OTP Bank Ltd. (OTCPK:OTPGF) Q2 2022 Earnings Conference Call August 11, 2022 9:00 AM ET
Company Participants
Laszlo Bencsik – Chief Financial and Strategic Officer
Conference Call Participants
Hai Thanh Le Phuong – Concorde Securities
Mate Nemes – UBS
Gabor Kemeny – Autonomous Research
Alan Webborn – Société Générale
Robert Brzoza – PKO BP Securities
Otto Szilagyi – Morgan Stanley
Operator
Dear ladies and gentlemen, welcome to the OTP Bank Second Quarter and First Half 2022 Conference Call. This conference will be recorded. As a reminder, during the presentation, all participants will be in a listen-only mode. [Operator Instructions]
May I now hand you over to Laszlo Bencsik, Chief Financial and Strategy Officer. Laszlo, please go ahead.
Laszlo Bencsik
Thank you. Good afternoon or good morning depending where you are and thank you very much for joining us today on this very nice summer day, I think [indiscernible]. We really appreciate that you taking the time to listen to us on this time of the year. The presentation as usual is available on the website and has been available for more than an hour. So hopefully, you will be able to download it, which we also shared during the presentation and the con call.
I tried to better restrain myself as usual and give a relatively fixing presentation of the recent results, and then, obviously, can do the Q&A session will be more interesting, but nevertheless start with Page 2. Maybe we can go to that page. Okay. Wonderful.
So I think, I mean the glasses either half full or half empty depending from which angle you want to look at this, if you look at the total profit after tax and the year-on-year development, then we are 80% compared to last year. And this – but if you look at the adjusted profit after tax, but including the risk costs increase in Russia and Ukraine during due to the was then, we are actually in 2%.
So, considering the – and including the negative business impact of the war in Ukraine, on the risk costs and on other factors in the P&L actually Group level, we managed to year-on-year increase the adjusted profit by 2%.
So that’s the kind of flip side of the story. Not-so-good side of the story is that during the first half of this year, there has been – there have been high excessive one-offs and quite of them were related to increase policy burdens in the format of excessive taxes, one-off taxes and this introduction of the continuation of the price cap on variable mortgages in Hungary, which resulted in terms of after-tax, almost HUF100 billion one-offs negative.
And then another close HUF100 billion came to other ramifications of the war in Ukraine outside Ukraine and Russia, namely the impairment we had to book on the Russian government bonds we are holding in Hungary and in Bulgaria, plus the goodwill write-off we had to do related to our Russian asset.
So huge negative one-off in the first half, but the underlying without one-off performance I think quite respectable despite the fact that we have this very special situation, very dramatic situation in Ukraine and the related situation in Russia.
Now looking closer to the quarterly development in profits, maybe we can go back to the previous slide. Yes, as you can see the profit after tax, including all the one-offs, including this large special tax on OTP in Hungary, we made actually HUF76 billion after-tax profit in the second quarter, which is a great improvement compared to the loss in the first. And again, the adjusted number HUF162 billion, I think that’s quite decent, and that’s obviously far bigger than we have ever done in any quarter and year-on-year this is like 25% up compared to last year.
Maybe we can move now to the next slide and Page 3. I mean, these are the good results, including Russia, Ukraine. First of all, I have to point out that exchange rate movements have been huge, especially in the second quarter this year.
So if you compare first quarter to second quarter numbers in half nominal terms as we present them in the – in our report you may not get the full picture, because the half we came – I mean to almost every currency expected region which became the loss and the ruble appreciated huge compared to first quarter.
So, in fact, if you want to understand the dynamics here, you would rather have to look at the quarter-on-quarter FX adjusted and year-on-year FX adjusted ratio kind of presented on the right side of the chart. And so basically this rather strong improvement in quarter-on-quarter results from adjusted profit terms HUF89 billion and HUF162 billion that was basically due to three reasons. One is the much lower risk costs, the provision much less we have seen in Russia, Ukraine.
So we went down from HUF73 billion to HUF32 billion, half risk cost the FX impact, which is quite substantial and I mean FX adjusted 3% increase quarter-on-quarter operating profit. So that’s off the picture. And again, I think it’s important always to take into consideration the large exchange rate movements, which do have an impact on our numbers.
Going to the next slide, which present the group results without Russia and Ukraine, and I think this is kind of important to show these numbers, especially because we articulated our expectations after the first quarter based on these sets of numbers. So without Russia and Ukraine, and it obviously does make sense. I think we continue to talk about these two parts of the group separately.
So if you just look at group performance without Russia, Ukraine, it was actually flat quarter-on-quarter. And the risk costs impact here was actually reverse. So, we had less write back than in the first quarter. And we had some improvement in operating profit 3% quarter-on-quarter.
If you look at the yearly, I mean, development then total income line 18% up year-on-year FX adjusted. And that’s roughly the speed with which we are growing our loan book. And this is not surprising, because the net interest margins and general margins is close to being flat compared to last year. So basically, income growth is driven by organic volume growth and business growth and that was roughly in this kind of 17%, 18% compared to last year.
Important line is the cost line, and year-on-year, we had 11% cost operating expenses, which actually created a positive operating and operating profits grew 26% organically. Now obviously this operating expense line is the line where we will be strongly under pressure and we will have a headwind in the coming periods given the very high level of inflation and especially in Hungary the impact of the weak exchange rate on some of the cost items. So this is going to be a challenging part.
Now the adjusted ROE without Russia, Ukraine actually better than originally expected at 23% and we kept the guidance kind of being around the last year level. But certainly, the first half performance was better than last year, cost to income ratio improved again due to this positive operating growth and the risk costs rate was positive first half this year. And might be actually closer to where we were last year for the entire course of the year, but we will see.
Now specifically Russia and Ukraine a few highlights. Russia operationally, the situation is stable and we are gradually ramping up retail lending. So the usual POS mass markets, POS loans, and process for credit cards and cash loans and despite the large volume decline that we saw, actually the new way and started to build up and it does seem to be quite profitable, sustainable business in even in the current environment in Russia whereas our corporate volumes drastically dropped.
So you will see that corporate loans, which were actually a small portfolio anyway and we are 50% down. So, in fact we adjusted the furtherly, the operating model and now we really only focus on this kind of mass-market consumer retail lending. And pretty much given up corporate lending where we extremely selective but technically it’s kind of zero.
And that actually resulted in a profit in the second quarter, obviously, we did not have to create further excessive provisions because the portfolio quality remained quite stable. So we haven’t seen any unusual deterioration in portfolio quality and we also reversed most of the kind of tax assets accrued tax asset write-off what we did in this – we were quite, maybe too conservative after the first quarter, regarding these tax assets.
So we have moved them back and therefore you can see this big kind of change in the corporate tax in Russia. But if you look at the first half, corporate tax asset more kind of in line with the usual performance.
Now Ukraine, again in Ukraine we booked quite substantially risk costs. And even with these risk costs, we have positive kind of plus zero performance and which has been kind of bolstered by the rate hikes. So the deposit rate – national bank deposit rate is 25% now. And that means that even if our loans are going back down and repaid and we have relatively subdued and limited new landing, we can actually maintain a decent net interest income level just by collecting deposits and placing them in the Central Bank. So that very much operationally or kind of P&L wise stabilizes the bank and seem to be able to provide a decent operating profit, which can certainly absorb relatively high level of risk cost without making the bank loss-making.
So that’s the trajectory where we are at the moment and kind of reasonably optimistic scenario this can continue. But it’s very, very difficult to have any clear vision on where the situation can develop in Ukraine. It is immediately linked – directly linked to the war situation in the country and rather that abate or exacerbates makes a difference in terms of having zero or slightly positive quarterly results or having another negative or more than one negative quarter in Ukraine. Whereas in Russia as far as we understand the situation the expectation is that from now on we are going to make okay levels of profits with a smaller balance sheet, which focuses on this kind of consumer lending retail business activity.
If we kind of broaden our view to the picture to the other group members then I think the – actually the story is quite positive. So most of the foreign subsidiaries have been doing very well. Bulgaria is doing really nicely. Profits quarterly up 27%, yearly 12%. Croatia has been doing quite well. So it’s really I think the bank, the market, the macro environment they are joining the Eurozone. The country has been upgraded by rating agencies. The tourist season is very strong. So from every angle, they are doing quite well and we are very optimistic. Serbia, in this difficult environment, I think the macro and policy-wise, they have been navigating quite well and this reflects in our results.
So, year-on-year 41% increase in profits and this seems solid and strong. Slovenia 22% annual increase in profits. I mean this is the country where we are very keen to – and very motivated to finally close the acquisition. Hopefully, this is going to happen before the end of September and then we can get into possession of NKBM and then start the merger and create hopefully a substantial uplift to our Slovenian nominal profits and also for the returns that we generate in Slovenia.
Romania, we again moderate profits but in line with this kind of aggressive organic growth strategy what we have there. Montenegro, we had that operational problem during the winter period and then we – the same time, we have now a new management. So a CEO and management team is partially reramp so actually quite positive that the bank has taken an even better direction than before.
Albania, very strong performance. I mean, almost doubled their profit year-on-year and the country is really in a very interesting situation, they are almost self-sufficient in terms of energy and its hydro base. So it’s not carbon related and somehow the whole economic environment started to make sense there and is a rapid development.
So, we are quite happy with Albanian we are even happier that we just finished closed an acquisition there, which is of this another big bank, neither compared to the group nor even compared the Albanian market, but nevertheless makes a very good addition to our activities there and adds to increase the market share of the bank by 50%. So this is kind of meaningful for our presence in Albania despite the fact that on a group level it’s not a big difference.
Moldova is in a very difficult geopolitical situation, there’s a stronger recession there in the country, IMF is there very high rate environment, very high inflation, enormous current account deficit. So this is a country which is in difficult situation and I think the good news is that despite this being a relatively recent acquisition, and in this difficult country still making profits. I mean, obviously, profits are lower by almost 40% than last year, but it still positively contributing to the group.
Hungary easing Merkantil are doing quite well, fund management doing okay, and then we have Russia, Ukraine that we have talked about that story before. I mentioned the acquisitions. We nicely keep this Alpha Bank process in Albania, it’s done and the last one in the pipeline hopefully, as I just mentioned, hopefully will happen by the end of September. It seem to be in a final Phase 2 before we receive the answer from ECB primarily and also from the local competition authorities.
If we dive into somewhat, but I’m not going to dive deeply into these lines, but net interest income, development, and I think here it’s important again to look at the FX adjusted number. So wherever we have the percentage changes year-on-year or quarter-on-quarter typically have two numbers except Hungary.
The second number is the FX adjusted one and even directionally, they can be very different for instance in Russia, quarter-on-quarter in Hungarian on foreign terms we have NII went up by 22%, but in ruble terms it actually went down by 17%.
So these numbers, I mean, the FX adjusted numbers are seem to be much more reliable than the unadjusted. And fundamentally, I think it’s true that in most cases again except Russia, Ukraine which are special ones is the underlying volume dynamics besides NII and in some cases, we have seen changes in the net interest margin some improvement in Hungary but most important – but kind of decline in Slovenia for instance and some decline in Serbia. So it’s a kind of a mixed picture and group has a more slice.
Talking about NIM Page 9 is the quarterly change and there were some improvement in Hungary, finally there is a small filtering in of the rate environment despite the kind of structure of the balance sheet, which is I mean we have this massive fixed assets in our portfolio, which we’ve had the short-term impact of the rate hikes to manifest in higher NII.
But this work in couple of years is going to have this flow or high rate environment. A lot is related in the NIM change to Russia actually if you just look at Russia standalone net interest margin in rubles then it declined 4 basis points. But then the overall NII in Russia struck and that then actually had an impact on kind of the composition of the group margin, so to say.
So the contribution to group level margin declined because the share of the Russian business declined and that was actually negative overall Russian margin is higher than the group average. So that’s the others minus 7 mostly coming from this one. And then in the FX effect again, most of it is coming from Russia and the appreciation, huge appreciation of the ruble compared to the first quarter. And again having this higher increasing share due to the FX impact.
So, basically the OTP Russia standalone, the FX effect and others, they are all related to Russia, they’re only kind of taken industry parts. And other than that Ukraine slight improvement, Hungary slight improvement.
Okay. So looking at volumes, quarterly loan growth volumes, we had a very strong quarter at 3% or 5% without Russia, Ukraine because Russia, Ukraine was strongly negative and Ukraine down and Russia 11% minus. But the rest of the group did really well. I mean, 5% and this is not annualize obviously, this is just one quarter. Hungary was the strong rebound, you might remember, first quarter it was zero.
Because – mostly because of the consumer loans being even negative due to this kind of one-off windfall payment to retail client by the government and – but then second quarter was 6, which is one of the strongest in the group, but all the other countries did quite well. I think, 4%, 5%, 6% growth quarterly basis in the bigger markets, especially corporate was a strong driver and in many cases, this is driven by working capital loans increase or quite an increase in the utilization of the working capital loan credit line.
So we have to see that a lot of corporates is stocking increasing their stocks. Right. So they’re buying stuff, they increase their working capital and kind of have as raw materials and so on. This is obviously in anticipation of raw material or parts price increase, but it was evenly kind of – I mean, the rather products volumes increase, because they kind of produce for reserves in order to – in anticipation of future price increases. So we, do experienced that and obviously this is not going to last forever, right? So, this is probably a temporarily one or two quarters situation, but that gave a big boost in many of the countries to our corporate loan volumes.
Looking at the first six months. Year-to-date performance without Russia, Ukraine 8% and this is obviously stronger than what we originally expected. So therefore if you read our guidance, this is the line where we made changes, previously we said that we expected around 10% performing loan growth without Russia, Ukraine now we are more inclined to say that it is going to be probably more than 10%, it can be actually materially more than 10% if – unless there is unexpected development there.
Again, I mean, the same pattern more or less, so around 8% to 10% in most of the countries for the first half. And in some countries, we have quite an interesting environment and for you – those of you who are from the Eurozone might be not – might kind of get used to it, but for us this is change to see that we have very high inflation at Bulgaria, Croatia, Slovenia, Montenegro, around 15% inflation and still a very low rate environment.
So it means that cost of loans remain low, especially compared to the level of inflation and the level of wage inflation. So that means that these are in this – it can happen that in this kind of high inflationary environment in these Eurozone are quasi Eurozone countries mainly loan volume, I mean, loan demand I should say stay actually quite strong.
Whereas in countries where the rate environment has increased a lot, namely Hungary, I mean that’s that kind of highest increase except obviously Ukraine, which is a 25% rate, but that’s a different story and also Moldova, which is close to 20%. So these are – except those specific situations obviously the Hungarian rate increase has been quite material.
So – and this is going to naturally impact loan demand and therefore, the expectation is that there will be less kind of loan growth in Hungary unless more oxidized grade products come and structure strong, There have been some positive developments on that front. So we heard that the baby loan program has been extended by another year, through the end of next year. And that is Szechenyi card program, which is primarily an SME loan facility refinance and subsidized rate by the fact that continues and that has been somewhat extended.
So this is the right time for the subsidized structures to come in place and we will see how much is going to come and how much to which extent they are going to moderate the otherwise inevitable decline in demand for new loans. Positive development, I mean quarterly 1% and for the first six months.
Next slide 5%, so the kind of deposit growth slow down somewhat and it hasn’t been focus obviously and given our liquid it’s not in our focus, but what very important is the Ukrainian and Russian situations.
I think it’s important to note that both of these countries deposits have been growing despite the fact that we are very liquid and liquidity situation improved a lot in these two countries given the huge decline in loan volumes year-to-date so we are not hunting for these deposits, they are coming to us and I think that’s a very strong in a very positive feedback that even in these very difficult situations clients trust us, maybe even relatively more than some other banks in countries where we are not big. So in Russia we are tiny and in Ukraine as well, we are one of the smaller banks. So this is not that we are kind of major players in these countries might be other reason.
Fee income year-on-year 15% growth, again this is more or less in line with the overall kind of growth of the group activities and lending in some countries it was stronger Hungary, Bulgaria obviously Ukraine, Russia year-on-year it’s negative, which is not surprising given the situation and there is some quarterly noise as well. Typically in Hungary first quarter is negative one balance therefore, usually the kind of growth in the second quarter is bigger than usual, but there is nothing fundamentally new here to mention.
Page 15, other income again, there is some noise here, especially in Hungary between the first and second quarter, so especially related to swaps, I mean ruble swaps positive first quarter, negative in second quarter that difference explains kind of half of this quarterly change. But I think if you look at the – and also the year-on-year development is mostly explained by technical one-offs in the base, again, there is not so much story here, other than typically technical changes in the base or in the recent periods.
Operating costs so far okay, but obviously this is something to be watched because in this again high inflationary environment we are exposed to these costs pressures. I mean, wage inflation high, energy prices we are banking is not kind of energy intensive business, but we do have utility costs going up and especially the Hungarian forint weakening is causing increase in real estate front or in IT cost, but so far so good. So, again positive operating euros, but we will – this is going to be a strong focus obviously in the future to try to moderate cost growth despite the fact that inflation is very high all around us in every country.
In terms of capital liquidity does not much development other than we probably heard we kind of issued a green senior preferred bond. This was our reintroduction to the market. I think last time we issued a senior bond was somewhere in 2006. So 16 years ago. And it may not have been the best time to start issuing bonds again but yes, obviously, under pressure from the regulator fulfill the increasing annual requirements.
Therefore we had to start this and this is quite expensive 5.5%, well expensive is relative because in fact, we were one of the very few financial institutions from the region to manage to issue anything in this quarter or in this period last couple of months, which had happened in July so after June.
And we have seen higher coupons with similar rated banks from the regions. So in that perspective even the pricing was kind of okay. But this is certainly a very different environment in terms of cost of funding by the liquidity situation is not so much a choice to do this. This is a regulatory requirement and we will continue the last one and half years, especially to come to issue new senior bonds to eventually fulfill the requirements.
There was a lot of movement in the capital, I mean the risk-weighted assets due to – maybe if we go back to the previous page comment again exchange rate, FX rate change related changes in the – in our capital base and in our risk-weighted assets is quite big, you see the first lines, HUF313 billion increase in the capital and HUF1.4 trillion half increase in the risk-weighted assets due to the FX rate changes.
And this is just that the kind of this natural hedge more or less in the group balance sheet or in the group capital adequacy I mean as risk-weighted assets growth due to weaker half the development capital, regulatory capital increases as well so the FX changes, FX changes explain quite a bit of the changes in the capital base and in the risk-weighted assets.
In terms of coverage and portfolio quality, again not so much change. Obviously, due to the increase, especially in Russia there were some increase in Stage-3 ratios due to the declining overall portfolio. Likewise in Ukraine some increase, but it’s not underlying so much. So it’s just because they performing the total loan volumes decline and therefore the ratios somewhat increased. So that was the increase quarter-on-quarter variables like 10 basis points so it’s not big. And I think in terms of level of coverage, we remain to be typically higher than some of the regional competitors.
Usual three slides for Hungary, Hungary specific performance, I think one factor here is important and if you look into the analyst tables, which are in Excel formats on the website, you actually can spot it that already the, for instance, mortgage demand for the market-based structures dropped substantially in the second quarter.
So that we do see and despite strong new mortgage generation and strong new applications most of the strongness is basically explained by the subsidized green housing loans and demand for that. And for the kind of market-based structures the demand, this is not surprising already drop significantly, that means that there is no further subsidized structure coming from the state and it’s likely that the mortgage lending – Hungarian mortgage lending in general will slow down and I think that’s an important message to make. Corporate loans was quite strong again related primarily to this working capital loan volume increase, which was related to the usage of the credit lines our clients have.
ESG remains a strong focus overall and again the bond what we issued in July was a green bond. So it was not just our first senior bond for 16 years, whether it was the first ever green one and actually there is a quite positive investor reception to the structure, and I think we have done a lot in this, I mentioned during the last couple of years and we will continue to focus our efforts on the ES&G factors overall.
Finally, a few words about expectation. I mean, certainly, the second quarter was rather more positive than we originally expected, so to say and that suggests some – at these short-term limited optimism I think and we only decided to reflect it in the loan volume expectations.
So again without Russia, Ukraine group level loan growth we expect to be over 10% as opposed to previously we expected to be around 10%. So now this obviously suggest and reflects the present year-to-date performance so it’s not hard to imagine that it’s actually going to be more than 10%. I think is still likely that net interest margin remain stable slightly increased year-on-year. Might be some slight more increase, but not material.
Operating cost efficiency improved, we’re happy about that. risk cost ratio again first half it was actually a positive I mean it’s always problem with this – whether the risk cost ratio is negative, so we have write back in without Russia, Ukraine portfolio first half. So therefore, the ratio is better than last year, we will see, I mean, these are quite small numbers either positive or negative compared to the size of the group.
So at that level, it’s kind of hard to be very specific about the forecast, I think the best kind of guess is that it’s going to be the whole year going to be at the level of last year. The risk cost ratio is still and profitability again this kind of adjusted without Russia, Ukraine number first half was actually markedly better than last year, but we kind of remain cautious in our guidance, and around last year it can mean that it can be kind of higher than last year.
So, Russia, I really told you that we expect kind of moderate profits but profits to come from our Russian business and Ukraine, I mean it’s just impossible to forecast what exactly is going to be the quarterly performance there. It is 100% dependent on how the war situation develops. So, that was the kind of presentation on my side and I am sure you have very good questions to ask and I’ll try to answer them in meaningful way.
So please open the floor for questions.
Question-and-Answer Session
Operator
[Operator Instructions] The first question is from Hai Thanh Le Phuong, Concorde Securities.
Hai Thanh Le Phuong
Thanks for your presentation. Just two questions from my side. The first one would be on your rate sensitivity to euro rates. So, I think in the previous call you said it would be around HUF3 billion for every 10 bps, so shall we translate the first 50 bps of euro rate hikes to impact your interest income accordingly, and how you see further rate hikes would impact this line? And my second question would be on the agricultural moratorium that was introduced recently in Hungary for agricultural companies and I was wondering if you could tell us what is the exposure in Hungary for that sector in your loan book? Thank you.
Laszlo Bencsik
Yes, indeed. So the answer for the first question is yes. So, I mean, the 50 basis points rate hike we have seen so far should translate into 5 times 3 and there the kind of forward-looking sensitivity is even higher. So it’s roughly EUR10 million for 10 basis points, HUF4 billion in current point terms and the difference because now we are in a positive territory. So I mean, in some cases we could not have referenced – we didn’t have negative reference rates.
Therefore, up until it went up to zero in some cases there were no increase in actually in loan rates. I mean these are typically corporate contracts and they differ in countries and by clients. So it’s not kind of overall, but we have quite a lot of contracts, which were innovated the kind of reference rate could not go below zero in the pricing, according to the contract. And so far the rates of these loans have not changed, but from now they will. So that somewhat increase is the sensitivity here.
The large loan book, which can be impacted total is HUF250 billion. And to be honest, we past as another HUF50 billion of balance sheet, by the client. So if you take on and off balance sheet, demand is like HUF300 billion which is not a – it’s not a huge portfolio, it’s pretty much impossible to track how many clients.
So it’s not a – it’s an opt instructor. So it’s not automatic that clients participate and the client who have to decide first half of September obviously we will try to communicate to these clients and we are very hopeful that these clients will actually approach us and discuss problems if they have any.
There has been a strong growth in Hungary. It’s really strong in some especially crop production it’s strongly affected. So yes, some producers experienced some of those, but it is certainly not across the sectors. So, hard to – we don’t have a good number how much participation we should see here.
Operator
Thank you. The next question is from Mate Nemes from UBS. I open the line.
Mate Nemes
Hi, good afternoon, and thanks for the presentation. I have three questions, please. The first one is on market shares and Hungary, can’t help to notice, but essentially in all products and segments you’re showing growing market share, albeit in mortgage loans, cash flows or on the corporate side. I’m just wondering if you could give us a sense why that might be? Is that basically the willingness to continue supplying credit versus some of the banks are holding back? Is that due to pricing or if there is any other factor? That’s the first question.
The second one would be on intra-group funding to the Russia and Ukraine as well. I just noticed that in HUF terms, we’ve seen an increase. Can you just confirm that this is simply due to the Hungarian forint deeper sharing versus the ruble and the hryvnia and there is no actual increase in local currency funding terms?
And the third question is on Ukraine, you mentioned that currently you’re seeing strong deposit inflows and you’re placing this at the Central Bank at very high short-term rates, money market rates. Can you give us a sense of what portion of your NII is coming from these deposits placed at the Central Bank in Ukraine? And perhaps also, how much is cash and how much is accrual on the NII side currently? Thank you.
Laszlo Bencsik
Yes. Just writing down the question not to forget those. So, okay, so Hungarian market share increased in retail it’s basically our composition is up. I do you think slide, page 19 can we go to page 19? Thank you. So we always have higher market share from subsidized products, you might remember. So baby loan and we have like more than 40% market share. I’d say it’s on the following page.
So the baby loan market share as you can see, it has been always above 40% if you go now. Also the green housing loan, which is a subsidized product, we have a much bigger market share in the subsidized product than in general. And what happens – if you go back to the previous page, what happened in the second quarter that both in consumer loans and in mortgages and retail the market rate base normal product volumes declined, new volumes. And a much larger share of new production was coming from subsidized products and in the subsidized products, we have always had much higher market share than in other products.
So it’s not that we have done something differently, it’s just the demand structure change and we happen to be stronger on the market in the subsidized products and increase in subsidize products and decreased substantially in the non-subsidized products. So that’s the explanation and these are very kind of low risk, I mean this green housing loan is 2.5% max for 10 years straight so whatever is it even more.
And so this is – it’s a bit more or less if you can take in this environment. I mean if they put the money – I mean they can’t because they have to buy, obviously a real estate from this money, but if they anyway have the money and take this and put into a government bond they are kind of 7% or 6%. So this is – these are actually quite glorious products. So that’s the reason. In retail – and in corporate increase is smaller in terms of market share and it’s more like this trend. Right.
We have seen this trend for many years in corporate, that we have an increasing share, market share in corporate loans. And that’s – and if the market share increase actually slowed down sort of this year compared to last year and previous year. So, again there is nothing specific or extraordinary there. And we do have this same phenomenon in corporate as well, especially SME.
On this slide in the right lower corner, you can see that for instance, the Szechenyi card program, which is a subsidized scheme or refinance scheme quite attractive. We have 37% market sharing and our overall market share in corporate loans is 19.2%. And obviously in this higher rate environment, the new bond is much stronger in the subsidized product than for the non-subsidized product.
So a kind of similar change here. So, it’s not that we are more realized than others and less conservative. I don’t know how preservative either side, but I think, we are conservative. Now in terms of funding Russia, Ukraine, I can confirm that the increase is only due to the fact that we have weaker HUF rates compared to ruble.
In fact, I mean our Russian entities could pay back a substantial part of this funding, the problem is that they are not allowed to pay back, they can only – if they were to repay early repay these loans they could – the amounts could go on to [indiscernible], which is the kind of trap in Russia. So it doesn’t make any sense.
So, really – and the same in Ukraine is now possible to payback the cross-border the maturing group credits, but nevertheless, I mean, actually their placement in the grouping thesis. So, they are not funding actually, going down not that it matters a lot but so happens. So yes it’s not – we have not increased our funding to any of these.
Cash accrual ratio, it’s I think the second quarter we accrued part the NII was 18% and the share of – and we have like 12%, 15% of our assets in central bank deposits at the end of the second quarter, and this is going to increase.
Operator
Thank you. The next question is from Gabor Kemeny, Autonomous Research. I open the line.
Gabor Kemeny
A couple of questions on Hungarian asset quality, please. I mean the economy slowing and the utility price freezes are being phased out, how do you think about the provision outlook in Hungary in this environment? And how do you capture this in your guidance of stable risk costs admittedly from that fairly benign H1 starting point? And the other question is, how do you think about the more negative macro scenario? And in particular Russian gas cut-off? Potentially, how would that impact your provision outlook? And my last question would be on Russia, you had a comment earlier today that you might consider a sale, what options do you see to potentially work around the government decree banning the sale of for instance? Thank you.
Laszlo Bencsik
So, I mean, really the development, the high inflation and especially the excessive energy cost is negative, no question about that. And it’s going to have a negative impact on our risk costs and portfolio quality. How negative, I mean that’s actually very difficult to tell.
And I mean, again, we made this guidance that we expect to see the risk cost base this year to last year, last year we had some kind of risk cost for the whole group and this year so far for Russia, Ukraine, we had write-back. So I mean the fact that we expect similar levels to last year still means that there will be more risk cost second half than first half. I’m talking about without Russia, Ukraine, which this Russia, Ukraine hopefully it will be less.
Now, in case of Hungary, I mean, risk costs are kind of very positive. I mean so first six months we have positive HUF19 billion. Last year, first six months, we had positive almost HUF8 billion. I think this is not going to continue long so probably we will start to see curious with normal risk costs, which means kind of negative risk I think in a way this positive risk cost is normal and that’s due to the fact that two years ago, we made these large provisions for COVID-related problems and COVID-related problems did not happen at all.
So we have still reserves and kind of slowly started to release these reserves, but now we have another problem, which might be more material than the COVID impact was because COVID was rather kind of we were scared and provision and everyone was negative two years ago, but at the end basically situation turn to very positive or at least I mean in terms of portfolio qualities and banking kind of sector results.
What happens now I think it seem like it’s difficult to tell. And in a scenario where there is no gas no, Russian gas at all coming to Europe that’s rather dire scenario and it’s not just to Hungary so across Europe especially Germany.
Some other sea countries, which are heavily dependent on Russian gas it’s very difficult to kind of capture the magnitude of the problem. I think if that happens, then we will have strong measures not just the Hungary but across Europe, because this is not something, which can be left to the market to be solved I think a situation if that happens. So I don’t know how to quantify that honestly but it’s certainly negative.
I think kind of complete stop of Russian gas and that’s certainly a tough scenario and I don’t know how you are going to cope with that if that happens. We also have to remember that this is a political decision. So this is related to the war and related to the sanctions, which have been imposed due to the war and there is no gas and this is the country section to the sanctions, which were kind of triggered by the military actions and the war.
So this is not something fundamentally economically driven or it’s not a fundamental supply demand imbalance it is a political decision. And I think I can only hope that political decisions will be wise on both sides. If it not, then if irrationality and tit for tat negative spiral continues then we might have actually strong problems and these problems will not be specific to Hungary or the region but certainly more – at least more on the European level.
Sorry, what was the last question it was related to – yes, Russia right, okay, yes got it. So I don’t know, I mean there was this Presidential decree that foreign banks, foreign assets cannot be sold every Presidential decree can be overwritten by a Presidential decision. So I’m sure technically it’s possible for the Russian President to give a kind of one-off approval. So I mean we haven’t digested this so much again, we started the process to explore if there is interest for the asset.
And I can confirm that there is local interest for the asset. Obviously, it is unclear to which extent meaningful discussions can continue in this situation, whether potential interested parties, Russian partners want to engage in a more meaningful and more detailed conversation and process given this ban, it’s not just that they cannot sell, but they are not allowed to buy it. So I don’t know, so this is – it probably – it does definitely at least slows down the process and it has slowdown the process. I mean, we try and open to this and we continue to explore strategic opportunities.
Having said that, if we just kind of look at the economic fundamentals of the situation, as I said we stabilize the operation, actually it’s not funded, it’s profitable, it focuses on a segment, which is I think the least sensitive politically it’s just the kind of mass-market retail or even below mass-market retail, times we have stopped corporate lending we are tiny by the way in Russia. So we are number having 50 or 40 whatever bank. So it’s still sensitive politically and we understand that.
Having said that, we have regional competitors who are top 10 right, still there and making enormous profits in Russia. So, put it this way we are going to monitor what they do with their assets and how they tackle the situation.
And then, I think that will be a guidance for us as well, given that we are tiny compared to them and we are not serving state own or corporate clients in Russia, we are only serving low mass-market, retail clients and they buy micro-oven or a TV or something like that. So I think it’s a kind of different profile and much more – but we do keep our eyes open and continue to try to explore this, the different strategic alternatives.
Gabor Kemeny
Thank you. That’s all useful color. Just one more follow-up, can you remind how much overlay provisions do you have as of now? And you mentioned as income release in Q2, if you could quantify that as well?
Laszlo Bencsik
In Hungary, in Q2 risk costs was plus HUF18 billion. Right. So that’s in overlay I don’t know what an overlay means. In fact, I mean sometimes it happens that you have situations when we create provisions based on expert judgment maybe more than our models. In our case everything is model base, and the models and the – so we don’t quite – I mean we don’t have an overlay, which we just put there based on no data. Right.
So for Russia, Ukraine, we do have models and the provisioning is more robust and our model for the rest of the group suggested that the provisions than what we originally thought, we would need under the stress COVID scenario. So the COVID situation officially stopped to negatively influence our business activities in the first quarter. So we have adjusted our models according to that and that resulted in lower provisions in some countries.
So I don’t know – I mean I think this overlay from a kind of accounting point of view, you cannot really – it’s not very meaningful because you can only provision, or release provisions based on some underlying rationale and that rationale has to be either related to some – client, observed clients activity or change in client activity, the ability to pay or a specific economic model we have for the expected risk costs for the future.
Gabor Kemeny
Yes.
Laszlo Bencsik
We can’t have an overlay, which is somewhere outside this framework hanging overall. And so we don’t have that. I don’t know others can have that if that’s what you mean.
Gabor Kemeny
No, that’s fair. What I meant was the provisions you created during the COVID crisis given your macro assumptions back then which you have not yet release even though the macro situation I think turned out to be more favorable than you had assumed. But it sounds like there is not much of that.
Laszlo Bencsik
We have released, I mean, we reallocated them, partially we release them and that’s what you see partially reallocated them or all of a sudden there is another reason to provision more and to be and plus optimistic or pessimistic for the future. And that’s the current economic environment, which is obviously deteriorated. So I mean the COVID reason ceased to exist, but now there’s another kind of negative scenario we have to take into consideration. We calculated the two, there is a difference. The difference we released and we have a new one now. So that’s the situation.
Operator
Thank you. The next question is from Alan Webborn, Société Générale. I open the line.
Alan Webborn
Good. Thanks for the call today. Do you think that in terms of the way your – the government of Hungary is managing its budgetary needs and so on is rational in terms of how it’s working with the banking sector? For example, we look across to Poland, and it doesn’t really look as if the reaction of the authorities at the moment is particularly rational. Whereas in your case you’ve been flat with a two-year extra bank levy, but at the same time, there are big subsidized loan program which from what you said today seem to be supporting volumes. But these programs surely must now be more and more expensive for the government to maintain.
And I wanted do you feel confident that when the government says it will continue these support programs for some time that you can rely on that or are we actually faced with a fairly important risk that these program get withdrawn and until rates come down, you could have quite a sharp contraction in lending as a result. I just want to, how you feel that that’s working? And what you feel about the development of Hungary, given the fact that you’ve got this take away with one hand and get back with the other, I just wanted your view on that. And in terms of your reaction to the new bank levy, are you able to do anything in terms of commercial policy to take something back? Or is that just something that’s not really within the spirit of how the relationship is moving forward? So, that’s what I was interested in terms of Hungary.
And then in terms of Ukraine were you positively surprised by the lower level of risk costs in the second quarter, was there anything specific better collateral, better collection, that pushed that forward? I mean, I hear what you say in terms of, it’s not really foreseeable. But I think we were positively surprised to see Ukraine back at breakeven in Q2?
Laszlo Bencsik
The first question is actually quite difficult to answer. I think it’s clear that it’s unusual what – how the policy environment works in Hungary. It seems to be a lot more intervention kind of usual I think the usually expected level put it this way generally in Europe, but this is rather new phenomena. And it started back in 2010, first it was negative.
So we got the bank tax and the workforce conversion early repayment mortgages and so on and somewhere the tide turned around in 2015, when politically growth became the primary target and since then we have seen a deluge of difference subsidized products for retail, for corporate in various forms from the Central Bank and from the government.
And it’s clear that we have benefited from these. And given our strong franchising and kind of ubiquitous presence in the country, we tend to have higher share of these kinds of subsidized products than we normal products. So relatively speaking we probably again more than some of other banks in these structures. And then time to time we got this shift, and I don’t know where the right balance is or whether balance is actually taken by anyone, we were…
Alan Webborn
I guess my feeling is that a lot of the support programs before interest rates went sky high were to some extent a choice. They were good for the consumer, they were quite – they were good for you and supported growth. Now, they seem to be really quite expensive for a government that doesn’t have any money and without that the people and the businesses that would be taking loans from you, would be paying an awful lot more.
So it seems to me that you are now for the moment, at least a lot more reliant for the loan growth and the margin that you’re getting from the support programs. And should they not be there, Hungary would be much more difficult. I mean is that something you recognize?
Laszlo Bencsik
Yes, obviously. I think that’s very obvious that you just explained.
Alan Webborn
Okay. And have you been able in your commercial policy to do any offsetting or this is not really something that you can do? I mean, if you’ve got these bigger market share…
Laszlo Bencsik
We cannot change the existing contracts, right? I mean, we cannot increase fees due to this. But in terms of new – I mean it can be priced into new production, but pricing is market base. So it depends on how the banking sector reacts to this. And I think here typically, the most important one weather what the expectations are whether other banks expect this to kind of be temporary for two years, which we are hopeful that it is or not. And if not, then obviously it has to become part of the new pricing. But the existing product pricing we cannot change. So this was certainly not the purpose of the measure. And I think there will be attributions, but I mean we cannot do that. I mean we are not in a position to change legal agreements with clients.
Alan Webborn
No, I understand, it’s okay.
Laszlo Bencsik
On the policy level decisions can all the existing legal contract change. Ukrainian risk for second quarter was not a surprise to us. So again, I think we quite diligently and conservatively provisioned in the first quarter for expected losses and since the environment developed according to those expectations in the second quarter, there was no reason to create even more. Having said that, we actually provisioned a lot in Ukraine in the second quarter as well. It was HUF22 billion equivalent risk costs in Ukraine, whereas in 2021 the full year, we had HUF7 billion risk costs. So in this one quarter, second quarter we provisioned 3x as much as in the whole year of ’21. And was just less than a half when we did in the first quarter, I mean that’s…
Alan Webborn
And the fact that you sort of don’t make a statement saying you feel – you’ve done as much as you need to. That’s simply based on the lack of visibility as to what the situation will look like at the year-end because you would suggest that if you were – if things has got worse in the second quarter then you would have not reduced. And so – but your statement about the rest of the year, unsurprisingly isn’t positive is it on Ukraine?
Laszlo Bencsik
We hope to put it this way. I mean in this tragic situation the only thing you can do is to be hope and especially if you have people there you are responsible to actually project a positive picture of the future and that is what we tried to do. But, obviously, they are always subject to the military actions there and we are not able to predict what’s going to happen.
Operator
Thank you. The next question is from an attendee joined by a phone. I open the line. [Operator Instructions]
Robert Brzoza
Yes, this is Robert Brzoza from PKO BP Securities. I have few more questions on the outlook of net interest income and mainly for some time you have been cautioning that the upside sensitivity of the NII in Hungary to rising rates is on a declining trend and my question is, have we actually reach a tipping point in the second Q? And I want to put this question in the context of the past quarter results when you mentioned that the NII in Hungary was hit by HUF12 billion quarter-on-quarter negative difference generated by the swaps. And for simplicity, if we assume an upward correction of first Q ’22 NII generated by Hungary core then second Q result would actually be softer, I mean lower in quarterly trend. So where do we stand today in terms of the potential upward sensitivity of NII in Hungary in this rising interest rate environment? So that’s my first main question.
Laszlo Bencsik
In terms of net interest margin, there is not much sensitivity short term, it’s more a kind of two, three years horizon where fixed assets were repriced either gradually in terms of the kind of fixed mortgage portfolio or just because replacement and the new – then the replace the maturing covered bonds there is higher rate there.
The corporate – the variable corporate loans are pretty much kind of balanced potentially the potential impact coming from the variable corporate loans and I’m talking about HUF is more or less counterbalanced by the corporate deposits, which are also variable. Now where we have a positive sensitivities, the euro and the FX loans and we do have FX loans in Hungary as well. And then I actually talked about the overall kind of group level sensitivity to the euro rates and that’s like 10 basis points roughly EUR10 million NII a year.
So that’s – but the short-term sensitivity of the HUF portfolios’ net interest margin is roughly zero. It’s very sensitive to deposit pricing it can even be negative.
Robert Brzoza
Actually, yes, exactly that I think if that’s the question of the deposit pricing upward pressure. So I assume for the moment it hasn’t become negative yet even given what we are seeing on the time deposit rates offered to households. Another issue here is that the share of term household deposits is actually at all-time low, below 20%. Whereas in the past, it used to hover around 80%. So do you expect this share of time deposits to increase for some reason more rapidly in the coming future?
Laszlo Bencsik
Yes, I don’t think it has ever been 80%, but certainly more than the current level is likely scenario in the – there are a lot of factors here. But liquidity levels on the market is very liquid. The extra tax. I mean the kind of reason for this extra profit tax was this one that the banks make so much money on – because they don’t increase the deposits rates. And they kind of have taken a way that extra profit. Now in our case this is not there. But for Banks which – there are some in Hungary. We have not bought any government bonds, for instance, in the previous year.
So for them, they actually have quite a big increase in their NII. And so I think – so I mean deposit pricing is subject to competition. The banking sector is very liquid and everyone has been hit by this huge extra tax. So I’m not sure – so I mean that we are exposed to this hit, put it this way. There is a risk of potential kind of compared to increasing your competitive pricing of deposits and that’s going to be negative for our margin in Hungary.
Robert Brzoza
Fair enough. And lastly, the guidance on the Europe, the ECB interest rate upwards movement here I wanted to ask, did you include in that figure the potential of the loan books to reprice in locations like Croatia or Bulgaria? Or did you only count in purely euro denominated exposures?
Laszlo Bencsik
No, that’s across yes. So, I mean technically I mean the Croatian and Bulgarian rates are same more or less. Having said that, in Bulgaria specifically loans are – retail loans are all variable but they are – the basis here it’s not market benchmark, but the base rate is the kind of average cost of funding of the banking sector. So it’s actually related to the average deposit rates in Bulgaria, which is a number published by their Central Bank regularly. So that’s the index.
Robert Brzoza
Okay, thank you.
Laszlo Bencsik
And it’s actually similar in Croatia as well. They have a specific National Bank range, which is the average deposit rate, and that’s the benchmark for the retailer. But for the corporate loans which are either broad based that’s included in this guidance which I gave.
Robert Brzoza
Got it. Thank you.
Operator
Thank you. The next question is from Otto, may I ask the name and the company, please?
Otto Szilagyi
Good afternoon, this is Otto, from Morgan Stanley. My question is about the corporate loans that you mentioned sort of corporates increase in working capital in Hungary. If you could comment, which industries do you see this in the most and what are the drivers or your expectations in the second half of the year? And secondly, you mentioned interestingly that deposit base in both in Ukraine and Russia are increasing despite you being relatively small player and despite all the challenges that are happening in this economy.
So, I imagine it’s hard to give a concrete reason for this, but just interested in hearing your thoughts. And lastly, about your ROE guidance, you expected to stay similar to 2021 levels, but at the same time your loan growth is expected to be higher than last year. Your cost of risk is relatively stable. Your NIM is relatively stable, potentially surprise on the upside. So, what is the negative factor that balances all this out and why ROE this year is not going to be higher than last year? Thank you.
Laszlo Bencsik
It’s not just Hungary that working capital loan kind of increase. You see that Serbia, Croatia as well that’s actually corporate production. Right. Those who have inventories and when they produce more for inventory and they purchase more for inventory in order to stock up the parts they need and also stock up the output.
In expectation of – I think that’s quite – this is normal reaction in high inflation environment, you want to buy your – you need to source, you want to source at a lower price expecting their prices to go up and what you sell as a product you want to wait for prices to go up. So this is – and in order to balance this situation and to fund this you increase your working capital loans. I am sure this is going to – this should be a kind of normal practice across, you know when I guess there is high inflation.
Positive increase as to Ukraine. I think it boils down to trust I think despite being small in Ukraine, especially, I think we have a very good reputation. It actually started with Raiffeisen because this what we have in Ukraine, we brought it from Raiffeisen in 2006. Raiffeisen Ukraine somewhere in ’97-98 so they were there early 2000 crisis they stayed there, they stood by their clients and we brought this Bank and then came to kind of ’08 crisis and we stayed there by our clients. And then came ’14-15 and the war started again we stayed we stood by our clients.
And I think that is just, we have a very positive reputation what we have. And I think this has been recently reinforced by the amazing heroic work of our colleagues there to maintain banking services in a war situation. And obviously it helps if we are a foreign bank and afford us more kind of huge level of trust in these institutions in these difficult times.
Then in Russia I think we kind of 40 own banks and if you look at truly follow our competitors, which are much bigger than we are, they had an explosion of the corporates there in their deposits. And so, also there is a strong flow of businesses towards foreign owned Banks in Russia. And there are technical reasons as well. We have access to international payment system, some big banks since many banks in Russia do not have. Having said that, again we are cutting back our corporate business in the excess lending, but I mean these are important factors there.
Now ROE guidance. Yes, we could have increased it, but I think the wording was kind of consider it when we made it of around last year but also it can be somewhat higher. Having said that, I also indicated that for kind of outside Russia, Ukraine, we expect higher risk costs, so actually negative risk costs the second half of the year as opposed to the positive risk costs so the provision releases what happened during the first half. So this itself make work somewhat the profitability of the outside Russia, Ukraine activities for the second half of the year.
To which extent this is difficult to tell. I mean, so we have been – even during this call, we have been there was a question about the scenario if there is no gas if gas supply stops to Europe, I suppose. I mean that’s a real dire situation, which can trigger much higher risk costs and then – so there can be scenarios I think and these scenarios are I would say some people really expect them to happen on the market.
So if those scenarios manifest and actually risk costs can be much higher. And then that would have an immediate effect on our returns as well. So I think it’s still the right thing to say that probably around last year. I mean, there is one more comment there that was kind of which is important to – we added another here and that is further. Right.
So the credit risk costs ratio maybe around it 2021 providing the economic expectations one deteriorate materially further. So the further was not there, in the previous but now it’s there. Because I think what we reasonably expect to happen, it’s intuitive that there can be much worse scenarios unfortunately manifesting for the remaining of the year or for the winter or for the next last year, and it’s only our imagination way to limit how worse this and higher it can be.
Operator
[Operator Instructions] As there are no further questions, I hand it back to the speaker.
Laszlo Bencsik
Thank you. Thank you very much. Thank you for spending your precious time with us today on this wonderful summer day. And thank you for your really good questions. I wish you all the best. Very happy remaining summer holidays and please join us when we report our third quarter results. We expect that to happen on the 10th of November. Until then all the best and goodbye.
Operator
Thank you for your participation. The second quarter 2022 conference call is closed now.
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