OTP Bank Nyrt

BET:OTP

Earnings Call Analysis

Earnings Call Transcript 2023-Q1

[Operator]

Dear, ladies and gentlemen. Welcome to the OTP Group First Quarter 2023 Conference call. [Operator Instructions].

May I now hand you over to Laszlo Bencsik, Chief Strategic and Financial Officer. Laszlo, please go ahead.

[Laszlo Bencsik]

Thank you. Good morning or good afternoon depending where you are, and thank you for joining us today for this conference call. The presentation is available on the website. And during the call, I'm going through it. So you can also follow it online or in printed copy if you have any.

As usual, I will give a kind of short presentation. I promise it's going to be short and then Q&A session follows. So maybe if you start on Page 2. I mean the after-tax profit of the first quarter was a historic high. We have never ever had such a strong quarterly result. Obviously, this was in a big way, affected by one-offs, but one-offs which actually canceled each other out. So we accounted for in the first quarter for the usual bank tax, which was introduced in 2010, and the windfall tax, the recent one, according to the kind of applied for last year, and it's another HUF 24 billion and HUF 61 billion, so together, HUF 88 billion.

But we also had a positive effect, and that's coming from the NKBM acquisition, as a badwill and then initial risk cost, and the -- some of these is basically this green line here, HUF 85 billion. So almost cancels out the financial taxes, the special taxes for the first quarter. And then we had one more positive one-off. You might remember last year, there was a default and the resolution of Sberbank Group including Sberbank Hungary. We booked the loss last year, but that loss did not manifest to reverse that booking in the first quarter this year. So there's not much difference between the adjusted and the after-tax profit. Actually, the adjustment is somewhat lower.

ROE terms, we do rather well, I mean, in kind of low 20s territory, which is arguably better than what we originally indicated, namely around last year level, which was 18.6% in the first quarter. So far, I mean, better than our original expectations.

Going forward, looking at the P&L, there are some factors which you have to take -- keep in mind when you look at our data. First of all, we consolidated NKBM starting from February. So February, March includes NKBM, the Slovenian Bank. Plus, there has been quite strong movements in the exchange rates. The half euro rate and half ruble rate. So in order to get a kind of full picture, you probably have to look at this without NKBM FX-adjusted numbers, which is the column -- the second column from the right. And as you can see, I mean, total income went up 3% quarter-on-quarter, costs were flat, and operating profit improved 5% in 1 quarter. And obviously, the risk cost was the biggest mover of the results. It was much lower in the first quarter than in the fourth quarter last year. Pretty much the portfolio across the group has been stable.

And even Russia, Ukraine, where we booked larger provisions last year, seem to be doing well in terms of portfolio quality. So there was really no need for further provisioning.

On this slide, you can see the net interest margin, which is probably the most kind of interesting as we're looking at the future of our quarterly report. That will be a slide where we detailed entity by entity, the NIM development. But overall, the group level increased from 3.5% to 3.66%. Cost-to-income ratio remained below 50% but slightly increased compared to the average of last year.

Now looking at the Hungarian performance, it's not as good as the consolidated one. As you can see, adjusted profit went down year-on-year considerably, and this is purely due to -- purely because also cost was increased and margin contracted. So this actually resulted in this squeeze of profits in Hungary. Quarter on quarter, we had some important, but that's more like kind of seasonal costs at year-end plus lower risk costs.

ROE, not very high, but I mean this is obviously somewhat distorted because here the balance sheet includes all the investments in the subsidiaries. So -- and that has some implications for capital as well. But anyway, this is the calculated ROEs. And here, you can see the one-offs, which manifested on the stand-alone or kind of core sub-consolidated level. One important factor here, the badwill does not appear at this level. The badwill only appears on a consolidated level. That's why actually, without dividends, we see the core business is negative HUF 37 billion in the first quarter because we booked the special taxes but not the badwill here.

Now turning to the other countries. And first of all, I think very important, you see the NKBM contribution, HUF 13 billion of equivalent for 2 months in terms of profit after tax. Bulgaria saw a decline, but that's due to one factor. We had to book all the regulatory charges related to deposit protection in the first quarter in Bulgaria and also in SKB and in Croatia, but for a smaller amount. And that -- in Bulgaria, that resulted in a HUF 9 billion increase of cost compared to the previous rate. So if we adjust with that, then the profit was almost as much as in the fourth quarter last year.

And strong Slovenian performance, including the new acquisition, and this is obviously going to further increase in terms of its impact in the second quarter where three months of the given quarter will be accounted for. And Croatia, Serbia growing fast. Albania, Montenegro, doing well, also Moldova surprisingly given the situation there. And it's Ukraine and Russia, very strong and stable earnings, the operating environment in both countries kind of stabilized. And therefore, it allows this level of profitability. And again, portfolio qualities seem to be stable as well. Romania is the only country here where we could not reach the required level of profitability and the required level of size, and there was even some decline quarter-on-quarter. I mean if you look at the efficiency indicators, they obviously improved a lot, but that's due to the NIM expansion and more about that later on.

So if we turn the page, there's some further detail on Russia, Ukraine as usual. Again, there is no major change in the situation in the countries, but probably worth noting is the coverage level. So even with this strong HUF 13 billion equivalent profit and more than 40% return on equity in the first quarter, we managed to increase coverage close to 15%. And this is provisions over total loans, total gross loans. So that's the kind of gross provision coverage, which is quite strong.

In terms of the kind of liquidation impact on the ratios -- the capital ratios, there's, again, not much difference between the last -- the fourth quarter last year. Russia contracted somewhat.

We've the increasing kind of retained earnings and equity, which is a potential loss if we have to deconsolidate. And at the same time kind of the other factor here is the exchange rate, which is important. The ruble started to weaken, and that actually reduced this number. So in fact, the ruble rate has a potential impact on the overall level of ratios capital ratios on a consolidated level. So this is something to watch because if the ruble weakens, then it has a negative impact on our consolidated group level of common equity Tier 1 and this kind of negative impact in terms -- in case of the consolidation and reduces. So there's some dynamics there. Ukraine decreased to 5 basis points of potential loss again. That's due to the earnings, which were retained there.

Now the first quarter was characterized by the consolidation of NKBM. And in fact, the work started there to merge the entity. It usually takes 1.5 years for us to fully consolidate an entity and fully merge in case we have two entities in a country. So we can expect the merger to conclude somewhere third quarter next year.

Now if we go to the Uzbekistan story. This is the one coming softer and NKBM Slovenia, Second quarter, we expect to close the Uzbekistan deal with Ipoteka Bank. I mean we have talked about this before, and it has close to 8% overall market share, 30% market share in mortgage lending. It's the fifth largest bank, state-owned bank and then the first in the line of privatization.

In terms of earnings potential, as you can see, this kind of latest published day-to-day average kind of first half last year, HUF 17 billion equivalent. So that's the kind of run rate of profitability for 6 months' period. So at least this much should be the contribution from Ipoteka for the second half of this year should the transaction close, which we expect to be so.

Now looking at Ipoteka numbers, I think there's one kind of unique feature, and that is the quite high loan-to-deposit ratio. It doesn't mean that we have to kind of refinance the entity with large third-party lines. It's basically -- the mortgage lending is to the large extent done by funding from various state organizations and at the preferential rate. And that means that -- I mean, and therefore, the mortgages are somewhat in a subsidized level of interest. So this is kind of large intrabank liabilities. That's the line where all these factors come in. Should we buy the entity, which we will, then this is only a small amount, which we have to refinance, less than $50 million equivalent.

The price, we have not made public, but we alluded to the potential size of it in the updated guidance because we said a roughly EUR 200 million one-off positive can appear in the second quarter related to the transaction if it closes. That, again, is combination of first the risk cost and mostly badwill, so buying the entity with -- have to badwill, as we assess the original data suggesting results.

On Page 8, total income. And here, you -- I mean if you are looking at the kind of quarter-on-quarter color, it can be somewhat confusing, so I'll try to explain the meaning of the different colors and numbers. So basically, the gray ones are the ones which are related to the NKBM transaction. So total income line was impacted by HUF 23 billion income from NKBM, February and March. So if you look at the kind of quarter-on-quarter change in total income and the nominal change for HUF 6 billion out of this HUF 23 billion was the impact of NKBM. At KBM, the nominal change, which have been HUF 17-minus billion. But if we also adjust with the FX rate, then you get the number -- the second number in the last column on the right, which is 3%. So without NKBM, an FX-adjusted overall income increased by 3%. So that's the kind of most meaningful number. And wherever we have 2 numbers, the second one is the FX adjusted.

And the similar logic is followed in the following slides. So maybe some bit of a deep dive into net interest income. Again, there is a strong -- if you go to -- yes, so again, NKBM contribution was HUF 18 billion to net interest income. And in terms of movement, I mean, looking at the FX adjusted number quarter-on-quarter, there was quite some improvement and 17% up in Bulgaria, 18% up in Slovenia, excluding NKBM growth. And Croatia, kind of double-digit growth in net interest income on a quarter-to-quarter level. Even Russia improved and even Ukraine improved somewhat. Now the only exception is Hungary, where we have kind of flattish net interest income dynamics, and the explanation comes on the following slide.

You can see the net interest margins. Again, Hungary was flat or margin was flat. This is basically a combination of very little growth and the fact that we have this strong rate of fixed assets in the balance sheet and, therefore, the increase in the rate environment had a negative impact during the course of '22, and there was not much rate change between the fourth quarter and the first quarter. We had some increase in corporate loan NII. And that provided a small improvement here in terms of 3 basis points, but it's rather flat.

And unfortunately, the expectation here is the second quarter might be worse or will be worse because of the change of the compulsory reserves. The amount increased from 5% to 10%, but we have to put into reserves and the rates, I mean, change in a way for 1 quarter of it, they don't pay anything. So the effective rate is 10%, so the requirement is 9.75%, which compares to the 18% reference rate, so we are losing more than 8% on these reserves. And that new reserve requirement regulation came into force from April from the second quarter. So the second quarter will have a -- probably be even lower in Hungary.

And then starting from the third, fourth quarter, hopefully, we will see a fast normalization of the rate environment there. And certainly for the second half of the year, we expect rather rapid cut of the reference rate. And then hopefully, this will induce improvement in the Hungarian NIM. From our perspective, we actually expect the first cut to happen in May because today, the new inflation data came out, and it's 24%. So finally, it started to visibly decrease. And hopefully, the central bank will react to it by cutting the rates, starting the rate cutting exercise.

In all the other countries, as you can see, net interest margin improved, and that's obviously due to the kind of euro rates increasing and euro countries like Bulgaria and Montenegro also applying that and basically everywhere due to kind of repricing on higher benchmarks, we see improvement, and that combination resulted in this slight increase in the overall consolidated NIM. Hungary was flat at the low level, and all the other countries improved quite reasonably.

Now volume dynamics of loans. Not surprisingly, loan growth slowed down to close to 0. So altogether, we had like 1% growth in the portfolio, and that's in line with our kind of previous guidance of not more than 5% growth overall to 1% in one quarter. Especially, mortgage lending is quite weak. With the exception of Bulgaria, we don't -- there's actually not much growth. And Hungary started to decline in terms of mortgage volumes. And it's the consumer lending, which is kind of more robust in a way. Especially Hungary, consumer lending is still growing albeit to lower -- much lower rate than last year, but it's still growing. In corporate volumes, there was some increase, namely in Hungary and in Bulgaria. This is related to one kind of larger deal which was booked in these 2 countries related to a leasing company in Slovenia, which we refinanced.

Year-on-year changes, maybe not so interesting. So I'm moving to the deposit section. So maybe to Page 13. So no change on kind of deposit levels and group level without the NKBM acquisition. Hungary was minus 1%. And corporate went down. Retail was flat. In fact, this kind of retail being flat meant that our market share in retail deposits increased because overall in the market, retail deposits declined in Hungary. The corporate deposit volumes are very sensitive to pricing. So the fact that you see some bigger plus and minus numbers means that we optimize the funding structure in each country, and we want -- we try to minimize the corporate deposits because, by far, they are the most expensive to take, so take as much as really needed.

In retail, it's kind of more flattish in Croatia. We had some bigger decline in the first quarter. That's due to the fact there was a kind of very attractive price retail savings bond program done in the first quarter, and that's retail savings and also kind of a few private banking clients migrated to banks, which provide -- smaller banks, which provided a high deposit rates. But again, this is far more than enough for Croatia and they're . Plus, there was another impact that because the euro was introduced in January -- 1st of January, and there was a lot of kind of deficit made to accounts of cash, and [indiscernible] in the first quarter. So that's the other kind of technical [indiscernible] there.

We included one slide with further details on the deposits in the share of insured, share of term. Now these numbers are actually quite stable. So we don't have a time series here but really stable levels in terms of share of term deposits and also the pricing level of overall deposits. For instance, Hungary quarter-on-quarter was flat, so there was no increase -- further increase in overall deposit -- cost on deposits.

Going further to net fee income. Again, this kind of complicated structure in a way that you can get the numbers without NKBM line, looking -- not looking at the gray numbers, and then the real fundamental change can be captured in the kind of second number in the last column. So went down by 6%. Here, the biggest kind of factor was the kind of bonus payments to the fund management company in Hungary. They overperformed the market last year. And therefore, in the fourth quarter, they received the bonus that's included here. And then Russia somewhat, but that's more kind of seasonal there.

Other income, there's some cross play here between Hungary and Bulgaria. This kind of intergroup placements and swap transactions between the entities, they have some kind of -- especially on the Bulgarian side, some -- explains some of the changes. And in Hungary, we had FX gains and derivative gains. So that's kind of trading result doing better in the first quarter.

Costs. This is a difficult factor. I mean we see kind of 2, 3 bigger numbers here. Hungary 25% year-on-year cost growth. That's quite strong, and then it's led by personnel expenses, but also other costs were strong. And this is related to wage inflation, a slight increase in headcount and a strong increase in real estate costs and other kind of service costs in Hungary. Just to remind you, in Hungary, we have -- today inflation number was 24%, but the peak 26%. So Hungary is by far the highest inflation environment in the countries where we operate.

Bulgaria, 55%. Again, this is just a technical item that is coming from this increased to deposit protection. And Albania, we are still -- I mean the merger actually happened, the legal merge, and that had some extra costs. So here we are kind of continuing to merge the 2 entities. And unlike in other processes, we first did a legal merger, and the operational merger will follow. So this kind of increase will disappear as we realized cost synergies.

In terms of capital adequacy and liquidity, our capital ratios went down due to the NKBM transaction. So that's quite visible here. And we expect another 30-basis-point impact from the Ipoteka transaction, which should happen in the second quarter. But of course, in the meantime, we expect to generate earnings. So hopefully [indiscernible] will be compensated by earnings -- retail earnings in the second quarter. We do quarterly reviews, audit reviews. So we always kind of incorporate the quarterly results in the consolidated capital ratio. Liquidity remains robust, and LCR ratio, close to 200%. Net stable funding ratio was 140%. We sit on liquid assets in euro terms.

If we go to the next one, I mean this is the usual kind of portfolio quality. Stage 3 ratio continued to decline. And again, there's not much to talk about here because portfolio quality is, again, quite robust even in countries like Russia and Ukraine. So there's not much to report here.

Just a bit more color on the Hungarian situation. As you can see, mortgage lending kind of tanked. So this is -- applications went down by almost 80% year-on-year compared to the first quarter last year, which was a very strong quarter, by the way, in terms of base since there was the time for the green housing loans. But nevertheless, this is the picture. So mortgage lending is at very low level in Hungary. Whereas consumer lending is still okay. There's some growth, as you can see, 2% growth on a quarterly basis on the consumer loan side in terms of cash flow and volumes.

And then overall retail savings, our market share somewhat declined, but more importantly, in retail deposits, so actual deposits, our market share increases and our volumes were flat. So it means that overall in the market, there's actually a negative trend of retail deposits fee due to the high inflation, living off their savings and reducing their savings. And that's one factor. The other factor is that they migrate their savings to bonds, to typically sovereign bonds. We have somewhat lower market share in that segment than other players.

In terms of the subsidized retail structure, the baby loan is getting less and less. I mean this basically -- the eligible client base is running out. This green loan program, as you can see the seasonalities of last year, it was very strong in the base in the first quarter. Still some going on, but we -- in terms of issuance. But this -- the program closed more or less in the second -- at the beginning of the second half last year. Our market share was usually very high, 42%, much higher than our usual market share in mortgages.

And then corporate slowed down as well. I mean, we had a very strong year last year, 32% overall growth, and they slowed down -- started to slow down considerably in the fourth quarter last year and actually slowed down to 3% in the first quarter. And again, this was characterized by one big deal mostly. So it not -- may be much less growth for the remaining part of the year.

There are 2 subsidized structures, the Széchenyi Card and the Barros Gabor loan program and both quite active and so are clients. There's the usual ESG kind of informational rating, keep improving sustainable analytics. There was some improvement in terms of the risk and [indiscernible], and this is something we strategically focus on and keep as a very important factor of our efforts.

Now in terms of the macro, Hungary has the lowest expected growth, even lower than Russia and Ukraine this year. And that's due to very high inflation and the very high rate environment, which resulted in substantial drop in consumption in new investments. So there's a strong break on the Hungarian economy as they try to kind of moderate inflation to more palatable level. We expect this effort to be successful, and we expect inflation to go below 10% by year-end. And obviously, this kind of -- the reduction will accelerate in the second half when the base increases last year. I mean inflation really started to pick up a year ago in April or May, and then skyrocketed during the summer up to 26% year-end last year. So compared to that base, we expect 9.3% further inflation.

And the rate environment is where we expect to kind of drop below 10% by year-end from which we will benefit in a meaningful way. Our sensitivity to the off-rate is HUF 15 billion NII per 1 percentage point. And this is true until kind of 13% level from which there's kind of less than that on HUF 6 billion to 1 percentage point.

This is the Hungarian situation and then other countries show somewhat higher growth potential and much lower inflation levels for this year. So something we should keep looking at. But in these countries, we see a kind of stable environment -- operating environment. So we don't see increasing risk or concentrations of risk. And again, even Montenegro is -- Moldova is doing okay where we had quite a big drop in the GDP. And then Ukraine, huge drop last year and some improvement this year. And as you could see, we have positive earnings in these countries.

Now finally, the kind of further color on the pending acquisition of Ipoteka goes through, there will be a one-off kind of around EUR 200 million that will impact. And then the next point here is the net interest margin. As I indicated, the Hungarian core and net interest margin might not improve the second quarter. Rather, it should be less or we expect a decline in the second quarter. And then from that level, if rate costs manifest, you should see an improvement by the second quarter. I mean Hungary will not be better than the first. We do see -- do expect some improvement in the other countries. But nevertheless, it may not be enough to compensate for the group-level NIM. So the group-level NIM will be potentially impacted here as well.

Now, there's good news. The calculation of the windfall tax change, and it's more closer now to windfall tax or an extra profit tax is now for the second half of this. So for the first 6 months is calculated in the same method as it was done last year. But for the second -- next 6 months for the second half of the year, the calculation methodology changed, and it's basically pretax earnings adjusted with dividends received and the extra taxes. And the percentage of that is the new tax, which in our case results in HUF 28 billion less tax. So we are going to book this adjustment in the second quarter. So that will be a plus HUF 28 billion pretax number in the second quarter.

The other kind of risk profile, cost efficiency, volume growth, we keep the kind of previous guidance kind of stable. Credit profile, risk profile, pressure on cost efficiency and cost-to-income ratio and performing loan growth, now more than 5%. And the ROE around last year, here, I think, should note that the first quarter was much better than last year. Last year, on average, we had 18.3%. First [indiscernible] 2-ish, 22%, 23%. So our first quarter performed somewhat better, and there might be some potential here to even achieve more than last year.

So that's the kind of short summary of situation, and I'm sure you have some questions so please ask them.

[Operator]

[Operator Instructions]. The first question is from Gabor Kemeny from Autonomous Research.

[Gabor Kemeny, Autonomous Research]

I'd like to pick up on your last point when you noted that there could be some upside to the ROE guidance. Can you just talk a bit a bit about this further record that, that upside could potentially come from?

[Laszlo Bencsik]

Risk costs.

[Gabor Kemeny, Autonomous Research]

Sorry?

[Laszlo Bencsik]

Risk costs.

[Gabor Kemeny, Autonomous Research]

Okay. Okay. That is indeed what we saw in Q1. Yes, my other question would be, can you -- this is a broader one actually. Where would you see the earnings share, the contribution of the Hungarian business relative to the current businesses going forward, in a normalized rates, normalized inflation environment, if we don't assume more acquisitions beyond Ipoteka, so maybe next year?

[Laszlo Bencsik]

I mean in the first quarter, it was 30%, which is the volume share of the Hungarian business from loans, for instance. And so the share of adjusted earnings of the Hungarian entity was kind of 30%. I mean Hungarian margins should improve in a lower rate environment if rates normalize.

And then the subsidiary rates, I mean, okay, it's a question of how fast. I mean next year, I don't know whether euro rate -- what the euro rate is going to do. Maybe there will not be so much normalization or reduction until we have this kind of current level of rate environment in kind of the euro-related countries. And Hungary, we see a fast decline in the rate and therefore our NIM to improve somewhat. That suggests that Hungarian share could increase during the course of this year, the second half of this year.

And next year, again, if you have Hungarian margin improves, then it can provide a boost. But in terms of kind of underlying business, so if you exclude the margin from the equation and just look at the fundamentals, volumes and sales and so on, then I don't see any leverage in Hungary. I mean if you look at the macro data, it's going to be kind of challenging to -- on the -- kind of, on the budget as well and the inflation, which is coming down from a very, very high level. So given the somewhat more challenging macro perspectives in Hungary, it's that the underlying businesses can actually grow bigger and faster outside Hungary than in Hungary, especially if you consider Ipoteka, I mean, there's a huge growth potential there.

[Operator]

The next question is from an attendee joined via phone. [Operator Instructions].

[Robert Brzoza, PKO BP Securities]

This is Robert Brzoza from PKO BP Securities. I have a question regarding the outlook for the NII in Hungary. Basically, you sound more cautious this quarter. A quarter ago, you said you expect the NII to improve compared to the 4Q 2022. Also, you alluded to the changed expectations regarding the interest rate outlook in Hungary, where during the call, you discussed the lower income from the reserve requirement. So basically, my question is, what's the major reason behind the change in this stance? And the additional one is, is there a need at OTP core to adjust upwards the pricing for deposits, given what you said on the smaller competitors attracting depositors away, as I've understood, from the bank?

[Laszlo Bencsik]

So that comment was related to Croatia so -- regarding deposits. So in Hungary and also in Croatia, we decided not to increase the deposit rates. And in Hungary, we also are not -- actually, the average overall level of deposit costs or average interest on deposits volume somewhat declined due to combination effect. So no, that doesn't seem to be an [indiscernible].

Now if you look at -- I mean, factually, the quarterly NIM improved from the fourth quarter, but that improvement was not as strong. It was only 3 basis points, right? And then this -- in the second quarter, we are going to see 2 new factors. One, the reserve requirements reducing NII, right, the change in the reserve requirement. And hopefully, we -- the rate cuts can start as early as this month. If the rate cuts start, then this can be kind of positive. We -- but overall, we expect the change in the reserve requirements outweigh the kind of short-term impact of the rate cuts.

So overall, I mean second quarter might be the kind of bottoming out. And then from there, we expect improvement. So that should -- again, if the rate goes down to the level where we expect, I mean close to 10% or below 10% by year-end. So these are the most important factors here. It's not repricing of deposits, it's the reserve requirement change and exactly when the rate cut start to happen. And we expected that somewhat earlier in our previous kind of expectations when we talked about the NIM development potential in Hungary. But I mean, again, quarter-on-quarter, there was some improvement, but not much.

[Robert Brzoza, PKO BP Securities]

Right. If I may continue on the outlook regarding the cost of risk. Do you think there's potential for provisioning charges to improve potentially? It's coming more from decreased NPL formation across the board? Or there are better opportunities for write-backs and NPL sales, which is the dragging force behind it?

[Laszlo Bencsik]

Stable quality.

[Operator]

The next question is again from an attendee joined via phone. [Operator Instructions].

[Unidentified Analyst]

This is a [indiscernible] from Bank of America. I have several. One is about your sensitivity to lower benchmark rates. You mentioned HUF 15 billion -- HUF 1.5 billion and HUF 0.6 billion to falling rates, so the different changes in the policy rates. Could you please confirm this is valid for falling rates, and are we talking about sensitivity to BUBOR or the sensitivity to deposit rate? This is my first question.

[Laszlo Bencsik]

The sensitivity is HUF 15 billion per 1 percentage point. And it's related to the kind of benchmark rate, which is 18%, the overnight deposit rate.

[Unidentified Analyst]

Right. Okay. So it's deposit rate. Perfect. And you mentioned that at some point, it will fall from 15% to 6%. At what level does it fall to that...

[Laszlo Bencsik]

When it goes over 13%, right? So when, kind of for reference, it catches up with the base rate.

[Unidentified Analyst]

That's clear. My second question is about your cost of risk, which was a very positive surprise for us in the first quarter numbers. And you'd mentioned that the asset quality outlook is stable. How shall we think about the cost of risk outlook going forward from the first quarter level?

[Laszlo Bencsik]

Well, again, we don't see portfolio deterioration. So it can stay at a lower level. But it's a big portfolio, and there's a lot going on macro-wise in these countries. So I cannot exclude a scenario where it starts to increase from the level we had in the first quarter. Nevertheless, I think it should not be higher than last year levels overall. So finding no visible signs of this deterioration.

[Unidentified Analyst]

Great. Okay. My third question is about your -- not your, but Hungarian interest rate caps. Could you just please update us on any conversations about potential expansion of interest rate caps?

[Laszlo Bencsik]

I'm not aware of any discussions here other than us trying to argue for no further. There are some kind of messages sent through the media. So bankers complaining and then the ministry people kind of arguing back. But so far, there's no clear indication of where these rates might go.

[Unidentified Analyst]

Right. Excellent. And I have last question. This one is less technical, more big picture, holistic question. The historic OTP was good in M&A and grew very well organically. Now organic domestic growth is negative in real terms, and the latest M&A was actually outside of CEE. Could you share with us what's your strategy for the next, not year, but maybe years? Where do you want to grow going forward?

[Laszlo Bencsik]

We have a strong preference for growing in countries where we are present. So I think that that's, by far, kind of strategic priority. And then opportunistically, we keep our eyes open for other jurisdictions. But first of all, we would like to grow in the countries where we are present.

[Operator]

The next question is [indiscernible].

[Unidentified Analyst]

Just wanted to understand the Magyar Bankholding is expected to be live in May of this year. So from your -- does that change any of your assessment of the competitive dynamics of the Hungarian market in terms of loans, deposits, market shares and the pricing of your deposits? How are you looking at the Magyar Bankholding Corporation? And what is your evaluation of this?

[Laszlo Bencsik]

Yes, yes. Well, in general, we welcome consolidation in the market. That creates better competitive dynamics. So -- and it's actually -- we consider it, from our perspective, better than kind of new entity was created as opposed to one of our foreign competitors buying up all its .

[Unidentified Analyst]

Just a follow-up to that. But another entity that's almost -- that could compete with you on market share, could that -- could they start writing larger corporate loans? Would they be able to attract deposits at more favorable rates? Could that also affect -- is there any chance you see this could affect the competitive dynamics of the market? That's my last question.

[Laszlo Bencsik]

Usually less players mean kind of better competitive conditions, not worse. Like, we are typically more conservative in every pricing instance than our competitors. So I mean, we are always typically more expensive than competitors, and we can do that because we are bigger than the rest. And if there's another big entity, they can potentially also have this pricing power more. And that should, in our view, ease competition, not to increase, but we will see.

[Operator]

The next question is from Weronika Lurka from Morgan Stanley.

[Weronika Lurka, Morgan Stanley]

This is Weronika from Morgan Stanley. I have 2 questions. So the first question regarding the loan growth outlook in Hungary. So how do you see the outlook for loan growth? And could there be any positive surprise?

[Laszlo Bencsik]

I think until -- I don't think this year will bring positive surprises in loan growth. Hopefully, by kind of next year, we're going to see kind of single-digit rate numbers and then we can expect again a revival of lending activity.

[Weronika Lurka, Morgan Stanley]

Great. And the second question is regarding your acquisition in Uzbekistan. So could you provide us with some more color about your expectations for Uzbekistan and the key drivers that make this acquisition attractive for you?

[Laszlo Bencsik]

I mean it's in large country, 36 million people and growing fast, quite young population, underpenetrated and underserved in terms of banking services and growing fast. I mean the GDP growth is expected to be around 5% in this overall kind of environment.

So we expect kind of very fast growth of the banking markets in the Uzbekistan, and we would like to kind of take our share from that and benefit from being the first in the line of privatization of state-owned banks. So that's the underlying rationale. And the -- again, last published data was for the first half last year. And there, they made roughly kind of $50-ish million in 6 months and the kind of ROE of 22%, 23%. So at least this much should come from them as first kind of contribution for a 6 months contribution this year.

[Weronika Lurka, Morgan Stanley]

And just to kind of understand like what the competitive environment is in Uzbekistan at the moment and where you see the most potential to improve Ipoteka operations?

[Laszlo Bencsik]

Well, it's -- I mean in terms of digitalization, it's -- they are actually quite good infrastructure services, and there's one kind of online player, Click and the TBC Bank present with kind of primarily online value proposition. So these are the kind of 2 strong retail digital players. And then, it's the -- Ipoteka is the #5 bank. And the first 4 are also state-owned. They are much bigger in corporate lending, and they are financing state-owned corporate. That's a different kind of segment strength than what Ipoteka has.

And clearly, our objective is not to be strong in corporate lending, to state-owned companies. We want to focus on the retail. And Ipoteka has 30% market share in mortgages, so that's potentially a big area where we see market opportunity, given the very fast urbanization and kind of fast, I mean, large programs to build new housing for the growing population. So I'd say the function of the retail and the mortgages and transactional services, consumer loans.

[Operator]

The next question is from the attendee joined by phone. [Operator Instructions].

[Unidentified Analyst]

This is [indiscernible]. Many questions already answered, but I would have 2 to 3 if I may. Maybe at a bit on deposit pricing on and [indiscernible] how is going in Bulgaria in other countries like Serbia, Slovenia. So what kind of -- compared to the previous quarter, is there any type of pickup there? And I will...

[Laszlo Bencsik]

Yes. It's also Romania where we see kind of strong deposit competition in terms of pricing. The other countries, not so much.

[Unidentified Analyst]

Okay. And you mentioned Romania, I mean a question. I mean you also mentioned the subscale there. So we all know this. But what kind of your strategy kind of going there? Let's assume, I mean there is no M&A in the next 3 to 5 years. So would you still consider kind of an in-country or whatsoever there?

[Laszlo Bencsik]

I mean this is [indiscernible] question. We have so far limited results. We have a strong operation there. We invested a lot during the last couple of years. It's now robust and strong, but it's a very competitive market. So I think we have to kind of carefully consider what we do here. It's a very attractive -- [indiscernible] is very attractive everyone's in Romania. So not an easy situation for us, and we try to figure out new ways to solve this situation.

[Unidentified Analyst]

Okay. And one last, if I may. I have not any kind of explicit wording on Russia-Ukraine outlook. But I hope that given, let's say, kind of robust results Q1 that wording is similar to the last one, so expecting kind of better profit compared to the last year, right?

[Laszlo Bencsik]

Quite strong in both countries. The only problem is that the equity is not there. It's -- we cannot take out dividends from Ukraine, and we haven't figured how to take our dividends to Russia. So that's the only problem. The earnings are out there.

[Operator]

The next question is from Simon Nellis of Citi.

[Simon Nellis, Citigroup]

First question is just on the integration that you're going to see integrating NKBM and SKB, if you could elaborate on that and what kind of synergy you expect and how long that whole process will take. That would be my first question. Second, Russia, we heard that Raiffeisen is looking to participate in the Russian business by the end of this year. Do you see any opportunity to also exit? And then last, if you could just comment, sorry if I missed this during the presentation, on potential extensions of some of the regulatory measures, like I think this is [indiscernible] windfall [indiscernible]. In addition, we hear the same for rate caps in the second half of the year.

[Laszlo Bencsik]

So what was the first one?

[Simon Nellis, Citigroup]

The integration costs expected in -- yes.

[Laszlo Bencsik]

I mean, usually, I mean it takes 18 months usually. And we target maybe 30%, 40% of the smaller entity as a potential cost synergy. I mean cost, I mean there's some kind of -- we use consultants, obviously, and some additional IT costs usually evolve, but it's not large. So it's not -- I mean the savings are much bigger.

Russia, I mean we continue to explore strategic opportunities. But there's a kind of -- they were banned on selling these assets. So it's not -- it's actually very difficult to do so. Nevertheless, we continue to look at various options. But the kind of underlying scenario is that we continue, and the business is doing okay. We are a tiny player in Russia, focusing on security lending, consumer lending. We are not very far from being systemic and hope this is kind of acceptable for reporting because, I mean, selling the assets seems to be quite difficult.

Measures in Hungary, I mean we don't know. I mean there is -- I think there's some reason to be potentially concerned that they might be extended. I think, I mean, the press release was with the conditions. So certainly, the rate cap, my hunch would be that it is going to be extended, but hopefully at a higher level than today. And the tax, that's a longer story because it is for next year. I mean there's a kind of better accord with the previous tax, which was introduced for 3 years, and then it still stays with us. Not sure, I can get it.

[Operator]

The next question is from attendee joined by phone. [Operator Instructions].

[Unidentified Analyst]

This is [indiscernible] Gold from Goldman Sachs. Two questions, please. I was wondering on your MREL strategy going forward. I appreciate the clear guidance you have given us on issuance plans for this year. But would there be any plans to issue senior non-preferred at any point in time beyond 2023? And the second question is on the Slovenian subsidiary. So it will be -- it will have an independent MREL requirement. So just to confirm, you will apply a multiple point of entry resolution strategy there?

[Laszlo Bencsik]

Yes, at least for this year and next year, the NKBM entity is going to be separate from the rest of the group, an a subgroup. It's still a question mark what the treatment of the entity after the merger will be, but [indiscernible] as well as kind of multiple points of entry subgroup within the point of entry group.

Now in terms of -- it's -- I mean for this year, we indicated that it is senior preferred. And it seems that we can fulfill the subordination criteria with requirements by doing those. So no plan, no visible plan for non-preferred.

[Operator]

The next question is from Mehmet Sevim, JPMorgan.

[Mehmet Sevim, JPMorgan Chase & Co.]

I have two main questions, please. One on deposit betas in Hungary specifically. It seems the retail segment is repricing a lot slower than the corporate segment, which of course, does make sense. But are there any reasons specific to Hungary that are keeping retail betas at these low levels, you think? And how do you see repricing evolve from here? And you mentioned earlier in the comments that deposits aren't really what will cause the margins to go down from here. But could you see a scenario where this becomes a pressure point later in the year?

And second question, if I may. This is on cost of risk in Ukraine, which declined quite visibly this quarter. And in fact, it was the lowest since the start of the war. But still, there was some visible increase in Stage 3 loans at the same time. So how should we think about provisioning and asset quality dynamics in Ukraine specifically in the remainder of the year?

[Laszlo Bencsik]

Deposit pricing, retail deposit pricing remains very low. And overall, deposit pricing did not change from quarter-to-quarter. And the reasons for that probably is, I mean, there's a lot of liquidity. So each bank is quite liquid. And there are these levies and windfall taxes. So everyone has to pay taxes in order to kind of earn enough to pay them. There's a kind of strong incentive to make profits. And we don't have new players. So each bank which operates in the market has quite robust kind of owned portfolio. And these portfolios will be immediately repriced -- they start to kind of increase the rates much than competition. So I think everyone understands that we can only lose -- I don't know, but I mean it seems that everyone is aware of the [indiscernible] deposit price. But obviously, we don't know whether this is going to happen or not. I mean this is obviously up to each player individually what they do.

Yes, so Ukrainian asset quality, there was -- yes, the portfolio is quite okay. And we -- in general, we also have higher coverage on Stage 2. So the Stage 3 migration, I mean, to be frank, I don't know exactly what happened. Just checking. But overall, we don't -- again, Ukrainian asset quality seems pretty, pretty robust and pretty stable, which is actually quite, in a way, surprising. And the -- I think the really interesting part is that we had increase in our coverage with low provisioning. And there, what happened was that we -- actually, the portfolio overall declines.

[Mehmet Sevim, JPMorgan Chase & Co.]

Very clear. If I may, just this -- is it reasonable to expect that these levels of cost of risk will remain for the foreseeable future? I mean given we were close to 3% this quarter, but last year was obviously significantly higher.

[Laszlo Bencsik]

Yes. I got the figures. Yes, Ukraine went up from , right? Stage 3. Now here, it's also that the overall portfolio keeps declining, and it declines fast. So I mean even if there's no nominal part of this is explained by that, that it's just the denominator getting smaller and smaller. Whether it can be characteristical for the whole year, I mean at least just for the second quarter, it seems to be characteristical.

[Operator]

[Operator Instructions]. As there are no further questions, I hand back to the speaker.

[Laszlo Bencsik]

Okay. Thank you very much. So thank you for joining us today, and thank you for your very good questions. And let's come back to the -- when we discuss the second quarter results. Until then, wish you all the best. Goodbye.

[Operator]

Thank you for your participation. The first quarter 2023 conference call is closed now.