2023-11-10 21:25:18 ET
Call Start: 09:00
Call End: 10:47
OTP Bank Ltd (OTPGF)
Q3 2023 Earnings Conference Call
November 10, 2023 09:00 ET
Company Participants
Laszlo Bencsik - Deputy Chief Executive Officer, Strategy & Finance Division and Chief Strategy & Finance Officer
Conference Call Participants
Gabor Kemeny - Autonomous Research
Simon Nellis - Citigroup
Mate Nemes - UBS
Hai Le Phuong - Concorde Securities
Presentation
Operator
Ladies and gentlemen, welcome to the OTP Bank's Third Quarter 2023 Conference Call. This conference will be recorded. As a reminder during the presentation all participants will be in a listen only mode. After the presentation there will be an opportunity to ask questions. I now hand you over to Laszlo Bencsik, Chief Strategic and Financial Officer. Laszlo, please go ahead.
Laszlo Bencsik
Good morning or good afternoon depending on where you are. Thank you very much for joining us today, expressing interest in OTP Group's 2023 third quarter interim results and presentation. As usual I will try to be brief and go through the presentation. We are going to show you parallel to the presentation on the screen. It's also available on the website, we just recently updated it because there was a previous version uploaded so the ROE numbers are not exactly the same in the version that are on the website at the moment but we are changing it and the this presentation includes the right numbers which equal to the one which we presented in our official report beginning of the day today.
So overall if we look at OTP's performance, maybe it's kind of we're stepping back a little bit and have a bird's eye view on the overall story of the group. And we thought that these are potentially the most important highlights of our performance. First of all, now we are building up a dominant position not just in Hungary but in a number of countries in the region. So OTP is number one in 5 countries in terms of net loans, I mean, client loan volumes. It's Hungary, Bulgaria, Slovenia, Serbia and Montenegro and this is a result of very strong and fast growth what we have done during the last 7 years. We have 11 acquisitions behind us and the loan book has grown 3.5x and this kind of composition of the group has also changed quite drastically. Now more than 40% of the total loan book is in the euro zone plus the ERM II countries which is Bulgaria, hopefully joining beginning of '25 which is now the kind of official target for the government. And then 80% is within the European Union. And obviously the share of the Hungarian Bank has gone down and the share of the outside Hungary businesses has increased quite substantially. Now Hungary is just 30% of the total group.
Now the other important factor is strong profitability. We have always been strong in our profitability numbers and with few exceptions over the last 20 years. Last year was one of those exceptions where we had big losses coming from the war in Ukraine and also the extra measures and taxes which were raised on us in Hungary. But this year, we recovered and we are again back to kind of higher than peers level of profitability. 33% all online but if you take out the one offs, then 30% Return on Equity in the first 9 months, adjusted Return on Equity, I think that's quite a decent performance. Even if you consider the expected return the cost of equity has also gone up during the last 2 years. So instead of around 10% now, it's more like around 15% for the entire group.
We are not just growing fast and are very profitable but we believe that our foundations are also quite stable and strong. And these foundations are the liquidity position, the capital position and the underlying portfolio quality. So, in terms of liquidity, we still have this situation where deposits by far outweigh the loan volumes, the net loan to deposit ratio for the group is 74%. We have a relatively small wholesale debt exposure so it's at 8% of the total balance sheet. It has started to grow, not because we need liquidity for the business but because of the regulatory requirements in the form of MREL requirements which is another layer of capital requirements in Europe. And the FCRA issue where the minimum is 100% is more than 200% to 220%. That's also quite high level.
Our capital position is also quite solid and there are 2 ways to look at it. One is just a numerical kind of ratio. So the common equity Tier 1 ratio is 16.4%. This is where we ended the year last year but then it dropped down especially at the end of the first quarter after our biggest ever acquisition in Slovenia. So at the end of the first quarter, we had a kind of local minimum of this number but it has actually very fast recovered to previous high levels. And the other way to look at this is looking at the results of the EBA stress test which is done every second year and it was done this summer and we came out as the fourth resilient or the fourth best in a way bank the in the list of the large banks in Europe. And this is measured in the decline in the capital ratios in case of distress scenario. So in our case, it was the force kind of smallest declining case of distress scenario defined by EBA.
So to strong liquidity, strong capital position and portfolio quality also very stable. And, I mean now the Stage 3 ratio is kind of materially below 5% it's 4.3%, it's actually slightly increased. But that's only due to the Uzbekistan Bank, in particular where we're in the early stage of our being in possession of the bank, I mean, we are getting a better grip on what the portfolio quality is and that resulted in some of the increase. But other than that, it's basically very stable portfolio quality across the group and therefore very low risk cost rate, so. Last year, we had a 75 basis point risk cost rate in the first 9 months. This year it's 3 basis points. Very flat risk cost and still very conservative 2% coverage on Stage 1 and 2 loans. And if we kind of consider that during the last kind of 7 years with that -- and if you take out the war in use additional provisioning last year and the COVID in use additional provisioning in 2020, then during the last 7 years the risk cost rate was between 30 and 50 basis points. And I mean the fact that we have 2% coverage on performing loans, it means that we have roughly 4 years equivalent of kind of normal level of risk costs in provisions for the performing volumes which is clearly more than what you would expect I think, as a first class.
On top of fast growth, strong profitability and very kind of stable operations, we also have a strong commitment to ESG targets. It became part of our genes and part of the core strategic goals of the management and the whole operation of the group. So that was just kind of more high level view on where we are and how we got here. And now maybe we kind of dwell into the details of the financial performance of the first 9 months including the third quarter.
I mean, if we look at the bottom line, HUF858 billion profit after tax for the first 9 months which is 3.7x increase compared to last year. This substantial improvement stems from basically 2 parts. One is related to the so called adjustment item. So what else as you can see on this slide in the right corner last year, we may -- we had HUF207 billion minus negative number after tax in the form of the one offs. In this year, first 9 months, that was HUF79 billion plus. I mean it came from basically 3 sources. The first one is related to acquisitions and that's where we have a big swing compared to last year. Last year, it was minus HUF10 billion. This year it's plus HUF145 billion related to acquisition and that's because of the bad will what be booked in case of Slovenian and Uzbekistan acquisitions. In both cases we acquire the banks at a price which was well below the net asset value, the book value.
Special taxes, primarily in Hungary and the interest rate cap which last year was close to HUF100 billion hit on us actually remained. Those are at somewhat lower level but still the fundamental and quiet material hit for the whole group. So this kind of close to HUF100 billion went down to HUF88 billion. So there's some decrease but it's still a meaningful burden, quite strong burden on our performance. And where we didn't have losses this year was the kind of direct immediate effect coming from the war in Ukraine. Last year, that was a big one off loss coming in the form of write of goodwill and investment and also provisions for the Russian bonds, what we have in Hungary and in Bulgaria but this year, that was kind of 0. So this resulted in a positive contribution from these one off items as opposed to the very big negative one last year.
Now if we look at just the underlying performance it improved also. So with that, one also made HUF779 billion profit after tax which is 77% improvement. Now this is primarily driven by improving net interest margin and group level as you can see, it went up from 3.5% to 3.8%. This is primarily driven by the euro related books, since in Hungary the HUF related book may decline. I mean I'm going to talk about this later on but basically this group level improvement is driven by related to the outside Hungary margin improvement typically in the CE countries which are linked to euro but also in countries like Moldova or Ukraine where the rate environment increased and we benefited from that was sort of seen improvement.
The other factor which is not on this page but very material is the risk cost rate as I mentioned it went down from 75 basis points last year to 3 basis points this year. These are the related 2 factors which have kind of driven the improvement in the in the kind of underlying business performance in the group and as a result of increasing interest margin we have an improvement in the cost of income ratio.
If you look at the P&L lines as such, the next slide, you can see that I mean without acquisitions and FX adjusted, so with that the impact of exchange rate movements within the group, income went up 26% and expenses 17% and that means operating profit 33%; plus, again this is without acquisition. So that's a very, very solid kind of underlying performance given that actually loan growth was rather muted, especially during this year, the performing loan growth without acquisitions FX adjusted was 4%. So that kind of 33% operating profit improvement is coupled with a relatively modest volume growth especially loan growth the year-on-year growth was 5%. So it's actually not so much more than the year-to-date growth.
So what happened in Hungary. In Hungary, as you can see, okay, most of these one offs actually manifested in Hungary, therefore, last year we had negative. Actually, I mean, the profit was loss. I mean, last year, we had a negative profit in the first 9 months. But if you take out all these one offs which manifested in Hungary and then we look at the kind of adjusted profit after tax performance, it's minus 2% year-on-year and that's basically due to the lower NIM as you can see on this slide.
Now, the good news is that we reached the bottom of the NIM cycle in the first quarter, it was 1.9%. And they the third quarter was actually 2.2%. So this kind of 2.1% which is on this slide for the first 9 months and is coming from this kind of low point in the first quarter at 1.9% or the improved level at 2.2% in the third quarter, the foregoes rather should continue to improve. There will be a detailed slide on this, I mean the reasons behind this NIM contractions but they are basically the reserve requirements which changed, they went up from 2% to 10% in Hungary and they only paid less than 10% on them where the reference rate was 18%. There was a decline in retail deposit volumes of 5% year-on-year which contributed to a lower NIM because I mean, by far the highest margin product in this period was the retail deposits where you don't pay much interest. And then there were 2 other factors which are very specifically OTP, the 2 acquisitions. When we do an acquisition from OTP, Hungary, the whole group is owned by the Hungarian Bank, then they pay out cash and instead we book the investment. Now the cash we have a return on that, especially when the reference rate is 18% and close to 18%. The investment, it's a non interest bearing assets. So when we do an acquisition, it always has a negative impact on the net interest margin in Hungary. Obviously, from kind of other perspective, these are very meaningful and worth do acquisitions. And then the fourth element which decreased the margin was the MREL loans. We had to issue these MREL bonds which are very expensive 1and we don't need them for kind of liquidity or business purposes. The only purpose they serve is regulatory but it's a kind of very expensive exercise and especially this year, it affected primarily the Hungarian margin because we are only passing on these loans within the SPE kind of strategic framework, resolution framework to the subsidiaries at the end of this year. Most of this burden expensive bonds has been on so far on the Hungarian operation.
So that's about Hungary. And now looking at the group, kind of composition of the earnings as you can see. I mean, up until a few years ago, Hungary tended to be kind of 2/3 of the group profit and also in terms of kind of business volumes, especially in deposits it was more than 50%, closer to 60%. Now this changed and this change due to this very dynamic growth, what we have done during the last 7 years and the composition of the growth which was partially driven by acquisitions outside Hungary and therefore the size of the non-Hungarian businesses has grown. And now it's kind of 70%. And this is actually reflected in the distribution of the earnings as well for the whole group.
As you can see this year, the outside, the non-Hungarian entity's contribution to the group profit increased to 66%. Third, this is something what we welcome. I mean, strategically, we believe this is a much better, much more diversified and much stable and better growth platform, what we have now and what we used to have a few years ago, where the exposure was kind of very dominant, the Hungarian exposure. Now this is less so, so we have a much more better diversified footprint and portfolio of businesses.
Looking at the individual performance of the countries, has so far has been an excellent year. As you can see, for all entities, we see improvement. I mean nominally, obviously, it's the Bulgarian operation which has always been the largest, continues to be the largest nominally. And it kind of doubled its profit compared to the first 9 months of last year. But if you look at the kind of percentage improvement and that is a Bulgaria which is leading, it's Slovenia, obviously, where we have a new entity joining us NKBM. And with the combination of the 2 banks, it's close to HUF90 billion profit in the first 9 months. There is good improvement in Croatia, Serbia, Albania, I mean Montenegro, more than twofold profit over the year. Russia, also tripling, last year was difficult. Ukraine, amazingly good performance, I think, given the very difficult situation in the country.
I mean last year, they made losses, in this year, strong profitability. In fact, the strongest in the group. So they made 50% return on equity in the first 9 months. Obviously, the expected return, the cost of capital is also quite high there. So we have to put it into perspective. But even then, it is at least 2x cost of equity or expected to return what they achieved this year.
Romania, very, very decent performance, especially compared to the loss since they made last year, still not among the best in terms of ROE in the group but promising performance and more lower double in its 9 months contribution as well. So across the board, we have very strong numbers. Where we don't have yet a strong number, it's our new acquisition in Uzbekistan, Ipoteka where the third quarter result was 0 due to basically provisioning. I mean, it seems that the portfolio, quality of the bank is somewhat worse than we expected and that partially was reflected in the PPA, in the bad will. We adjusted down the bad will, what we created in the second quarter.
Just to remind you, this is a normal accounting procedure according to the IFRS standards. After the acquisition, you have one year to continue to adjust the bad will, where the purchase price allocation process actually continues for 1 year and it's perfectly fine from an accounting perspective to make changes on that should be evidence that retrospectively, it was warranted to change the valuation at the time of taking over the assets. So we partially did that and we also provisioned for the third quarter quite heavily, primary on corporate, exposures which started to not perform. We still don't fully understand whether it's intrinsic change in their conditions or just the new ownership of the bank with some other factors but it's clear that the corporate portfolio quality started to decline in a quite meaningful way.
Now we have to take into consideration that this was somewhat reflected in the price. I mean we brought this asset lower, much lower than book value. And we believe that even with these difficulties in the portfolio quality, it was, in a way pricing. We did not know exactly how it would manifest but we certainly included in the pricing, quite a big buffer for this type of potential problems. So we still believe that even with these kind of deteriorations, it was a quite meaningful deal and we believe in the strong potential of the bank and of the country. And hopefully, we can get through these problems during the course of this year.
Now just a few highlights about the situation in Russia-Ukraine. I mean as we saw on the previous slide, in both cases, nominal profits and profitability are excellent. In terms of kind of volume dynamics in Russia, we continue not giving any corporate loans. So that volume, this phase continues to phase out. While in actually retailers, in POS loans and cash loans and credit cards, we see some improvement in the market. And actually, in the third quarter this year, the consumer loan growth was 11%. So it seems that after losing quite some volumes during last year this year should be better.
We also see some improvement in in Ukraine, while kind of year-on-year comparison, we are still quite negative, almost 30% down in terms of performing loan volumes. The last quarter, there was some improvement. So there's some, hopefully, light at the end of the tunnel now and then not just profitability but also business activity can somewhat normalize.
In terms of provisioning, especially in Ukraine, previously, we talked about potentially going up to 30% total provision coverage on gross loans. We kind of did that in the first half of the year. We ramped up to almost 25%. But to be frank, portfolio quality is exceedingly good. So what you can see that actually the Stage 3 ratio started to decline and the Stage 2 ratio started to decline, so some loans that we restructured right after the war last year, capped in paying perfectly. So we are kind of going through this process where we continue to monitor the portfolio and classify the portfolio according to performance and that performance is actually very solid, much more solid than we originally expected.
So what I'm trying to say here that it's unlikely that we are going to increase further the provision coverage on the total loan portfolio. It's rather going somewhat lower, as you can see on this slide. That is some of you might be interested in these numbers, the potential kind of impact on the capital ratio should there be a complete deconsolidation of these activities. It is actually quite moderate, especially if you compare it to the 16.4% Common Equity Tier 1 ratio of the group. So we are talking about now 14 basis point potential impact in Russia and 13 basis point potential impact in Ukraine. Not that we are expecting these scenarios to manifest. It's quite the opposite. We believe that these are very, very low probability events
Okay. So going into the P&L lines kind of cross-section among the countries. NII, I mean, group level improved FX adjusted without acquisitions, 21% and also on a quarterly basis, there was a 4% improvement. Year-on-year, Hungary is still negative 10% but quarterly, there is 10% improvement. So again and the NIM as has started to improve. So we see the kind of benefits coming through from the lower decreasing rate environment in Hungary and the kind of the fresh news is that year-on-year inflation dropped below 10%. That's the data from today. So October inflation was less than 10%. This is better than expected. These inflation seem to be even faster than expected.
Our expectation is that by year-end, we will see around 7.5% year-on-year inflation levels. And that creates quite a big room for rate cuts. I mean with this less than 10% inflation and the reference rate standing at 12.25%, there's already a very big kind of positive difference between the rate and the inflation. So that's a positive rate and quite a big one. And then as the inflation is expected to decline fast, this is probably going to increase.
There's one element here which is more technical in case of Romania, there was a reclassification of swap results from other income to net interest income and that's a kind of one-off negative HUF10 billion negative in NII and a similar positive number in other income in Bulgaria. So that was kind of a one-off technical impact on the NII in the third quarter.
Net interest margin, I mean, we kind of talked about this but third quarter, the group level went up to 4%. As you can see here, there's this improvement in Hungary 2.24%, again, comparing that to the first quarter low number of 1.9%. There is some improvement in all the other countries, basically improving compared to last year, especially the CE countries and in Russia and Ukraine, it's kind of more stable. The only place where we have lower margin than last year, it's Moldova, where the rate has been cut from 20% last year to 5% this year. So there has been an enormously kind of precipitous drop in the rate environment and that obviously reflects in our NIM. And the lower NIM in Romania, again, this is not something kind of business driven. This is just a one-off this adjustment of, I mean, a reclassification here which temporarily technically reduced the NIM there.
I mean, this slide which some of you liked after the kind of when we did the second quarter result presentation, we just updated that with the current third quarter numbers but the overall picture didn't change. As you can see, the NIM decline in Hungary was induced by the mandatory reserves, the retail deposit decline especially acquisitions, the MREL bonds. And in general, the fundamental impact of the interest rate environment on the NII was pretty much marginal and that's due to the fact that we did not have much interest rate risk when this kind of a very steep rate hike started. So we had more or less fully hedged position and that we did not benefit from this. We have not benefited from this rate hike. That's what happened. And obviously, there were pluses as well on the other side which kind of partially counter-weighted the negatives.
Some details about the volume numbers. And I think what is interesting to see is that the kind of strong dynamics in consumer lending, in Hungary, despite high inflation, higher rates and high APRs for consumer loans, just in one quarter, we had 4% growth. Well, Slovenia was quite strong 7%, Bulgaria 4% and then Russia started to grow fast and this is what I told before. And then what's interesting to see is actually Ipoteka, Uzbekistan as you can see, there was an incredibly fast growth in consumer loans. Partially, this was in the form of car loans and that's just intrinsic demand growing for us. And at the same time, the corporate volumes declined. I mean that decline is actually decline in volumes is the decline in performing volumes. So unfortunately, we had to classify to Stage 3, quite large percentage of the corporate book and that shows up here as a decline in the performing volumes.
If you look at the year-to-date numbers, again, I think quite a positive surprise is the Hungarian consumer loan growth of 12%. And likewise, the Hungarian mortgage growth, that's 3%. This is just year-to-date growth. So these numbers are not annualized. And all the corporate growth was negative in Hungary.
Now again, given that the country has been in recession now for 4 quarters for a year and the magnitude of kind of decline in the housing market in consumption. I mean, in that comparison, these are very, very decent numbers. But Bulgaria was strong. I mean, it continues to be strong and Croatia is strong. And in some countries like Romania, we had some negative and also in Slovenia, some negative. And if you look at the whole year in Ukraine, the overall picture is negative. But again, the kind of last quarter was already positive.
Deposits, I mean, very good news that the third quarter was 4% up for the whole group and Hungary was 3% up. Still, retail deposits in Hungary were negative but the rate of the decline is less and less, so that we see improvement. And if all goes well, the trend, it can reach the bottom of the pit somewhere now in around November. And hopefully, we see a trend change by the end of the year. So far, what we have seen is a very tangible slowdown in the erosion of the retail deposits in Hungary.
Year-to-date deposit growth numbers. I mean again in Hungary, it was like 4% negative in retail and overall negative. But if you look at the other numbers, they tend to be positive across the board. And so it's actually a quite favorable picture.
Looking at fee income, 14% year-on-year growth and 4% growth in one quarter. And usually, the third quarter is strong in fees because we have countries like Croatia where tourism generated fee revenues are an important part of the earnings. So there we had a kind of seasonal peak. The other kind of positive development is the Hungarian Fund Management fee income growth. I mean, it's more than doubled in one year. And that's the other side of the coin.
So when we complain about the decline of the retail deposit volumes in Hungary, in general on the market and in our case as well, then at the same time, the assets under management in our fund management company in Hungary increased substantially and the revenues more than doubled. So that's why we have this positive growth number here.
Other income, I think there are 2 important factors here. Similar to the second quarter, I mean each quarter, we do the fair value adjustment, the fair value assessment of the subsidized retail structures in Hungary, is the CSOK and BUBOR and the subsidized housing loan where the subsidies where they are kind of linked to the government bonds multiplied by 1.3x.
The benchmark is not just the bond rate but a multiple of that and therefore, we have to mark-to-market these volumes. And last year, when the rate environment increased and the discount rate on this volumes increased. We had negative fair value adjustment. And this year, we have positive fair value adjustment. So in the second quarter, specifically, we had HUF37 billion positive fair value adjustment. And in the third quarter, we also had HUF25 billion positive fair value adjustment. These numbers are boosting the other income line. And I mean, they are not recurring in a sense that the value depends each month or each quarter on the movement of the yield curve. So if the yield curve goes up, then this is negative if the yield curve goes down these numbers tend to be positive.
The other factor here which happened in case of Romania, I already mentioned that, that there was this reclassification from other income kind of negative item, FX swap negative result was reclassified from other income to NII. And therefore, the other income line went up.
So moving to operational costs. Overall, I mean, year-on-year 17% increase, FX adjusted and without acquisitions. And there are some numbers which are optically big. One is Hungary, 20%. I mean in Hungary, inflation I mean, year-on-year, is that to now kind of below 10% but the average inflation will be around kind of 19% for the whole year. In the peak, the year-on-year inflation was 26%. So Hungary has gone through an extremely high inflationary period and that somewhat reflects into the wages. I mean we had to increase wages quite significantly in order to kind of remain competitive and all other costs went up. So in Hungary, we have a 20% year-on-year increase.
The other country where we have a rather big increase in Bulgaria but part of it is technical. I mean, this is the first year where we had to book the entire supervisory kind of fees and charges for the whole year last year and previous years, it was kind of spread evenly across the year. Now without this kind of methodology change, the increase would have been only 12%. And then Albania here, where we kind of included, that includes the impact of the acquisitions which we made last year. So the part of the base last year did not include the new bank that we acquired. So this kind of big increase is due to that the new acquisition.
Risk cost. I mean risk costs are close to 0 for the whole year. The third quarter was quite kind of meaningful in terms of Uzbekistan. As you can see, we booked HUF26 billion negative. So they all kind of these first 9 months is close to 0 risk cost, including the HUF26 billion negative which we booked in Uzbekistan. I mean, generally, again, portfolio qualities are quite solid. We don't see deterioration and also volume growth, performing volume is relatively modest. So therefore, we don't have to provision so much for the newly dispersed volumes either. So I mean, those 2 factors together kind of resulted in this kind of low risk cost situation. The other factor here, is kind of disclosed is the kind of high reserve level. So on the following page, you can see that we continue to have this relatively high coverage level for Stage 1 and 2 loans which is, again, it's like 4x the typical risk cost rate level what we have had for the last couple of years.
We have this kind of declining trend of the Stage 3 ratio. I mean, the year-end last year was 4.9%. Second quarter, we were at 4.2% and only the kind of Ipoteka acquisition and the aftermath of that resulted in a slight increase in the ratio. But I think from here on, this trend should continue to be rather downward than upward.
A few words about capital. This is the capital adequacy ratio based on the kind of supervisory or regulatory consolidation, consolidated group. So these are the actual regulatory numbers we have to comply with. So it's 16.4% back where we were at the end of last year. And you can see here the composition. So we really kind of strong profitability in the first 9 months kind of increased the ratio by 2.3 percentage points.
And then there were different factors which decreased the biggest 2 were the acquisitions, NKBM and Ipoteka acquisitions and also the regulatory changes. At the beginning of the year, we were phasing out some of the transitional adjustments, plus there was an increase in the some of the risk rates and these together actually contributed quite healthy capital requirements increased by 80 basis points. If you look at the ratios themselves, again, kind of historically, that's where we are. I mean the 16.4%, you have to compare to the 11.1% basically, that's the Tier 1 requirement at the moment.
MREL has become a key focus of our activities. So we have been very active on the capital markets. Recently we issued many bonds, including this year. We did a Tier 2 at the beginning of the year and then 2 senior preferred and in the third quarter, we did or kind of rather in October, we did another kind of private placement in RON. Now this resulted, the reported kind of number for the end of September for the MREL ratio was 23.51% but doesn't include these 2 issuances. So if we include the EUR 650 million bond and RON 170 million and then actually the pro forma ratio at the end of the third quarter was 24.78% which is much higher than the current requirement. The current requirement is 20.52% but this requirement is going to go up first quarter next year.
Our official requirement for next year is 24.13% but in our best understanding, this is going to be somewhat lower when we receive the official requirement, new requirement for next year which is expected to happen in the next weeks. So once we receive that, we obviously will immediately announce it in the form of a special announcement. But, if you take the pro forma third quarter number of the MREL ratio, it was already above the next year requirement.
Next page, you can see the bonds that we issued recently and the kind of maturity profile but more importantly, the call date profile which is quite kind of modest despite the recent activity. And that's due to the fact that despite these bonds being issued to the market and kind of wholesale debt to total asset ratio is at 8% which is quite low, especially if you compare to ourselves before the financial crisis in 2008, this was actually 25% and kind of loan-to-deposit ratio was well above 100%. Now loan to deposit ratio is low and we only do these bonds in order to fulfill these mentioned MREL requirements.
Maybe just kind of a few more details about Hungary and the Hungarian performance. Kind of mortgage loan demand drop. So applications are less than 50% of last year. But despite of this, we still managed to increase the portfolio 3% in the first 9 months. Our market share is increasing from new production and also from the stock. Likewise, in consumer loans which is dominated by cash loans, we have an increasing market share which is now well above 40%. And I think it's very important that despite kind of decline in retail deposits in Hungary, our market share in retail bank deposits continue to increase. So the decline is less in our portfolio for the whole market.
A quick glance at the corporate kind of market shares and volume dynamics. Large corporate volumes declined. And like a small corporate volumes continue to increase. So again, despite this relatively in this kind of difficult environment in terms of the macro and muted loan demand, we still managed to continue to grow our micro-small volumes by 8% year-to-date. Now overall, due to the kind of drop in large corporate volumes, the market share did not increase during the course of this year, there was a slight decrease. But nevertheless, I think if looking at the kind of previous long-term trend is still kind of very decent position to be at that level.
This is our kind of usual slide about ESG, just to keep it in your mind that we kind of consider it very important. There has been against some improvement in our rating in case of Sustainalytics this year. And we continue to focus kind of proactively and positively, especially on the environmental and climate risks and we have quite ambitious targets to increase our green lending activity and we have the stated target of HUF1.5 trillion half equivalent of green lows by 25%.
In terms of macro, after the drop this year, across all the countries, we expect improvement next year which is a good news. Operating environment, we expect to be better next year than this year and we are quite hopeful that this is going to reflect in loan demand and increasing business activity, especially in Hungary, where, again, we have had a recession for a year now. And the expectation is that, that negative situation can change hopefully this quarter. So hopefully, this quarter, last quarter will be positive but definitely for next year, we expect a positive GDP growth. My personal expectation is actually more than 2%. So this is our research department which they might be right. I think my personal view is that the growth might be even higher than 2% in Hungary. But nevertheless in Hungary and generally in the other countries is where we expect improvement in the environment.
Finally, kind of from the adjustments to the management guidance. Performing loan growth was 4% in the first 9 months. So we think that it's likely that the overall annual loan growth will be more than 5%. And also given the 30% adjusted return on equity in the first 9 months. We felt that maybe the previous wording of the expectation that it may be more than last year, was not ambitious enough. So we now have another kind of update on the ROE guidance. It's probably remains conservative but now we say that it may exceed 25%. Again, that's not a very ambitious guidance compared to the 30% in the first 9 months.
So that was it. That was the presentation, we have the usual disclaimers. Please read them. And then I'm sure many of you have very good questions. So I would like to ask our colleagues to open the floor for questions.
Question-and-Answer Session
Operator
[Operator Instructions] The first question is from Gabor Kemeny, Autonomous Research.
Gabor Kemeny
A couple of questions from me, please. First on loan growth, some encouraging upgrade to your guidance for this year. What are your initial thoughts about loan growth and the possible acceleration of loan growth going into 2024. And especially, I would be interested in how you think about the new family subsidy mortgage program in Hungary, CSOK Plus [ph]. How you see the adjustable markets there. Another question is on the Uzbek provision top-up. I mean, it looks like a slightly unexpected top-up on the corporate portfolio, what reassurance can you give us that such challenges would not recur?
Laszlo Bencsik
We expect, again, the operating performance environment to be better next year than this year and we expect higher loan demand in general but also specifically in Hungary. So acceleration, as you said, this is what we expect. I mean, exact guidance for next year, we will make when we talk about the full year results. I think it's the 8th of March next year. As usual, we will make kind of concrete guidance for next year then. The initial expectation is obviously positive. After this kind of difficult year due to the high-rate environment, especially in Hungary next year should be better in terms of loan dynamics.
Uzbekistan, I mean, in a way, yes, it was unexpected and we didn't expect this to happen. But when we buy something, we are usually quite conservative in our pricing and we have usually very conservative assumptions. What happened was in the range what we assumed when we priced the asset but we didn't expect this future manifest. So in a way, it wasn't expected but it was within the potential range of scenarios within this range. I mean, now we understand much better the corporate portfolio and we are still kind of working on cleaning out the retail portfolio historical data and there will be potentially other much smaller adjustments related to the retail portfolio provisioning in the fourth quarter.
And once we are absolutely sure that the historical data on which the collective provisioning models are based, right? In order to do collective provisioning, you need a historical kind of data set for defaults and PDs and so on. And then that database what was originally used is clearly not 100% correct. So we are working on this. I think by year-end, we will kind of clean out everything and kind of have a very precise view.
What assurances we have, I think it's unlikely, I mean, we lost 28% of the performing corporate portfolio. It's quite unlikely this can happen again. Really, in the corporate, I think we have a much better understanding of the intrinsic quality of the portfolio now than what we had. And the retail portfolio, in general, is not worse than what we originally expected. It's just the coverage levels, we still have to work some more to be absolutely sure that the historical data on which they are basis is absolutely correct and that might take some time. So I guess that's the best answer I can give.
Gabor Kemeny
And thoughts on CSOK Plus, the possible demand?
Laszlo Bencsik
CSOK Plus would be positive, definitely. I mean this is part of the positive expectations that we have regarding Hungary. I think it's fair to expect further kind of other structures, other subsidized structures to come next year. So I don't think this is the end of the kind of policy measures, positive policy measures in Hungary.
Operator
The next question is from Simon Nellis, Citigroup.
Simon Nellis
Thanks very much for the opportunity. Just again on the Uzbek issue, I'm still a little confused. I mean, was it a problem of incomplete due diligence that you haven't identified the issue? Or is this portfolio provisioning that potentially could be released if the portfolio actually ends up performing better? I'm still a little confused. And I guess it sounds like you're doing a similar exercise on the retail portfolio. Maybe it's not going to be as large but it sounds like we could see some additional provisions in the fourth quarter, if I understood what you were saying before. Is that right or correct me if I'm wrong?
Laszlo Bencsik
We discovered the data that we had had was not exactly reflecting the situation when we had the chance to put our people there and take over the bank. That's one aspect. The other aspect is that the corporate portfolio deteriorated fast in the third quarter. And we still need to understand what exactly happens here, to which extent the change of ownership or kind of intrinsic fundamental factors. There are clearly intrinsic fundamental factors in some cases. For instance, we have this cotton producers and growers and processors and the harvest was not very good and the cotton price is low. So there are some kind of intrinsic deteriorations which happened in the third quarter. That's part of the problem.
This is what you see, actually in the quarterly risk cost. And the other part where we adjusted the bad will, that's more related to the, put it this way, in data inconsistencies what we discovered related to the corporate portfolio when we took over the bank. We are aware that the quality of the historical data for the retail coverage is not for the portfolio quality percept. So we don't expect reclassifications in the retail portfolio between stages where the coverage levels, now IFRS 9 coverage levels, we still need to work on the kind of data quality of the historical data in order to have a full picture of that. Whereas in corporate, it was actually a reclassification from Stage 1 to Stage 3 and that resulted in the decrease of the performing volumes by 28%. In retail, we don't expect that to happen. In retail, it might increase somewhat the coverage level.
Simon Nellis
And just one other question on margin. You've had nice margin improvement pretty much across most of your markets. Can you help us out going into next year what's your kind of base case margin outlook for next year?
Laszlo Bencsik
The short term looks like a sweet spot because we are benefiting from the decline in rate environment in Hungary and we are benefiting from the high rate environment in the kind of Eurozone or euro-related books. So until the Hungarian rate decline continues and the euro rate decline doesn't start, it's going to be kind of improving NIM situation, most probably. So it's a kind of sweet spot. And it depends, I think the trajectory of the Hungarian rates, I think it's easier to forecast because the run rate inflation, so if you annualize the monthly, the last kind of 4 months monthly inflation, you get like 3%, 4%, right? And there's no sign for inflationary pressure next year either. I think inflation will continue to fall quite fast in Hungary and therefore, the rate environment can definitely continue to decline fast and that we should benefit from there.
The sensitivity is less than it used to be. It's roughly HUF4 billion per percentage point annualized NII, the kind of forward-looking sensitivity from here and which is less than the sensitivity we had between 18% and 13%. Now, the euro rate, for me, that's more difficult to kind of forecast when it's going to start to decline and with what rate, that is more of a bigger question. There are sensitivity in terms of kind of percentage point is bigger. So the current sensitivity to the euro rate is EUR 190 million per 1 percentage point change. And again, this is an annualized NII impact.
Simon Nellis
And sorry, the HUF4 billion per 1% cut in Hungary that is under which rate? Below 13%.
Laszlo Bencsik
There's further rate cuts, right? So we're HUF12.25 from now on.
Simon Nellis
Understood. But you're still benefiting from the higher sensitivity from the previous rates cuts right because they haven't?
Laszlo Bencsik
That's filtering through.
Operator
The next question is from attendee joined via phone. [Operator Instructions] There is a question from Mikhail Butkov [ph].
Unidentified Analyst
Thank you very much for the presentation and congratulations on solid results. I have a few questions. Firstly, can you comment if you already have visibility on any one-offs, either related to regulations or something else looking into the year 2024 which can materialize? It's the first question. And the second question is on Romania, there was a number of interest and strategic changes in the banking market over the past few months, if not weeks. How do you see the competitive landscape currently? And maybe could you give any also outlook within that particular segment, if you may?
Laszlo Bencsik
So next year, one-offs. Hopefully, it won't be followed. But what we know, I mean a couple of countries, unfortunately followed the Hungarian example and either introduced or are in the process of introducing extra taxes and rate cap. So specifically, Serbia, introduced the rate cap on the existing mortgage portfolio and the impact of that, we already booked in the third quarter this year. So that's already in our books. It was HUF7.1 billion after tax equivalent and that implies for 2 years. And then there's a discussion in Slovenia for an extra bank tax which is 20 basis points of total assets for 5 years. It's still unclear whether they start it from '23 or from '24. There hasn't been kind of -- so the bill has not passed but in our understanding, it's likely that they will raise this extra tax on the banks. And the annual impact is roughly EUR 30 million for the 2 banks that we have there, so including SKB and NKBM annually.
And then the other one is in Romania. In Romania, they introduced a new tax on the revenues and an additional one on banks. And the total impact is approximately HUF3 billion per year, RON 40 million per year. These are the kind of policy measures we know about. In Hungary, we already know that the extra profit tax is going to be lower next year. We actually know the number. It's HUF13 billion in our case which is much less than what we paid this year. And this can be further reduced if we buy some more government bonds which we will do.
So most likely, this is going to be only 50% of the HUF13 billion next year and I hope there won't be other one-offs. So I really hope that, we are back to kind of normal growth, more GDP trajectory started to improve. Inflation is falling. Consumption is coming back. So hopefully, the appetite of governments to kind of tax the banks and levy the banks will not be as strong as this year or last year.
Indeed, in Romania, there's quite a dynamic change in the competitive landscape, as you said. I mean, 2 acquisitions were announced and there might be another announcement in the future because, I mean, it's not a secret that we are revisiting our strategy towards Romania and we are exploring the potential scenario where we actually sell the asset. There is an ongoing process. And we are in a reasonably advanced phase of negotiations with potential buyers which is fairly innovative. It's not that we don't see potential in the Romanian market. The problem is that everyone sees a huge potential in the Romanian market. And therefore, it's very congested and competitive and we are small. And we have not been able to acquire a meaningful asset there. And our understanding of the situation is it is not very likely that we could acquire a sizable bank as we may not be the preferred buyer there. Yes, so we might contribute to this changing landscape in Romania in the foreseeable future.
Unidentified Analyst
And if I may follow up on the first question, there were some comments in the press earlier that in case of extraordinary profits for the banking sector, the windfall tax, in fact, can be increased or the rules could be changed. Do you see any risks related to that, although I think you already answered about expectations for the next year about the one-offs but still, what probability may be you assign to this scenario and those comments for the change in those rules?
Laszlo Bencsik
Yes. I mean there was this unfortunate comment from the Minister of Finance in I think it was September, late September but that was denied, right? He stepped back from this and then also the government showed some kind of deny that. So in our best understanding, this is not going to happen. I mean, certainly, if you look at the TP profit this year, it's actually lower. I mean with that, if you take out the kind of one-offs, the additional taxes and the war-related losses and the dividends that we received and the underlying performance in case of OTP is actually year-on-year decline. So we are certainly not making extra profits in Hungary. Some banks may. But again, in our understanding, this is not going to come.
Operator
The next question is from Mate Nemes, UBS.
Mate Nemes
I have 2 questions, please. The first one is on costs. I think in Q3 on a like-for-like basis, we've seen quite good cost control. I was just wondering, what do you see in terms of salary inflations in the region? Did you have a sense in a number of countries, this is clearly moderating and perhaps it will be somewhat of a lesser pressure going forward? Or this is unrealistic, the market is still very competitive. And this is something that could remain perhaps at an elevated level?
And the other question would be on capital allocation. The CET1 ratio improved quite substantially in the third quarter. You are now at 16.4% CET1 ratio. So I'm just wondering how do you see the adequate capital level for the bank? And what do you see in terms of the preferred capital allocation in the next, call it, 12, 18 months. Do you perhaps still see opportunities for consolidation in the region or outside the region? Or if that's not the case, would you entertain the idea of perhaps a meaningfully higher payout ratios or perhaps share buybacks? Any thoughts around that would be helpful.
Laszlo Bencsik
Yes, costs, due to the high inflation in the job market which remains quite tight, so despite the slowdown in economic activity, labor markets remain quite tight across the country. So in order to remain competitive on the job market, we had to increase wages by quite high level. I mean in Hungary, it was more than 15%. And now this is not going to be repeated next year. I think it's very clear. So on one side, I think that the labor market is still quite tight. Our labor markets are tight but this are in the countries where we operate typically but now we see some minor kind of changes and people seem to be more concerned about preserving their jobs than they used to be and new opportunity seem to be less and plus inflation is dropping fast. I think the kind of wage increase next year will be much less than this year. So in that sense, the pressure will be somewhat less. So I think the cost pressure will ease somewhat next year compared to this year which is, I think, a good news.
Capital, yes. I mean we are back where we were a year ago. I mean, in terms of Common Equity Tier 1 ratio, I think it's good adequate level, that's difficult because I mean, we obviously want to be well above regulatory requirements. But how much higher? We tend to look at competitors and benchmark ourselves to competitors because we like to be seen as capitalized compared to other banks, right? Now I think there's an increasingly insane levels of capital adequacy across Europe. I don't know this is because of preparation for Basel IV for just a crazy trend that banks are going to levels which I don't see justified but there's a kind of peer pressure, I think here.
So if you ask, if really we were operating at the necessary level, then we should be actually very close to the regulatory minimums and not much than that. But this is not what is usually the trend in Europe. So it is a kind of a difficult question, what exact kind of adequate level is. I think we are getting to levels, especially in terms of the kind of traditional ratios of Common Equity Tier 1 and capital adequacy ratio levels which are clearly high and include quite big buffers above minimums and the Common Equity Tier 1 ratio, even in kind of peer comparison is quite high.
In this year, the bottleneck was the MREL requirement, right, because it increases in a big step, almost 4 percentage point increase in the requirement level from one year to another and we have to meet that. And it's a one-off exercise. So, we are getting there.
Then certainly, if we continue to be as profitable as we are and unless kind of organic growth triples or something like that which is unlikely, I mean, we believe that organic growth rates will improve but maybe one triple in a year, then we will continue to accumulate capital. And then, I mean, the type of questions you asked are the questions what we will ask ourselves. I think during the course of next year, whether we see a big promising acquisition opportunity over the organic growth rate which might require some capital to be allocated to it and, indeed, to return more to shareholders. We like to have a gradual nominal increase in dividend payouts and dividend payments actually. And historically, we have been inclined to do share buybacks. So I think this will become a topic next year. Whether to do it? How much -- when, how but I think these questions will certainly be asked and addressed and answered during the course of next year.
Operator
The next question is from the analyst of Concorde Securities, Hai Le Phuong.
Hai Le Phuong
Thanks for your presentation. I just connected later. So maybe my questions were already answered. But I would like to ask, first of all, about the risk outlook for 2024 because in 2023, it seems like risk cost was let's admit it, basically non-existent on a group level. And I was wondering if you could give us some guidance for 2024. My second question would be on Kazakhstan because I saw in the news recently that you may be more planning to or you are looking at acquisition targets there and I was wondering how serious it is and what would be the motivation behind? And my third question is related to capital allocation again about dividend payout ratio because you said that dividends should increase gradually. But if I apply the historical dividend payout ratio to this very stellar profit, then it shouldn't be that gradual. So how should I think about that for the dividend after 2023?
Laszlo Bencsik
Yes, the risk, again, regarding the risk outlook, when a year ago, we planned '23, we thought that we would come back to kind of more normalized level plus some ramifications still coming from the war in Ukraine but neither of those happened. Indeed, it's a stable portfolio what we have with low kind of new volume growth. And if anything, actually, at least portfolio quality wise, the situation improved in Ukraine and Russia. So these were kind of positive developments compared to what we expected.
Now, next year I think there's a good scenario that things don't change so much. There's a kind of most probable scenario that we kind of converge back to more kind of normalized or regular level of risk cost. If you look at our risk cost rate for the last 7 years and if you take out or exclude the extra provisioning we did due to COVID which was with hindsight, not requested and also the -- or required, sorry. And then if we take out the extra provisions we made last year for Russia and especially more in Ukraine which again with hindsight was not all of that required, then you end up with kind of risk cost rate being between 30 and 50 basis points. So that's the kind of underlying risk cost rate for the last kind of 6, 7 years. I think this is one proxy to start with and then it might be somewhat better than that or might be somewhat worse than that. But I think that's the kind of run rate range.
There can be some divergence from that range like this year on the kind of it was better and then in some years, it can be worse. And that excludes kind of big unexpected events, right, like the war was or the pandemic was. But it's kind of difficult to forecast because, I mean, for a number of years, we have been positively surprised by the risk cost levels and the qualities of the portfolio. And at least for the CEE countries, I think the intrinsic portfolio qualities are much closer now to Western European standards than compared to the past situation like 10 years ago or 15 years ago in the region.
Kazakhstan acquisition, I don't have anything to comment on that. Regarding new acquisition opportunities, I guess keep our eyes open and keep looking and primarily strategic objective is to grow in the countries where we are already present. And as a kind of secondary focus we currently are scanning and monitoring the situation in the countries where we are not present that might be interesting. There's nothing I can comment on regarding Kazakhstan.
Dividend payout ratio, we don't have a kind of payout policy as such. We rather approach dividends is kind of in terms of their nominal values. We haven't made the decision on how much to suggest to the to the general meeting next year. So to be fair, I mean, I cannot comment much on the expected dividend payment. This is going to come next year.
Operator
The next question is from [indiscernible]. The floor is open.
Unidentified Analyst
Maybe just one more question, a follow-up question regarding Uzbekistan. We've heard that in some future there may be more banks put on sale by Uzbekistan. And actually, I was wondering what is your right now strategy, especially after this third quarter experience. If there will be any M&A opportunities, would you take it next year or rather think about right now, organic growth and making some cleaning of the business right now to OTP standards. Just one question.
Laszlo Bencsik
Well, our view on the potential of the country and of the banking market there has not changed. So we think there's an enormous potential. And I mean, first of all, I'm not sure whether we would be one of the preferred buyers. If they want to privatize another bank, I'm not sure if they wanted to sell it to the same buyer, so that's one aspect on this. If we were allowed to look at it, we would probably. So if there's another asset coming to the market and we are not excluded, then we probably look at this and then decide on what we see.
Certainly, even now, we have a much better understanding of the market and the situation in Uzbekistan. And as time goes by, this understanding increases, I think, quite rapidly. Certainly, we are much better informed and much more knowledgeable about the market and the situation there than we used to be before entering the market and this is going to continue to increase. So I don't know. I think if we are allowed and we would look into another opportunity there, if there were another opportunity and we will decide based on what we see and including the recent experience.
Now having said that, putting aside the portfolio quality mishaps or challenge, there's another kind of big challenge to transform of previously state-owned institution into a more than high-performance bank. And that challenge we had known about. So this is not new but this is a formidable challenge. So there's a lot of work needed to be done and it's going to be a big and relatively kind of long effort to convert this bank into more than a financial institution.
I don't know whether on top of that, the merger would be a kind of a smart thing to do because typically when you do a merger, then you have to kind of 100% focus on the merger activity and you have to freeze every other development. And certainly, I mean, that will be kind of difficult operationally to combine a major fundamental transformation with a large merger process, that would be kind of quite a challenge. So this is something as we would have to take into consideration when making a decision there.
Operator
[Operator Instructions]
Unidentified Analyst
Thank you for the presentation. I would like to address a few topics on the credit side, please. The first question is on your Tier 2 instruments. You executed one benchmark deal this year and have one upcoming call in July next year which is currently trading all of the money. So I was just wondering what would be the factors at play when deciding whether to call and replace that instrument? The second one is whether you would consider an AT1 instrument in the future for capital optimization purposes. And lastly, just a follow-up on the capital question, please. So I was wondering whether there are any other elements we should consider when thinking of your CET1 buffer into 2024, apart from the increase in the other systemically important institutions buffer and the countercyclical buffer.
Laszlo Bencsik
I'm legally not supposed to comment on whether we call or not call the bond next year. But I think it's quite clear that we are a regular issuer and we will remain a regular issue and kind of frequently appearing on the markets and this is a strong factor, obviously, when we have to make the decision on whether to call or not to call the bond.
No plans for alternative Tier 1. I think that has to be a very special situation potentially kind of large acquisition opportunity or something like that in order for us to consider it. From our perspective, the price of an AT1 would be, from our perspective, we're actually high. The buffers, I think we actually talk about the buffers in detail technically. Yes. So if you go to Page 22 of this presentation, there's a kind of detailed description of the buffers that we have and the potential changes in the buffers coming next year. There are 2 certainly important changes. One is the other systemically important buffer is going to increase from the 1% this year to 2% next year. And also, there's a countercyclical buffer potential increase from 1st of July next year which was announced by the National Bank in Hungary and that's specific to Hungary. But you see all the details here in this space. So, that's all what we know.
Operator
[Operator Instructions] As there are no further questions, I hand back to the speaker.
Laszlo Bencsik
Thank you for your interest. Thank you for listening to the presentation and thank you for your very good questions. I hope you will join us when we present the year-end numbers on the 8th of March next year. Until then, I wish you all the best and goodbye.
Operator
Thank you for your participation in the third quarter 2023. Conference call is closed.
For further details see:
OTP Bank Ltd (OTPGF) Q3 2023 Earnings Call Transcript