we started to repo. That increased the balance sheet. But overall, the NII impact was marginally positive because this is the most efficient way to provide liquidity for the volume loans that we have.

So in a sense, this is going to continue for a while, and then probably we'll turn around and go back to 0 in the subsequent quarters as we -- as some of the liquidity gets freed up from existing government bonds. But nevertheless, this is an item, which decreases the margin but doesn't have a negative impact as such on the NII. And then we had another business, other line which happened in OTP core.

This is basically -- it's a booking, which happened in the second quarter, and we had to have changed or the booking between net NII and other income so we have -- so basically correction. Reclassification so to say, but it doesn't have an impact on the profits, neither in the second nor in the third quarter is just so the reclassification between NII and other income, but nevertheless, it did have an impact on the NII. And therefore, in the margin. But for core, this is not going to be repeated in the first quarter in the following quarter in the fourth quarter. So that -- it is not something which is going to stay with us.

And then all the other effects had basically a positive basis points number. In the third quarter. And then we end up having this 4.17% without acquisitions margin, and then the with acquisitions margin was 18 basis points less. Basically, the difference between the second and third quarter adjustments due to effect of acquisitions was the fact mostly that as the Serbian bank came at the end of the third quarter, and it's was only included in the balance sheet and not in the earnings.

So therefore, they obviously have a very, very strong negative impact on the net interest margin because the denominator was increased but the denominator was not increased due to the fact that we did not recognize in the third quarter and the earnings related to the new acquisition in Serbia, which we are going to do, by the way, in the fourth quarter.

So that's obviously a very technical element.

And then Page 17 shows the same story from the perspective of OTP core, the Hungarian entity. And some of these events, which actually are described on the previous page appeared within the Hungarian core. Namely, the first one is the reinvestment yield, the lower rate investment yield and the second one is the repo deals outside the bank and then again, there's 3 classifications between NII and other income, that's the third one. And the fourth one, it's another tactical item which does not have, in fact, material impact on the overall consolidated numbers.

It's basically an intra-group swap deal between our Bulgarian bank and Hungarian bank because a part of the excess liquidity of the Bulgarian bank is actually invested and capped in Hungary and the way we move it to Hungary is basically an FX swap and a repo deal combination. And we have to value the swap market-to-market in the 2 different entities. So therefore, it has an impact on, again, NII and other income in both entities. And if we take these kind of 2 lines in each of these 2 entities so altogether, the 4 numbers, then be more cancel each other out not exactly 100% because there's a timing effect as well, so they cancel out the full duration of the swaps, which is 2 years then, but even in this quarter, it was more or less close to 0, the over impact.

We are -- by the way, we hope we can improve on presenting these because it doesn't make a lot of sense to talk about this more kind of noise. So for the next quarter, we are going to net them out and still keep showing you the impact, but only in the -- in the adjustments what we make in the original financial statements and hopefully it won't show up in these overall numbers.

So the remaining is actually positive. So this this is green 8 basis points, which is all the rest, right? There's the impact coming from primarily increased lending activity and increasing portfolios, customer portfolios, loan portfolios, which do have a positive contribution to margins.

So in a sense, if you take out the technicalities from the Hungarian core from the core margin, namely 2, 3 points 2, 3 and 4, the repo, this kind of reclassification and the inter-group, then we have the minus 7 basis points negative coming from the reinvestment -- lower reinvestment yield of our bonds and a plus 8 basis points coming from all the other effects. And that's -- these 2 could have actually that and each other, if they had not had these other rather technical items.

Okay. So the remaining part of the group. Bulgaria increased somewhat and improved. But here, again, is noise. And because of the inter-group swap actually we terminated it at one swap, and therefore, we have 3 out of 4 results. So this is -- this -- it improved this -- just the line the NII line in Bulgaria by 3 basis points. So this is -- so actually, the increase you see here that actually decreased in the second quarter. So if you take the side then in fact Bulgaria was rather stable and flat. And what you see here is increased, it's just basically due to this impact.

Russia continued to decline. Croatia, slightly lower Ukraine, somewhat lower, and Romania actually started to increase. And this is due to the change in the rate environment and also due to the very strong business activity I showed you on a previous page.

So all in all what we see is that in Bulgaria, and Romania, it's slightly stable or slightly positive in case of Romania, but Russia and Ukraine especially still on the negative slope in terms of NIM development.

So I know this is a complex topic. And maybe it's too technical, but I'm still confident that we will have very detailed questions regarding the NIM and so on. So therefore, we thought that it was just try to explain it as much as possible and be as transparent as possible related to the NIM changes.

Okay. So moving away from the NIM story to the risk parameters. They seem to be in line with our previous expectations. The third quarter is [frustrated] somewhat higher than the second quarter, but still in line with our kind of yearly expectations. And as you can see, the stage 3 ratio continued to decline and also the 90 days plus due ratio continued to decline. Actually, the latter reached 5% and -- but also the stage 3 ratio declined substantially to 6.9%, and especially if you compare this numbers today to the level when we introduced this new metrics with the introduction of IFRS 9 in the first quarter of '18, I think it's quite remarkable how much we improved on the [MPI] ratios which are measured in terms of the stage 3 ratios.

That covers pretty much stay the same. Cost. Again, this is an area where we -- where we adjusted the guidance, and then here the adjustment was upwards compared to the original kind of expectation of 4%. We now are actually guiding for around 6% growth. And that's after the first 9 months, we had year-on-year, 6.8%. Having said that, this is already better than what we had last year. Last year it was about, actually, 8%. And what I'm talking about here is always, obviously, without acquisitions and FX-adjusted numbers. Now again, a little bit -- I'm trying to put this number into perspective [with cost curves] because in itself, this is just one line. If we look at the efficiency development of the group over a longer period of time. So on Page 20, we put basically since 2007, the cost to asset ratios.

And as you can see, it has improved, and we are at the lowest pretty much ever level with 3.3%, cost to average assets. And if you compare it to 2010, the after kind of after the crisis here, then -- actually, there was 10% improvement. Now despite of this, we see a different development in the cost-to-income ratio, which actually worsened 15%. And we are in the first 9 months in 52% level. And this is due to the fact that our revenue margins substantially decreased. I mean, in this 9-year period, basically 22% decrease into the revenue margin.

So the driver behind this somewhat higher cost-to-income ratio than we used to have is not that our cost to assets and therefore, kind of primarily efficiency ratio got worse, it's because our income margin declined. That's obviously not an excuse for having a higher cost to income, so we are working hard at making it lower. And I think there's some potentially good news here that, first of all, last year, it was 56%. Now first 9 months, it was down to 52%. By the way, the first 9 months last year was rather 54% so the last quarter was seasonally high. But nevertheless, no matter to what we compare it, we actually managed to improve this ratio with it being material compared to last year. And in fact, in the third quarter itself, we have lower than 50%. So it was 49.8% level.

Okay. So this was the kind of cross-section part. And then we have 3 slides on the Hungarian core. Some more detail about our retail and corporate business lines performances in Hungary.

So basically what you're going to see some key metrics about our market position in Hungary regarding our retail customers. So our market share from new mortgage production continued to increase during the course of this year and the first 9 months, it was actually higher than 30%. Newly disbursed cash loans, close to 40% at 39.1%. And then we capped basically the same level our market share from household savings. So this picture we like.

We believe this is -- that is probably the most important indicator, how the market shares developed in a given market. And I think these are quite convincing numbers and levels in Hungary and show the strength of the brand, the franchise and the level of innovation and service quality, we are providing to our customers.

On Page 22. This is this new loan. It's -- call it, baby shower loan. It's not actually the real translation, but the Hungarian name, this means something like that. It's primarily a subsidized scheme which is intended to boost demographics as well as general economic activity and consumption. And the way to structure it is basically a loan distributed by the banks, and the volumes you see here are quite substantial.

So in just 1 quarter, we contracted HUF 124 billion half of this new loan, and the market was HUF 277. So we have somewhat less the 45% market share. And then in the bottom part, I'm not going to read it, but if you have more or less the outlines of the structure here. It basically states guarantees and the interest income we receive is coming from the state. And the customer pays guarantee fee, which we transfer to the state. And this is going to last. So it was not just 1 quarter. This is going to continue to grow. And we see continuously high demand for it, which is not surprising. So technically, it can be distributed for 2.5 years.

So that's the technical expiration of the structure. But obviously, only eligible clients can apply for this. And we expect this -- the demand to be very much front-loaded because those who want to take it and qualify for the conditions actually, it makes a lot of sense for them to take on this structure. So this is going to continue to boost the volumes and as well as revenues and income.

Now, Page 23, the usual numbers about our corporate activities in Hungary. So the good news is that our market share remains stable in Hungarian corporate loans year-on-year. And the overall market growth slowed down somewhat compared to last year, but still quite decent and pretty much in line with our expectations. And especially, the good news is that the -- in segment terms, we are -- the growth is stronger in micro and small companies than in the overall corporate (inaudible) market, and that means that really kind of higher-margin part constituent of this curve is actually growing faster.

And finally, this is our formal update on the original guidance we made at the time when we presented the annual results and the AGM by our Chairman. And it's not a kind of full revision. We only put on this page the lines where we do see changes and where we believe that it's material enough and important enough to let you know.

So first of all, there's more clarity on the expected level of Romanian bank tax. It was not very clear end of last year and beginning of the year. But now we expect to pay around HUF 700 million, equivalent in the fourth quarter. And it's lower than the theoretical maximum because we are growing fast, but also margins increased. So in order for this to be 0, we should grow fast and decrease, and our margin should decrease, which laid on. So therefore, we actually had to pay this expected amount.

Then I think the most important one, which is, I mean, very obvious and very visible, is the loan growth. So it's quite clear by now that the loan growth dynamics is going to be more than around 10%. And the other one is the margin -- the original guidance was that -- that in this year, without acquisitions, the margin may not fall below 4.25%. Now depending on how you look at it and how you interpreted the original guidance, if we interpreted as a quarterly number. Then it's actually did fall below 4.25%. It was already 4.17%, and without acquisitions, in the third quarter. And we -- to our best understanding, we expect a similar number in the fourth quarter.

But I mean, I think if you look at -- I mean, if you follow the description of the reasons behind the decline in the third quarter, you understand that there are some technical items here as well, which actually introduced noise in the third quarter and may continue to introduce noise. But I can promise that we will try to reduce the technical noise, at least in the numbers in order not to create more confusion than what is meaningful in order to understand what's going on. But our best estimate for the fourth quarter, last quarter is that it's going to be somewhere around the third quarter number.

By the way, if that happened, and then the annual number would be actually quite close to this 4.25%. But nevertheless, the second half would be lower. Okay. And then the other line, which is -- I think it became quite clear that the original guidance was not going to come through is the cost growth. So the original guidance was around 4%, and this is what we targeted. And by the end of the third quarter, year-on-year, FX-adjusted without acquisition, cost growth was [6.7%].

We continue to try hard. And our best estimate is it's going to further slow down by year-end. And annually, we may see around 6% annual growth. Having said that, I think the good news is that the cost-to-income ratio, if you compare the first 9 months of this year to last year has actually improved more than 2 percentage points in 1 year. And the dividend, I'm sure you will have clarifying questions on this one as well. And I have to -- I mean, I mean, so I disappoint you, we still are not at a stage where we feel that as we to get the final update on our dividends.

So the numbers you see in our detailed financials, which are available also on the website in excel format, that is just a technical number, which was based on the Commission Regulation. This number you see here on the slide. And we follow the original guidance what we had at the beginning of the year in the AGM that the final proposal on dividends will be made in the first quarter next year once we know the annual numbers. So in a sense, this has not changed, but I just wanted to reiterate in case you have questions related to this.

And then in the rest of the pack, you have further details on cross-sections related to the P&L line. And I hope that there's some useful information there. We also try to present you the adjusted numbers, with FX changes with and without acquisitions and so on and so on. If you want to have better understanding of comparables year-on-year, I hope you will find them helpful. And then also, there are some usual slides included regarding our risk profile, but I'm not going to present them now.

So this was the intended overall presentation for today, and then I would very much like to welcome you to ask for questions. So please, operator, open the floor for questions.

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Questions and Answers

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Operator [1]

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[Operators Instructions)

The first question received is from Anna Marshall from Goldman Sachs.

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Anna V. Marshall, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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Two questions, please. The first one is predictably on the margins, specifically, what is your outlook in terms of dynamics into 2020, in particular, with regards to impact or further impact from bond yield compression and rate environment across the group? What are your expectations there as well as MREL issuance? And could there be some sort of offsetting positive impacts, for example, further shift in business mix so -- on the lending side? Any benefits from integration of acquisitions, for example, on the funding side or pricing of assets or liabilities? So that was the question on margin.

And the other question is on costs, please. So you've mentioned the improvement in your cost-to-assets ratio and cost-to-income ratios. Do you have any targets or either those ratios in the medium term? And do you expect them to continue improving?

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László Bencsik, OTP Bank Nyrt. - Chief Strategy & Finance Officer of Strategy and Finance Division [3]

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Now I think these are very valid questions. Again, we are not prepared to make guidance for next year. One reason is that we are just in the middle of doing the detailed budgeting and planning for next year. So we don't have yet an approved plan. And as usual, we are going to do that when we present the annual figures. So the kind of detailed guidance, you can expect us to make when we present the full year numbers in March. But nevertheless, I think your kind of questions -- or the implied answers, so to say, so -- I think for both questions is yes.

So the rate environment due to the external -- I mean the margin development due to the rate environment, especially in Hungary, is certainly lower and worse from our perspective than we originally expected. And therefore, there will be a continuous pressure on this line and the kind of the reinvestment here of the bond portfolio. And indeed, we, due to regulatory requirements, we do have to come issue new bonds which will be MREL compliant and then, you just pointed out, the potential factors which could partially or entirely counterbalance this. And that is volume dynamics, and that is new sales, which is, on the other hand, I mean, in a lower rate environment, we actually have higher demand, it seems. And then we have these structures which we introduced, for instance, in Hungary, with this subsidized product.

And just to maybe, again, to go back to this slide, the Slide 17, but I'll try to just explain the third quarter event in the context of our Hungarian core business. And if, again, if you exclude the technical lines, the technicalities, the repo, the reclassification of hedging and intragroup transaction, then in this quarter, specifically, the negative impact of the reinvestment here was actually counterbalanced by all other factors, which is obviously a large combination of different business events which happened especially -- typically on the front of planning.

So I think this is the -- and if you consider MREL, then actually, the rate environment changes. Concerning our core future expected cost of this MREL-eligible instrument is actually lower because the whole spread and yield environment keeps declining, and therefore, the expected kind of interest expense on these is going to be less and less. So this is a kind of [margin and a positive news]. But I think -- sorry to disappoint, but I'm not going to tell you the exact numbers. This is going to come during the next conf call when we talk about the year-end numbers. But I think what is very clear that, especially in Hungary, we are continuing to move in against a headwind coming from the rate environment, and hopefully, part of it -- I mean part of it for sure, but which part, I mean, that's the big question mark -- can be counterbalanced and mitigated by certain positive volume dynamics we see on the lending side.

And then we have Russia and Ukraine. And in Russia, we have -- the recent inflation number was somewhat lower. So we expect a kind of declining rate environment there as well. Plus, we have this regulatory pressure which continues to kind of down our margins. So in Russia, this is going to continue. And in Ukraine, what we see is actually that the environment started to consolidate, which means that margins will probably somewhat decline on the product level -- will decline for sure. But then on the other hand, we expect quite robust loan demand. So its loan growth can be actually quite impressive, and this is our kind of highest-probability scenario for Ukraine for next year. Obviously, Ukrainian situation has always been volatile, so relatively extreme scenarios are possible with relative high probabilities. But again, the highest-probability scenario, which we have, is that the Ukrainian growth next year is going to be very strong. On the product level, there will be moderation of margins, but the composite effect actually can be stable.

And then the only country where we do -- we see actually margin increase as you -- in the third quarter, it was actually Romania. So I know this is not an exact answer to what you asked. But these are roughly the avenues we have when we think about this.

Now cost. And clearly, the target is to reduce the cost-to-asset and then cost-to-income ratios. Again, we don't have -- we have not decided yet to kind of publicly set the target for the future. We may at some point. But marginally year-on-year, it's clear that the intention is to improve on those metrics. And I think here, the environment is more supportive or -- in a sense. I mean in another sense, it's not.

I mean the supportive factors, either we do acquisitions in countries where we are present so we expect cost synergies there. And as you can see, for instance, in case of Croatia, there, we actually seem to be able to manifest some. And the other thing is that volume growth is actually quite robust and strong. And that obviously has helped us -- helped these ratios. The problem is that when we have high loan demand, high loan demand comes mainly from increasing disposable income for our retail customers, and that comes from higher wages. So we do continue to have a high wage inflation environment, which poses a big challenge, and we obviously -- I mean we are quite ambitious in our targets, and we believe that we have performed well, and we want to continue to perform well. And for that, you need very good people. And for very good people in this part of the world and every part of the world, specifically because of the very tight labor market, we have to pay, at least, according to the market. So that's challenging. And I don't think we are going to see similar levels of [fair] wages than what have seen in the previous years. But nevertheless, it's going to be still quite high, unfortunately. So that's -- basically, these are the 3 factors.

And the fourth factor is obviously to continue to invest a lot of money into IT. And the way we do it is more hiring more people into IT and try to do more in-house as opposed to just increasing OpEx, therefore, it has a bigger negative short-term impact on OpEx. But yes, definitely, here, the goal is to continue to improve on those ratios.

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Operator [4]

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The next question we received is from Gabor Kemeny from Autonomous Research.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [5]

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I'd like to follow up on this NII point, please. I see your point that NII is more important at this stage of the growth than actual margins. And in Hungary, your NII was trending upwards. In the previous quarters, there was a drop in the third quarter, though, and you are flagging a few one-offs here. How would you expect your Hungary NII to evolve from these levels?

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László Bencsik, OTP Bank Nyrt. - Chief Strategy & Finance Officer of Strategy and Finance Division [6]

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Yes, again, I mean, in Hungary, indeed, in the third quarter, as you can see in this kind of presentation on Page 27, it was almost HUF 4 billion equivalent negative one-offs, I mean, quarter-on-quarter, if you could relate the 2 quarters. So that's that. And the overall decline is HUF 2 billion so, actually, nominally, the nominal difference between the 2 quarters was much more than itself explained by [these loans]. So actually, the underlyings kept growing. And this is certainly what we expect in the fourth quarter. So that in the fourth quarter, this should definitely continue.

Again, we are not yet prepared to give kind of concrete guidance for next year. But, I mean, given the volume growth that we have and given the -- especially here on the -- this new structure, which was, I mean, very recently introduced in the third quarter, I think chances are somewhat better, despite the negative developments in the rate environment, to continue the trend what we have seen. But it's going to be challenging because the rate environment is not going to change. That's almost sure for next year. So we will have to be in the same situation.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [7]

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Understood. And a broader question on the growth outlook. And how do you see the slowdown in the Eurozone economy impacting your businesses, if at all? So given the early warning indicators you look at, do you see this impacting either your -- the health of your corporate customers or the growth outlook itself?

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László Bencsik, OTP Bank Nyrt. - Chief Strategy & Finance Officer of Strategy and Finance Division [8]

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We don't -- I mean we don't see any visible signs in the quality of the portfolio or any loan demand. I mean if you just look at the loan growth rates that we have and the portfolio quality indicators, it's clear. Now having said that, we definitely for -- if you take the example of Hungary, the expectation for the GDP growth next year is [typically] less than our focus for the half -- this year. This year, focus is 4.8%. Next year, we expect some higher than 3%, around 3.3% growth.

And so that, in a sense, that's a slowdown in GDP growth. It does not necessarily have to translate into slowdown in, especially in retail, volume growth, not at all. We believe with consumption and retail investment can continue to be strong. I mean the labor market is extremely tight. So there's -- I think it's quite -- so from what we have seen so far in the Eurozone, we don't see a saying that this is going to fundamentally change the labor markets in Hungary's situation and [not for] loan demand either.

And I think -- specifically to Hungary, we have a very active policy environment at the state. So the government, the state debt management company and the Central bank all have been quite active in coming up with the structures and measures which kind of guide and boost and -- growth and consumption and savings. So honestly, it's not -- I don't think that from what we see today that it's not obvious why loan demand should so much slow down.

And in some cases, again, I started to talk about briefly about Ukraine. So in case of Ukraine, we're actually quite bullish. Russia is an interesting environment, which is not as obvious to read because there seem to be, again, a kind of increasing leverage in certain customer segments concerning unsecured loans. And that is reminiscent of the situations we saw like 5, 6 years ago and so on and so on. So -- and that points towards somewhat lower optimal growth in unsecured lending in Russia, which is our, obviously, our main market.

But that doesn't mean that this is not a very -- I mean the growth is artificially subdued in Russia. It's -- so if they were just a little bit fiscal and monetary [easing] there, the growth could be so much better there. So there's a lot of potential we see in Russia. Nevertheless, it can happen that our consumer lending, unsecured lending growth is actually going to be less next year. And then what we have seen, just because we see this buildup in terms of leverage in customer portfolios.

We're quite optimistic about Bulgaria. Bulgaria is still in the early phase of the cycle and somewhat behind in terms of the cycle than Hungary is. So they're still -- it so that happens it's going to be much less in terms of GDP growth there than what we expect to see in Hungary. Romania, we have a new government. They seem to know what they wanted to do and so on and so on. So I think the concerns regarding to the remaining potential growth are somewhat mitigated. So we, again, are warming up to be more optimistic about Romania.

Croatia in terms of growth has been relatively low so far, and so therefore, I'm talking about volume growth, loan volume growth. So that actually, there's not much to change there, in a sense. Serbia for us is very strong, and then the remaining portfolio is relatively small.

So we are -- all in all, we are, I think, on the more optimistic side of the spectrum concerning next year growth potential. But again, we are in the process of actually deciding and agreeing on the targets and the next year plan. So I'm not prepared to share you -- with you kind of actual numbers. But the overall perspective we have is rather positive, even concerning the backlog of what we have in the core Europe.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [9]

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That's useful color.

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Operator [10]

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The next question received is from Andrzej Nowaczek from HSBC.

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Andrzej Nowaczek, HSBC, Research Division - Analyst [11]

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I have a couple of questions. First, I wanted to follow-up on the revised cost growth guidance. You showed very good cost control in Q3. And of course, we remember why Q4 of last year was so high. And my question is, should we expect another hike in salaries in Q4 this year?

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László Bencsik, OTP Bank Nyrt. - Chief Strategy & Finance Officer of Strategy and Finance Division [12]

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There's always some seasonality, of course. And put it this way: there hasn't been any [complete decision] on that one. But it's a very fine line we are trying to balance. The overall wage increases we make is just a small of the very faction of the wages curves, what we see in the market. It's much less than what we've seen in the financial sector, and it's much less than what we see in the overall market. And it's not just finance, especially if you talk about the network and tellers, and we are not just competing with other banks. We are competing with retailers and so on and so on.

So so it's a very fine balance we are trying to navigate here to optimize the personal expenses on one side, on the other side, to try to continue to improve our cost efficiency, and then -- and also to be able to kind of retain the best and attract the best talent, what we need in order to achieve results. So it's what I can promise is that we do our best and try to be, at the same time, as efficient as possible in this environment where we have but also to retain and [maintain] the people that we need in order to deliver these results.

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Andrzej Nowaczek, HSBC, Research Division - Analyst [13]

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And on baby loans, it's early days, but do you think the current run rate is sustainable in the coming months? You've mentioned front loading which, to me, implied volumes could decline going forward.

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László Bencsik, OTP Bank Nyrt. - Chief Strategy & Finance Officer of Strategy and Finance Division [14]

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At some point, they will. I don't think that, that is going to happen so much in this quarter. So still, we'll see demand coming. But I mean, eventually, the eligible customer base will kind of get flat. Or does it -- yes. Well, I mean -- but kind of guidance I can make or best suggestion I can make is that we pretty much expect to see similar numbers in the fourth quarter.

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Andrzej Nowaczek, HSBC, Research Division - Analyst [15]

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And how do you explain your high market share, 45%?

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László Bencsik, OTP Bank Nyrt. - Chief Strategy & Finance Officer of Strategy and Finance Division [16]

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It's -- well, in normal cash flows, we have 40% market share, I mean. So this is -- it's only highly -- or kind of slightly higher than that. Usually, when this -- when we have this type of subsidized products and when we tend have higher market share just because of our reach, we have a very strong market share in the physical presence, in the physical network. And these structures are distributed physically through branches, right? And this is where we can kind of monetize our higher continuous commitment to having a physical network, right? That's it.

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Andrzej Nowaczek, HSBC, Research Division - Analyst [17]

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Okay. So market shares also looks sustainable. Okay.

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Operator [18]

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The next question received is from [Adomec Pisova] Domenico Petrova from PKO Securities.

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Unidentified Analyst, [19]

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I have a couple of questions. First, what's the reset time for the baby shower loans. I mean you referred that you are showing that the reference rate for the pricing of these loans is 5-year yield on government bonds. This has already declined by around 1 percentage point during the quarter. When should we see the impact of this decline in the average price for these loans? So that's the first question.

Second question, could you briefly comment on the development of NPLs in Russian business because there was quite a sizable increase and also comment whether and when we are going to see the impact of the new increased capital requirements on most risky consumer loans there, whether that has already been included in risk-weighted assets? Or what could be the potential impact in the 4Q?

My third question is about the head count at OTP Core. What was behind the recent quarter-on-quarter increase in the head count figure there? Is it -- I mean, is it going to be repeated in some of the subsequent quarters? Or was it a one-off?

And finally, my fourth question is about potential acquisitions across the region. Is there any specific country that you might be looking at given what's the current situation, for example, which we currently have in Poland, for example?

And finally, what's your approximate redemption scheduled for the fixed income book portfolio? I mean, roughly what percentage of your bond portfolio you will need to refinance next year? In other words, what would be the potential impact, whether that would be higher than this year or lower, in a lower-yield environment?

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László Bencsik, OTP Bank Nyrt. - Chief Strategy & Finance Officer of Strategy and Finance Division [20]

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Wow. Okay.

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Unidentified Analyst, [21]

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No, I can repeat these no problem.

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László Bencsik, OTP Bank Nyrt. - Chief Strategy & Finance Officer of Strategy and Finance Division [22]

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Sure, you can. Okay. So it's 5-years fixed. That was easy question. So it's fixed for 5 years. And today, the 5 years is around 1%. And then the benchmark is actually -- is the 5 years multiplied by 1.3. So that is considered as a benchmark basis for a few years. It's been the view of the Central Bank that is the substitute for the mortgage benchmark, and we consider this together with this 1.3 multiple as a benchmark.

Russian NPLs, indeed, we started to experience worsening of the quality -- portfolio quality in Russia [bank] as early as in the second quarter. And therefore, we adjusted our scoring and so on and so on. And somewhat, that's what I kind of implied when I said that in Russia, despite the overall economic environment not changing so much, we do see building up of concentrations of risk and higher leverage in certain customer segments. And therefore, we will most probably grow somewhat less in Russia next year than we did previously, and this is directly related to the perceived or expected risk of new production.

I mean -- I mean the changes in regulations are building up into the portfolio gradually, as new productions come in. But all in all, we believe that we are quite well capitalized in our shares sort of -- the kind of local capital, which we have there seem to be enough for changes.

Head count in Hungary in the Core, we are checking that. Well, I mean, in general terms what happens is that -- has happened over the last couple of years, last 2 years in Hungaria, head count acquisition. If you look back the last 2 years, actually, the head count increased quite substantially. So we have like 20% plus head count increase in Hungarian Core. And there are 2 fundamental sources of this decrease. One, what was related to higher business activity, right? I mean we are selling much more, and therefore, we have more people in the network. And the type of flows and mortgages and the subsidized structure require more, more people in the network. The other one is clearly IT. So it's IT where we have a growing number of people. And that comes from 2 sources. One is that, in general, we are hiring much more IT people than we used to have. And the other one is that we are actually buying up independent vendors, providers, smaller developer firms, we are buying them out and emerging with or -- it's the kind of in-sourcing what we do. And when we do that, by the way, that's typically positive for overall spend because then the CapEx or OpEx is less. And then we typically increase the personnel expenses. But it's typically personnel expenses against CapEx. And the CapEx, I don't see in the OpEx line. So therefore, we actually started to be more active in booking some of the personnel expenses as CapEx in IT development, and that has started to happen in the third quarter. But so it's basically IT and what happened, [I call it stubborn].

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Unidentified Analyst, [23]

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Acquisitions.

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László Bencsik, OTP Bank Nyrt. - Chief Strategy & Finance Officer of Strategy and Finance Division [24]

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Well, that's quite acquisitive -- first of all, we have been quite acquisitive and extremely busy. And our strategy to -- and quite stretched, right, in every sense. So this is not exactly the time when we are looking for further more immediate acquisition opportunities very proactively. Nevertheless, we are opportunistic and open. Our clear strategic focus is the countries where we are present. And only opportunistically, we would consider other markets, should there be a very obviously attractive, lucrative situation, which we could also fit into our broad strategy.

Now we tend not to comment on any specific potential or actual deals. And if you allow me, I won't do that here either. But kind of high level, we are actually very busy and very stretched in managing the -- I mean we buy 6 banks this year, and we still had some mergers to finish, and that's one side of the coin. The other side is that long term, the prime target, the prime focus remains on the countries where we are present.

Now please fix the -- the bonds which we have to kind of -- which will be redeemed next year, we have somewhat above HUF 100 billion for the maturity fixed portfolio at a yield of 4.2%. So it's around HUF 120 billion, HUF 125 billion, which is going to mature next year. Plus, we have the retail bonds, retail bonds, meaning the bonds which we distributed to retail clients, and they gave them back, and they will kind of expire during the course of next year. So that's actually a larger volume. It's in the magnitude of, I think, HUF 400 billion. So roughly that's it.

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Operator [25]

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The next question received is from Olga Veselova from Bank of America.

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Olga Veselova, BofA Merrill Lynch, Research Division - Equity Banking Analyst [26]

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I have several questions. Can I just pick something on baby share program? Do you charge a 0% cost of risk on these loans? Thanks to the state guarantees? And if so, does this mean that the credit extends the period of normalization of cost of risk for you? And remind us for how long this program will operate? So this is my first question.

My second question is about fee income in OTP Core. I was very pleased to see strong results for the third quarter. How sustainable do you think is the third quarter results in the next quarters? And also part of this was -- this quarter was caused by the distribution of state bonds between households, how long do you expect this impact will last? And last question is about loan growth in the Ukraine, given lower policy rates, low inflation, a reasonably good market, do you see potential for sustainability of this growth rates? Or do you think that the growth rate will slow down? And also, what will be normalized cost of risk in the Ukraine or [in Belgium]?

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László Bencsik, OTP Bank Nyrt. - Chief Strategy & Finance Officer of Strategy and Finance Division [27]

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Okay. The baby share loan in the third quarter, we did not provision for this structure. We still continue to look into it with our auditors and so to better grasp the nature and potential treatment. But in the third quarter, we did not provision, but we continue to discuss it. Duration of the program, the application period is open for 2.5 years -- sorry, 3.5. 3.5 years now. And each scheme is 20 years. So the maturity of the product itself is 20 years. And the application period is open for 3.5 years, starting from the end of June.

Fee income, again, in the Core, this is on Page 28, for a small presentation, and indeed, there is a strong quarter. And indeed, the fee income was mostly driven by the -- this distribution fee, the grows. And that is, that is going to somewhat continue in the fourth quarter. But I mean, overall, we don't expect the same positive dynamics in the fourth quarter.

So the -- so there will be somewhat muted growth, that's the best forecast we can have. So we don't expect this kind of level of growth to be repeated in the fourth quarter compared to the third quarter. Ukrainian growth. Yes, as I said, we tend to be optimistic about the Ukrainian situation, and we expect our growth rates to potentially continue into next year. But this is very preliminary. As I said, we are not yet kind of agreed on the targets for next year. And that's -- and we have been gaining market share. So that means that the market -- the market itself should accelerate. That's our view. And this is -- and in fact, it can be quite surprising. I think the levels of potential new volumes because Ukraine -- Ukrainian lending has been very, very low level for a long time for almost 10 years. So we talk about a market which is very unlevered. And if consumption starts to grow, and so your wages start to grow, we can easily get to a situation where we were before -- before 2008, when we had 4 or 5 years of exceptionally high -- high-volume growth in terms of new production. So that is -- we see a lot of potential in the Ukrainian market, and we very much hope that a good scenario will materialize. Obviously, this is a country with quite high level of geopolitical risk and potentially volatile outcomes. So while this is -- this scenario, again, for us, is the most probable. There are other scenarios with also material probability, which are [certain now as with this region].

Obviously, a lot is going to depend very early on IMF, agreement will be approved by the IMF Board and also the policy measures, which take place from the new kind of leadership of the country. But our general feeling is actually quite positive. And in terms of cost of risk, again, I mean, if we happen to see similar environment that we saw before '08, then the cost of risk there in Ukraine will be quite low for a number of years. Because if we have -- if disposable income starts growing and leverage starts to increase from a very low level, and banks are active in lending, then it can keep -- risk cost rate is quite low for a number of years. But that's a good scenario, obviously. And there are other scenarios there.

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Operator [28]

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The next question we received is from Máté Nemes from UBS.

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Máté Nemes, UBS Investment Bank, Research Division - Associate Director and Analyst - European Banks Research [29]

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I have 2 questions left, please. The first one on Croatia and operating expenses. It seems like that you're making good progress extracting synergies, post the integration of the business. OpEx down 10% so far this year. Could you comment a little bit about what is still remaining? How much further do you think you can reduce cost there? And then perhaps also, if you could give us a sense of the expected time line there? That would be helpful. And secondly, a question of Slovenia, I think in the press conference in the morning, you mentioned that even after the integration of the newly acquired business in the country, the market share is still lower than optimal. Are you referring here to opportunity specifically for bolt-on acquisition? Or did you mean more of an organic cost scenario here?

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László Bencsik, OTP Bank Nyrt. - Chief Strategy & Finance Officer of Strategy and Finance Division [30]

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In Croatia, we pretty much realize the synergies that were inherent in the merger itself. So now we are actually in an organic transformation mode. We decided a new kind of growth strategy and especially on the retail front a very ambitious transformation program. So we pretty much realized the synergies. And now we try to grow as well as possible.

Slovenia, indeed, I just made this comment that -- I mean first step is to get the approval for the transaction -- for the transaction and integrate this business. And I think this is going to keep us quite busy and quite happy for a while regarding the country. But I mean we -- obviously, the reason we entered this country wars that we find this attractive and interesting. And if there were other opportunities there to consider, we would potentially consider them. I'm not suggesting that there's any other opportunity at the moment. What we are considering, it's more kind of long-term openness and -- but this is true for almost all the countries where we operate. I could pretty much say, I mean, certainly, for Romania, it's very clear that we have high desire to further acquire. And there are a number of other countries where we would be quite happy to continue acquisitions should there be any attractive target at an attractive price. But there aren't. So we don't see that -- them coming at the moment so much.

So it wasn't kind of more general and long term and kind of suggesting that we find this market attractive and interesting and have a long-term strategic intention and commitment.

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Operator [31]

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And the last question received for today is from Sam Goodacre from JPMorgan.

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Samuel Magnum Goodacre, JP Morgan Chase & Co, Research Division - Executive Director and Head of Emerging Market Europe, Middle East and Africa (CEEMEA) Banks [32]

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László, can you hear?

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László Bencsik, OTP Bank Nyrt. - Chief Strategy & Finance Officer of Strategy and Finance Division [33]

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Yes. Yes, I do. Yes.

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Samuel Magnum Goodacre, JP Morgan Chase & Co, Research Division - Executive Director and Head of Emerging Market Europe, Middle East and Africa (CEEMEA) Banks [34]

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Sorry about that. I've got a couple of questions on Slide 6, 7 and 8. And the new -- the 3 sort of acquisitions. And you're showing what the number of branches, number of employees is. So I suppose following on from Máté's question on Croatia, what is the sort of restructuring potential in these 3 in terms of the branch network, the employee optimization and potential cost savings here?

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László Bencsik, OTP Bank Nyrt. - Chief Strategy & Finance Officer of Strategy and Finance Division [35]

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Yes. The easiest answer is (inaudible) -- we don't have anything else. So there we don't see much cost synergies. Serbia, I mean, this is, I think, clearly, there's potential here, especially if you look at -- I mean, to be honest, but the situation here is that the newly acquired bank is much more cost efficient than our old entity, right? And then -- actually, the difference is huge. So the SocGen has achieved a level of cost-to-income ratio around 45%. And they actually ran through a very, very rigorous and successful cost transformation program during the last 3 years, whereas our bank before cost synergies realized, because the regulation is such in Serbia that we actually have to have a quite long notice, if you want to change the employee situation [for somewhat], then -- so the synergies have not been realized in Serbia yet. But we are starting from 80%-ish level of cost-to-income ratio with our old entity was [landslide already]. So obviously, there are some cost synergies to be gained even from the previous merge, and it's very clear that we have an entity which is much bigger than ours, the equity -- the entity which we acquired, which runs at 45%. So that in itself shows that in this market, at least you can get to this level. And as you can see, our existing bank being smaller has more branches and has a higher number of employees than the one which we acquired. So this is kind of same situation that's a more inefficient bank acquires, technically, a more efficient one. Having said that, we probably should take this into consideration, then we decide on the future management team. And then we -- also when we decide on what type of procedures versus an organization to have in the future, and so be it.

So I see strong synergy potential here. Having said that, we just kind of acquired the bank at the end of September. As I said, we are in the process of offsetting the budget requirements, including the future cost synergies as well for this entity at the moment.

Montenegro, again somewhat similar situations. It's actually, SocGen was somewhat better in terms of its cost-to-income ratio than our existing bank, and there are very clear opportunities here. It's a relatively small country. And I mean we obviously do have sizable potential here, sizable compared to the entities what we have there. I mean the impact on the (inaudible) will be, obviously, much more moderated. But I'm very optimistic that both of these banks are Serbian joint entity and then the Montenegrin entity will be in the higher levels of profitability, then we will look into the distribution of ROEs within the group in the foreseeable future. So I think we have a very good ground in both of these countries to develop banks, which are efficient and have good returns as well in the future.

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Operator [36]

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If there are no further questions, I'll hand back to the speakers.

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László Bencsik, OTP Bank Nyrt. - Chief Strategy & Finance Officer of Strategy and Finance Division [37]

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Okay. Well, thank you very much. Thank you for attending this conference call, and thank you for your very good questions as well. I hope that you will join us when we present the annual results in March. It's one of the early Fridays in March. And until then, I wish you all the best. Have a very nice weekend, and thank you again for joining us today, and goodbye.

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Operator [38]

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Yes, ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.