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Edited Transcript of OTP.BU earnings conference call or presentation 9-Aug-19 1:00pm GMT

Q2 2019 OTP Bank Nyrt Earnings Call

Budapest Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of OTP Bank Nyrt earnings conference call or presentation Friday, August 9, 2019 at 1:00:00pm 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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* 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

* Simon Nellis

Citigroup Inc, Research Division - MD and Director

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the OTP Bank Q2 2019 Conference Call. At our customer's request, this conference will be recorded. (Operator 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 where you are, and thank you for joining us today for OTP Groups' 2019 Second Quarter Results Conference Call. As usual, we have the presentation available on the website as well as the very detailed interim report, which is our document plus the analyst tables as well. So I hope you all have the presentation available. And as usual, I'm going to go through, given that it is a nice summer day, at least in -- here in Budapest. I'll try to be as succinct and focused as possible in the general presentation. And then as usual, you will have the opportunity to ask a question.

So going through the presentation, Page 2, overall results. First half compared to last year increased adjusted profits 19% and accounting profits 15%. Now -- which this includes -- these numbers include the acquisitions, namely 2 which we executed during the first half in January. As you might remember, we acquired Expressbank Bulgaria from SocGen and then the end of the third quarter, the Albania Bank of SocGen. So these 2 banks have already been included in our first and second quarter numbers. Without the acquisitions, adjusted profit after tax for us was 13%, 1.3.

Now Page 3, you see the adjustments. There were some. In the second quarter, you see all the details here on this page. Basically we've wrote off goodwill. Obviously, that does not have an impact on our regulatory capital, but nevertheless had an impact on the P&L. And then according to the regulatory moves in Serbia, we realized HUF 1.9 billion equivalent of after tax losses in Serbia related to the Swiss franc portfolio conversions, which is a forced conversion taking place in the country.

And then on Page 4, you see the adjusted profit after tax, the composition by the different group members. And I have to, well, warn you and also apologize, but this is just due to how we developed during this year that there are some factors you have to take into consideration when you evaluate our half year results. And these 3 are obviously the acquisitions. So within this document, we tried to highlight the with and without acquisitions numbers as well. So as I said, the overall growth profit grew 19% with acquisitions and 13% without. So that's one type of adjustment. And obviously, in case of Bulgaria, this is also substantial. So there, the growth without acquisitions was just 1%.

The other factor we have to take into consideration, the FX trade changes. When they -- if you compare it -- if you talk about the first half results, then it was only materially meaningful in Ukraine. And the hryvnia appreciated, namely to the half. And therefore, if you want to understand our Ukrainian numbers better and dynamics, you might want to look at the FX-adjusted numbers. And in the back of this presentation, line by line, the P&L lines, we include these numbers. So overall, the profit growth in Ukraine was 42% nominally. But if we exclude the impact of the FX changes, there was only 30%, still obviously a robust number.

And that the third element, which introduces structural changes or introduce structural changes in our numbers, namely how we treat and present our non-Hungarian leasing companies. And it was a -- it used to be a mix, because in case of Ukraine, where it has been for a long time a quite meaningful and substantial activity, that has been for quite number of years presented as part of the bank. But in Bulgaria, Croatia and Romania, these -- the leasing companies were -- used to be presented as part of our kind of international leasing group. Now this line ceased to exist. So now we have Merkantil leasing as a separate unit. And all the other leasing companies, we combined with the banks, which operate in this country. So therefore, again, if you want the exact precise numbers for different growth rates for Bulgaria -- sorry, Croatia, Romania and Serbia, then you have to take this into consideration.

This became important from a kind of group governance perspective because the banks which we are acquiring or the entities which we are acquiring during this year, namely the SocGen activities in a number of countries, they typically involve quite sizable leasing activities as well in separate leasing companies. And from a governance point of view, we want to run these businesses in a country basis, basically led by the relevant banks being present in this country. This is, by the way, in line with how SocGen has managed these companies, these leasing activities in the countries.

So therefore, on the -- actually, on the right side of this page, you see, in some cases, even 3 different numbers for growth. For -- so for instance, Bulgaria, you see the 42%, which includes the acquisitions and the leasing; and 1%, which doesn't include the acquisitions but does include the leasing; and minus 1% without the previous 2. So that's just some context. And hopefully, this is going to help you to better understand and interpret the numbers where they present.

But all in all, it's a -- I think it also presents solid growth, without acquisition, 13%. And then as you can see, typically, the bulk of the profit growth came from the mid or smaller entities within the group and less so from Hungary and Bulgaria, where we have larger presences. So Russia was growing strong. Croatia was growing strong, Ukraine, Romania, Serbia and also Montenegro. So that's -- I think it's an important factor that finally these kind of relatively mid or smaller-size bank size to increase their profit contributions to the group.

On Page 5, I see the group level P&L lines. And I think one development, this is probably going to be important to highlight here. And again, I suggest you look first to the middle part of this page, Page 5, where we show the year-on-year changes based on the first half results without acquisitions, without M&A. So that's basically operating profit without one-offs grew 14%; total income without one-offs, 11%; and operating costs, 9% growth. And in fact, unlike in previous periods where, typically, the profit growth was driven by risk cost and typically lower levels of risk proceeds. In this period, in this first half, this was not the case, because actually, operating profit started to grow with double-digit number without acquisitions and the risk costs actually increased compared to the base period last year, the first half of '18. I think that that's an important development, and obviously, this is primarily driven by the volume growth, by what we have seen during the last year and which slowly feeds into revenue growth.

Now on the other kind of one-off item you see, which was substantially the second quarter, is related to this treasury share swap agreement in the second quarter, amounted to HUF 6.3 billion. Basically, this is the -- most of it is the dividend, what we received for the -- for these shares, what we have, and more shares, what we have in -- is part of this agreement.

And if you look at the quarterly changes, they're also quite remarkably high. Now again 2 points here. And on this slide, we have not highlighted the without-acquisition numbers. But obviously, there's a difference between the first and the second quarter, namely the second quarter does include the entire P&L of the Albanian bank. It's not much, but it's something. So all in all, it's actually contributed 2 percentage points to the operating profit growth or -- sorry, no, 1 point, sorry.

And then the other factor which we have to take into consideration here is that there was a weakening of the currency, of the half compared to the hryvnia, to the ruble and also typically to other currencies as well, to much less extent, but it was there. So unlike in the first half year comparison where it was really only Ukraine, where this was materially important. And if you compare the quarter-on-quarter numbers, actually, the exchange rate changes were important.

So in fact, if I were to list the relevant numbers for these growth rates, we start looking to Albania and does not include the FX changes. Then basically, instead of 14%, we had operating profit growth 10.7% and total income grew 5.3% as opposed to the 8%, which also includes the FX changes and also the Albania one. And the good news is that in these metrics, operating costs grew only 0.9% as opposed to 3%, what you see here on this space. So that's just a small remark. And then again, on the following pages, you will see -- in the back of this pack, you will see the -- by country, this kind of adjusted numbers as well, if you want further information on this.

Turning to volume growth. The second quarter was particularly strong, especially after the first quarter. It was not kind of spectacular. If you remember, in the first quarter, the quarterly growth of the performing volumes was only 1%. And then following this, in the second quarter, we grew 4%. This is -- I mean it show seasonality so it did not surprise us to [-- demand is --] say it happened. Usually, the first quarter is less strong than the rest of the year. And what we are seeing in the second quarter is broadly speaking in line, maybe somewhat even better than what we originally expected. And I'd like to highlight, especially the Hungarian business growth, which was 5% in -- just in one quarter. Again, these are not annualized numbers. So this is just one quarter growth. And again, the growth was reasonably balanced between retail and corporate. Consumer loans grew 5% and housing loan, 3%, and corporate was plus 8%.

And the other country, in general, I think across-the-board, these numbers are reasonably strong, so Bulgaria, 2%. Russia, somewhat slowing down actually, but if you look back the last 10 years, this is -- also that there's a strong -- even stronger seasonality in Russia in consumer lending than in other segments and in other countries within the group. So typically, most of growth comes in Russia in the second half. But nevertheless, I have to say that the second quarter growth is 1%. It's kind of moderate, which is, to some extent, in line with the kind of macro somewhat slowdown there and also to our quite conservative retail lending policies we obviously optimize for maximizing net present value of future cash flows and not just volumes. And when we feel that from this point of view, it's actually warranted to somewhat limit new growth, then and we do. And this is part of the case there.

Croatia, strong. Ukraine, particularly strong but again this is obviously a small, small, small portfolio there, especially in consumer loans. The 7% looks quite high. But actually, it's still the kind of portfolio in its early stage of developments, relatively small. We're quite happy with the Romanian growth, which accelerated, also the smaller countries' growth rates have started to show good signs.

And on Page 7, you see to the kind of year-to-date. Volume growth is -- again, this is performing, and this is FX-adjusted. So in here, you don't have to think about the FX changes.

And on Page 8, you see the year-on-year growth. There is nothing fundamentally new about this.

On Page 9, we show the quarter-on-quarter deposit volume growth, and again, this was reasonably strong on a group level with the exception of Serbia and Albania, where primarily corporate deposits dropped us. In Albania, this was another surprise, given that then typically, we acquired from SocGen a bank, it's usually the course of business as some, some large corporates, who are kind of -- more kind of associate themselves with the Western European banks. And they attempt to leave us from a deposit perspective but that's -- that was, so to say, expected.

I think what is remarkable here is the number in Hungary, which is not a big number, but the retail deposit growth was 1%, right? Now this is -- we had quite a headwind in Hungary in the first quarter because this new retail government bond was introduced, and it became available from the 1st of June for our retail clients. And the substantial part of the retail savings started to migrate to this product. This is a tax-free 5 years increasing rate yield product, which is -- I mean kind of the average yield, which can be achieved by retail customers is actually close to 5%. So this is a product hard to beat.

And within this environment, with this even organic -- this headwind, we managed to grow our retail deposits despite having very low levels or no levels at all of deposits that is paid for, for Hungarian half of deposits. So I think that for us, at least the way we took at it is that, that's probably the strength of the brand and the franchise and the services and the level of satisfaction of our customers with our transaction and all the services that resulted in these numbers.

And then also, we included the year-to-date and year-on-year numbers, just for your information if you -- if this is what you are looking for in your models. But there's nothing new in there.

And that leads us to the margin question, which is obviously a hot topic. We have discussed it in detail during the last couple of years. And then as well as you can see on this page, on Page 12, we have seen a huge interest net margin decline during the last 5 years within the group. And as we suggested, we expected for this year a kind of stabilization of the margin on a group level without acquisitions. I mean indeed, this is what we seem to see. So if you look at the first -- if you compare the second quarter without acquisition margin, it was similar to the first. But the with-acquisition margin declined. That's basically a technical -- the difference between the first and second quarter is a technical element, basically the -- because the Expressbank was not -- we acquired it at the end of the 1st January so it was not fully included in the first quarter. Therefore, only part of its margin erode, kind of negative impact of the Expressbank consolidation was included in the first quarter numbers.

Now I think what important is also to look at the bottom part of this page because it looks great that we actually -- that the without acquisition margin was -- didn't change quarter-on-quarter. But actually, they were helped here by the exchange rate. So as you can see, if from a kind of entity level margin changes, due to these, the overall consolidated margin should have declined. But it did not decline because of the FX rate changes, especially in Russia and Ukraine, which have a high -- obviously, a high net interest margin. And therefore, their contribution increased compared to the Hungarian one and that, overall, have destabilized the margins.

The following page, 13, shows the entity by entity -- or at least the biggest banks within the group and their marginal development and focusing on the -- on a quarterly changes. Hungary, again, there's some fluctuation there. There are some base effects and technicalities. It's not that there's no clear direction, I would say, here. And totally, this is the market where we had to revise our very original expectations. You might remember that at the end of last year or beginning of this year, we usually expect a gradual increase in the reference rate and even -- again, at the beginning of the year, we -- our expectations were that it might actually reach by the end of this year the level of the base rate, which is at 90 basis points.

Now given the developments in the Eurozone, both in terms of monetary policy and also in terms of the real economic growth, obviously, it's quite unlikely that the euro operating environment moves upwards in the foreseeable future. And therefore, that creates a substantial room for monetary policy in Hungary. And therefore, it became extremely unlikely that the -- in a foreseeable -- that during the course of this year, we see material further increase in the reference.

So having said that, some increase did happen. So in the second quarter, the closing level of the 3 months into bank rate, which is our reference rate, increased by 7 basis points. And the quarterly average increased like 4 basis points. So there is some increase, but it's rather moderate. And we have given up our short-term expectations for higher or more material quarterly increase in these numbers. And that obviously means that this describes continuous pressure for the Hungarian margin, and we try very hard to counterbalance it with new volumes, with new production. And so far, it has actually grown more or less. And given the second quarter has strong growth in performing volumes, hopefully, this is going to translate into stronger NII or it will, by definition, in the third quarter. So there's some hope that the Hungarian NIM continues to be stable and kind of -- might even technically grew somewhat higher than the second quarter, but certainly, we don't expect a material decline in the Hungarian NIM to the third quarter.

In Bulgaria, again, we had a very longer series of declining NIM numbers there, and obviously, there's some noise here. We have -- on this page, we indicated the without-acquisitions numbers, so the standalone DSK Bank net interest margin. And the good news is that, actually, there was very small decline quarter-on-quarter in that. So that seems to suggest that maybe in Bulgaria, we are getting close to a situation where this -- where the NIMs might stabilize. But that obviously seems stronger, continues the strong new production of [lev].

And then in Russia, Ukraine, we are seeing more meaningful decreases in the margins. These are 2 countries where we have -- the rate environment decrease, and where the central banks cut rates. And it's Romania where we see increase. Basically, this is related to our deposit pricing there, which was less aggressive in the second quarter compared to the first.

There were 2 events quite important for us in the -- or in the -- after the close of the second quarter, namely in July 16. And closed -- we closed 2 transactions, one and Montenegro and another one in Moldova. They don't appear obviously in the second quarter numbers, so you will see their numbers in the third quarter. And I think there are 2 statements, which are -- which hold true for both of these. One is that on a stand-alone basis, these are quite meaningful profitability banks. So in -- last year, the Montenegrin bank's made 17% return on equity and the Moldovan bank's 18%, 19% return on equity. So even on stand-alone basis, they provide meaningful profitability. The other important remark, that these are very small banks, as you can see here. So overall, these 2 are going to increase our performing loan volumes by 2%. So that -- today, will not change the overall picture of the group.

Having said that, there are 2 more acquisitions in the pipeline, the Serbian one and the Slovenian one, both coming from the same center from SocGen. And we expect these further 2 banks are acquisitions to close and to be executed during the course of this year. Now these are much bigger banks and can -- and if we look at their performing loan volumes and we compare it to the end of the second quarter, our volumes, then they are -- they would increase, on a pro forma basis, performing volume by 15%, 1-5. So these 4 banks together should, again, if we close these transactions, contribute to 17% growth in the performing volumes by year-end in that sense, right? So -- and this -- and that, I think, is meaningful and fundamental and as good is it.

Now obviously there's a price for it. They also have to pay for it. These banks, they don't come from -- for nothing. So on Page 16, we show you the level of capital, what we have and what we accumulated. Just to remind you, we -- the -- during the course of this year, we conduct quarterly audit reviews, and therefore we are allowed to include the period results minus the calculated dividends based on the EU rules of calculating dividends, whether an entity does not have a dividend policy per se, which is exactly have to result in a number. And therefore, you get -- you can actually see a quarterly increase in the common equity Tier 1 ratios. So this was 15.9% at the end of the second quarter, including the quarterly results. And the -- and as we said, the expected pro forma impact at the end of the second quarter of the 4 acquisitions, which were left to be concluded for this year, is 2.8 percentage points. So paying for these banks, going to cost 2.8 percentage points on a pro forma and on second quarter basis in terms of the common equity Tier 1 and also the Tier 1 ratio, which are the same in our case.

But there was another important event in July. We issued a Tier 2 bond, and this was, in our understanding, the first MREL-eligible insurance from the region. We regard it as quite successful. There was a strong demand for this paper. And the rates, they ended up having 2.875% fixed rate. And so it's a 10 years, 5 noncall structure, where we have the right to call back the one-off right after 5 years. So for a long time, we have not been present on the debt capital markets, and this is -- or the equity markets, and this is the first time that we reappear. And we believe that this is a decent benchmark, what we created, and it show just the strength of the franchise that we have.

In terms of risk cost and portfolio quality, Page 17 shows the Stage 3 ratio development. It further declined to 7.7%. Coverage remains slightly increased compared to the first quarter. And the 90 days plus due ratio, which is a subset, were included in this 7.7%, also decreased. It ended up being 5.5% at the end of the second quarter.

At the end of the presentation, there are some more technical details on the portfolio of quality. And the risk cost rate for the first half ended up being 19 basis points. So it's somewhat lower than our original expectation was for this year, which we said that it was -- we expected it to be similar to last year, which was 23. But just to remind you that in our case, we have -- we might have kind of spotted some tendency in our provisioning that we intend to provision more year-end. So it might happen this year as well.

But nevertheless, these numbers suggest that the underlying risk environment has not changed. It's still quite supportive. And if you look at our 90 days policy formation, it actually increased in the second quarter compared to previous ones. But this increase was primarily due to corporate -- one corporate default in Russia and a small number of corporate defaults in Romania. And I would not draw kind of systemic conclusions from these corporate defaults. It seems that we -- for a long period of time, we have had, basically in our corporate, sizable corporate defaults and now they happen to -- they happened in 2 countries at the same quarter. I don't think that there's a kind of, again, systemic conclusion to be drawn from those facts.

I'm sure you will have many questions regarding our cost and cost increase, especially Hungary. But I mean just to -- so -- and I probably just wanted to give you a kind of longer-term eye kind of overall high perspective, higher perspective view on our cost efficiency, and that's Page 18. And what is that basically is that cost to assets, which is one metric for measuring banks' efficiency, actually improved. So if you take the year at the base of 2010, where our cost-to-income ratio was on the 45.2% in that year, our cost-to-assets ratio was 3.6%. Now this ratio versus then declined by 7%. And in the first half of this year, we were at 3.4%, which is the lowest for the last 5 years.

And then the middle line is the income per average assets. So this is basically the total revenue margin. And there, you see a fundamentally big change. So there was more than 10% decline in the total revenue margin. And the cost-to-income ratio is basically a combination of cost to assets divided by revenues or income per assets. And as income per assets decreased by 20% despite some improvements in the cost-to-asset ratio, we ended up having a higher level cost-to-income ratio by 18% compared to the 44 -- 45.2% in 2010. Now this is not an excuse. This just -- it's just trying to show you the problems. Revenue margins -- margin declined. But the revenue margin, unfortunately, has nothing to do with operations. So that's just purely pricing. Lower revenue margin doesn't mean less work or less costs, rather the opposite. And despite we managed to improve our cost to asset, our cost to income just worsened.

Some piece of good news is that actually if you compare last year to this year, we seem to manage to have some improvement. But that assumes that we can stick to the kind of cost development on quarterly basis to what we have seen so far in the first and second quarters.

And then expectations. I -- again, at least for this year, we are quite optimistic regarding the countries where we operate. It's only Russia where we see the GDP slowing down materially, and it's -- it is, in our view, primarily due to policy factors, conservative fiscal and monetary policy kind of slowing growth more than what its potential is. But certainly, if you look at Hungary, the level of growth there. And so it's in our expectations are almost at the level of last year, right? So we expect 4.8% GDP growth for this year. And for the rest of the countries where we are present, Bulgaria, quite strong, Romania, quite strong, and some ups and downs in other countries. But in general, for the course of this year, we expect continuously positive environments, supporting environment. And the recent development in Ukraine actually might fuel further optimism going to the future in -- of the Ukrainian economy.

Having said that, if you look at the broader picture, then obviously this picture gets less cheerful. The Eurozone slowing down, materially slowing down and looming Brexit perhaps and the global trade war and so on and so on. So that's kind of mid, long term, and obviously, it create challenges for these countries as well. But if you just look at the fundamentals of growth within the region, they continue to be strong. And at least short term, we don't see reasons for particular concern.

So that was the kind of highlight, general part from the presentation. We included a number of slides explaining the P&L lines. And here, we try to give you more detailed information and showing adjusted numbers without leasing kind of -- and also the FX-adjusted numbers in detail for the -- therefore being efficient here. I'm not going to go through in details. But obviously, to your questions, you might as well some of these points and then we can elaborate further.

I already passed up on the Page 26, which is -- which shows you the 90 days policy volume developments and time series comparison. And again, you see 2 numbers, just sticking out. One is the second quarter Russia and Romania. So in Russia, they were -- basically, out of the HUF 16 billion, HUF 3.7 billion was attributed to one corporate client. And in Romania, out of the HUF 6 billion, HUF 5.7 billion was related to -- mostly to large corporates and, to a small extent, to SME.

And the last 2 slides give you more detail on the -- on our Hungarian market position, in terms of market share connectivities in retail and corporate. And as you can see, our position remained strong.

And maybe there's one piece of information worth highlighting. This is new subsidized structure for retail clients in Hungary. It started in July. So it was not present in the second quarter. The -- now the numbers reflect this, but it's going to be material and important. And I'm sure that after the third quarter, so during -- when we discuss the third quarter numbers, this is something going to be quite important and visible.

It's basically a subsidized loan. It's kind of difficult to translate into English the best decisions for baby shower loans. So something in the -- the literal translation will be that newborn baby expectation or expecting loans, something like that. It is primarily -- the target or purpose of this structure is to boost the birth of new children in Hungary and improve the demographics, and therefore -- and it's actually complicated structure. It's got the [same tendency] and it's a loan. It's a free purpose basically cash flow without collateral to Hungarian women who are less than 41 and who commit to have children. And if they have 3 children, they don't have to pay back the loan and they don't have to pay an interest. And if they had 2, then there's -- then they're actually -- some part of the loan is actually paid by the government. And they if have one, then there are less -- so it's a complicated structure.

We're going to talk about this. It's quite new. So again, it started in July, but it is going to develop into a sizable loan in Hungary. But so far, no impact in the second quarter numbers obviously. So that's more kind of pointing to the future and potential future topics we're going to talk after the third quarter.

So all in all, this was what I intended to tell you as part of this general presentation. And I would like to ask you to -- answer your questions. And so please, operator, open the floor for a Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We've received the first question. It is from Anna Marshall of Goldman Sachs.

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

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A couple of questions, sir, from my side, please. The first one is on your M&A strategy. So you've closed 2 more acquisitions. You have 2 more remaining to close until the year-end. Is there more in the pipeline? Or indeed, if you're kind of approaching the end of this part of your strategy, and you're going to move towards more of a time where you've kind of considering increasing, say, dividend payouts. So this is the first question.

And the second question is more how to interpret the lack of the outlook or management expectation pages in the presentation. Does this mean that the outlook is under review? Or that it remains unchanged?

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

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Yes. So the pipeline, in terms of acquisitions, nothing to increase the shares I could talk about as new. So the most likely scenario is that, indeed, with the -- when we finish the remaining 2 acquisitions, then for a period of time, we are not going to acquire further banks.

I mean this is obviously the situation today. Obviously, it is partially also driven by demand. It's also because we don't see so much assets which would be tremendously interesting for us. So you could draw up scenarios where, I don't know, if some of our Asian competitors decided to withdraw from the region or things like that, and that could justify our strategy to be revisited. But if you ask about the current pipeline, it doesn't include any serious further acquisition.

And from that, I think it's reasonable to interpret that if we continue to accumulate profit in the way we do, then that will naturally lead to higher return to shareholders. But this is something we're going to talk about concretely when you -- when we finish this year. And as we said during the AGM, we were going to come up with the dividend policy after the end of this year, in first quarter. But I think there's some reason to interpret the numbers in a positive way, right? So -- as I mean -- if you look at our ROE, especially in the second quarter, it was above 10%. So that's clearly a quite strong performance, so -- and it seems that we are creating room for those outcomes as well.

Now the -- regarding, the outlook, indeed, we believe that we are more or less kind of operating within the framework what we suggested or indicated as a guidance. And if we go through these lines, and basically, I mean about 15% ROE seems to be -- if you look at the first half numbers, clearly well above that level. The margin being flattish and not lower without acquisition, then 4.25%. That was the other guidance we made. Again, looking at the first half, it seems that -- we seem to be within that perimeter as well.

Risk cost rates, slightly lower in the first 6 months and -- or it's actually lower than it was last year. But I already kind of hinted that we -- it doesn't necessarily mean that we are going to be lower for the whole year as a -- as it -- for some reason, it has happened so far that we tend to provision more at the year-end. And I already told you at the end of this first quarter that the original 4% FX-adjusted cost for us was -- it's a tremendously stretched and difficult target to reach. But this is -- depend what we have and -- but that's a risk that we are not going to reach that 4%. But hopefully, this is compensated by having these factors.

And I think very important here is obviously the other -- the last part, the guidance of the [remainder] was related to the volume growth, and we indicated around 10% volume growth without acquisitions. I mean the first half was 5%, and it was broken down between quarters, there's 1% and 4%. So we do see some acceleration compared to the first quarter. So again, it doesn't justify for a guidance review.

So I think out of the 2 options which you have given me, it is more like we seem to develop according to the original guidance.

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Operator [4]

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The next question is from Máté Nemes of UBS.

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Máté Nemes, UBS Investment Bank, Research Division - Associate Director and Analyst - European Banks Research [5]

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I have 2 questions, please. Firstly, on Hungary. I think it seems like that corporate lending is still at a relatively high level. I think your original expectation was that we should be seeing some moderation. Could you talk perhaps a little bit about the demand for corporate lending in Hungary and perhaps also in the region? And also in the context of some of the soft data or PMIs indicating a bit weaker sentiment, what are you seeing in this space?

And then secondly, the potential that you see easing further and there's less pressure also on other regional central banks to perhaps hike or manage interbank rates higher, would you mind sharing with us the main interest rate [for the -- these] in the largest operating countries? That would be helpful.

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

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Okay. So corporate lending growth, the year-to-date growth was 7% in Hungary. Last year, it grew 28%. So I would say that there's some visible slowdown. I mean -- and I don't think we are going to reach 28%, so it's going to be materially less. And I think the first half, 7% is a good proxy, right, so for the dynamics. So on this line, I think we are in line with what we more or less expected. The -- our expectation for the market growth for this year is basically 15%, which is like twice, so far, our half year growth. So it's also in line with that. Yes.

I mean in terms of our sensitivity to the euro rate, it's basically like 10 basis points decrease in the 3-month Euribor would result on a -- in a HUF 1.3 billion half reduction in -- on an annualized basis in NII. And this is most -- more or less domestic [also]. So a much less likely scenario is that it actually increases. So if it did, that would result in higher HUF 1.3 billion half higher NII. Now this is for the all group consolidated. Is that what you asked for?

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Máté Nemes, UBS Investment Bank, Research Division - Associate Director and Analyst - European Banks Research [7]

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Yes. Yes.

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Operator [8]

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The next question is from Simon Nellis from Citibank.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [9]

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Can you just repeat those numbers, the sensitivity again? I didn't quite catch it.

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László Bencsik, OTP Bank Nyrt. - Chief Strategy & Finance Officer of Strategy and Finance Division [10]

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So 10 basis point decline in the euro reference rate, the 3 months Euribor rate, 10 basis points decline, would decrease our NII by HUF 1.3 billion half annually.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [11]

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And then vice versa as it goes up? But...

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

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Yes.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [13]

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What's the impact again?

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

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That is the likely scenario.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [15]

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And does the same relationship hold with the BUBOR rates that you said in the past -- I think you said 10 basis points is around a HUF 2 billion impact?

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

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Yes.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [17]

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So no change there?

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László Bencsik, OTP Bank Nyrt. - Chief Strategy & Finance Officer of Strategy and Finance Division [18]

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No. It was actually HUF 2.2 billion, but it's down to HUF 2 billion today. So after the second quarter, it's HUF 2 billion.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [19]

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Right. Okay. And can I ask a question just on fees? You obviously explained the jump in the fees in the quarter at OTP core. But is this the new run rate? Or so you had kind of 12% growth quarter-on-quarter even if you strip out the one-offs.

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

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It's -- I mean each year, if you look back into the past, there's been a seasonality. So usually, the first quarter is less strong in fees. So there's a seasonality. Now as -- I'm on Page 23. We try to explain that, absolutely, on a quarterly growth, which was nominally in Hungary, HUF 6.5 billion. Basically, HUF 3.4 billion is attributable to one-offs. So our, basically, base is kind of different taxes accounted in the first quarter and the second quarter and vice versa.

During the previous 2 years, we had a negative impact of the repricing of the retail government bond distribution fees. They have -- there are fees for these -- the distribution of retail bonds has been cut tremendously, right? And that was a huge negative impact the prior 2 years. And that -- but this is over now. So it's a -- that now there's no difference compared to the base because there hasn't been further changes since beginning of the first part of last year in the pricing.

So therefore, the volumes are going to drive Hungarian fee income from distributing retail bonds. And particularly, this line was strong in the second quarter because this new retail bond structure came out. It's called Hungarian Government Bond Plus. It provides with -- the investors with a very strong investment opportunity, and it became extremely popular. And actually, this generated revenues, securities distribution fees in the second quarter, which was strong.

So I would say that the change compared to the last few years is that we are no longer subject to declining fees in distributing securities and -- which is a big part of our business because we are fundamentally a retail bank in Hungary. We have 32% market share in retail savings. So for us, this is actually a sizable business. And if anything, this is growing hugely by volume. And therefore, yes, we should see the positive impact of that in the fee structure in the future.

So what I'm trying to say is that from -- that there are no further structural changes in the fee income and in pricing. So it should -- the revenue should be volume-driven. And volumes are strong, transactions grow fast and blending is growing. So in general, there's a growing activity here, what we can witness.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [21]

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Okay. And maybe just one other question on the Russian margin developments. I mean, there was a pretty steep drop in NIM. Is that going to be sustained? What are the dynamics there?

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

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Now this is a story we started a number of years ago. And partially, this is driven by regulation. But in the second quarter particularly, it was also driven by deposit pricing. So we increased deposit pricing and that -- obviously, that -- there was -- it came as a cost. And it's a decreasing rate environment in Russia. And then if anything, it should even decrease faster than it does. So -- in terms of the external rate environment. So I don't think this trend will turn around, and it's most likely to continue. Obviously, the debt [is obvious] smaller and smaller as the nominal number, what we talked about, gets smaller and smaller. But I don't expect this trend to turn around soon.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [23]

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Right. Okay. And then just one last quick one. I mean when do you expect the Serbian transaction to close? Do you think it will close this year? Or is it likely next year?

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

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Definitely this year, definitely this year. We are -- we're working hard to close it in this quarter.

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Operator [25]

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The next question is from Gabor Kemeny of Autonomous Research.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [26]

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Couple of questions, please. Firstly, on the Russian consumer lending regulation, which will take effect -- an new round of tightening will take effect in October then this limit the capital requirement to the PTI. On consumer loans, what do you expect from this regulation in terms of capital and growth in Russian consumer?

And the other one is on the margin. I think you show an 8 basis point support from the FX rate changes in Q2. So with your -- clean NIM has been 4.25% in Q2, if we take out the effect of the FX changes.

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

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Yes. That's what it means. The second -- answer to the second question is yes.

And the first one -- yes? Sorry. Regarding your other question, what we expect is [other] moderation in kind of volume growth. It's -- we expect less of an increase in further capital requirement because the actually high APR lending is less and less. Especially what we've done from the bank is less and less. So -- and this is the reason why the NIM is getting less and less because we have less and less high APR lending. So the capital hit would be quite moderate. But I think what we are seeing here is the difference between these products, the POS and other type of unsecured lending loan -- retail loans get smaller and smaller because the pricing is getting closer and closer.

And in general, I think -- because if you look at the overall consumer lending growth in Russia, it is tremendously robust compared to the GDP growth. And I think this potentially concerns the regulator as well. And actually, we are -- now that we more or less gain back the volumes, what we lost during '14, '15, we will be okay if the -- with a lower growth rate there and the more kind of controlled risk profile. So being very honest, I -- we actually quite like this, probably an exaggeration, but we're not -- we understand why these regulatory changes happen, and we understand that they may actually have a positive impact in the market by basically limiting excessive risk-taking and exuberant growth of portfolios, which usually don't lead to a very good end.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [28]

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Okay. Understood. And just to follow up on the margins. Do you see -- what do you think is the likelihood that the margin will drop below this Q2 level, which was I think for -- in a couple of -- next couple of quarters? Because if I understand the -- then adjusted for the FX changes, that was a bit of a negative development here.

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László Bencsik, OTP Bank Nyrt. - Chief Strategy & Finance Officer of Strategy and Finance Division [29]

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Okay. This is what -- and I can only refer you back to our guidance, which was that -- I mean literally, it said that the net interest margin started to flatten out in '18, and it may not fall below the 2 -- second quarter '18 level, 4.25%, without new acquisitions in 2019. And this is what we have told.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [30]

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Okay. And this was based on a constant FX assumption presumably?

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László Bencsik, OTP Bank Nyrt. - Chief Strategy & Finance Officer of Strategy and Finance Division [31]

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Not necessarily.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [32]

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So do you assume any FX changes when you formed this guidance?

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

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Certainly, we had an assumption on -- based on the FX rates. Yes, we have an assumption. If you ask -- well, if you ask about my expectations, my expectations -- our expectations have not changed. So the exact guidance, what we gave for the expected NIM, we still think that this is the most likely scenario for the course of the year.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [34]

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Okay. That makes it clear.

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Operator [35]

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Thank you. If there are no further questions, I will turn it back to you.

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László Bencsik, OTP Bank Nyrt. - Chief Strategy & Finance Officer of Strategy and Finance Division [36]

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Okay. Thank you very much. Thank you for joining us today. Thank you for listening to the presentation, and thank you for your very good questions.

It's midsummer, so I hope many of you are just ahead of a very relaxing summer vacation and some of you probably have gone that -- done that and already are very relaxed. But in any case, I wish you all the best and good time, a very good summer.

And I hope that you will join us when we discuss the third quarter results on, I think, on the 8th of November. So again, thank you very much, and goodbye.

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Operator [37]

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