OTP Bank Nyrt. (OTCPK:OTPGF) Q3 2022 Earnings Conference Call November 10, 2022 9:00 AM ET
Company Participants
Laszlo Bencsik – Chief Financial and Strategic Officer
Conference Call Participants
Gabor Kemeny – Autonomous Research
Robert Brzoza – PKO BP Securities
Otto Szilagyi – Morgan Stanley
Alan Webborn – Societe Generale
Mehmet Sevim – JPMorgan Securities
Hai Thanh Le Phuong – Concorde Securities
Operator
Ladies and gentlemen, welcome to the OTP Bank Third Quarter and First 9 Months 2022 Conference Call. This conference will be recorded. [Operator Instructions] May I now hand you over to Laszlo Bencsik, Chief Financial and Strategic Officer. Laszlo, please go ahead.
Laszlo Bencsik
Thank you very much. Good afternoon or good morning depending where you are. Thank you very much for joining us today on OTP Group’s 2022 third quarter stock exchange report. I hope you have all been able to download the presentation if you wanted to, but using the new technology, we are also sharing the presentation as I speak. I try to be relatively short and focusing on the key points. And then as usual, we will have a Q&A session.
So starting on Page 2. Yes, so the quarterly profit was after-tax profit was HUF189.2 billion. And there were not much or net – put it this way, the net adjustments, net one-off items were less than HUF1 billion. So it was a relatively uneventful quarter from a one-offs perspective, and therefore, the difference between the adjusted and the actual profit after tax is relatively small. In the adjusted profit, we made 16% quarter-on-quarter improvement. And that’s also a historic high. So we have never ever had such a high quarterly profits neither adjusted nor unadjusted after tax profit.
With this, the first 9 months performance is still below last year – still below last year by 31%. And kind of the difference is due to two factors. One is the direct and indirect facts of the war in Ukraine, our Ukrainian bank last year in this period, made HUF29 billion. This year in the first 9 months, they made HUF26 billion loss. So that’s one item. And as we previously discussed among the one-off items, you can see two lines, which are related to the war. That’s the impairment of Russian government bonds, which we made in the first Q and the goodwill impairment and investment impairment, what we also had to do in the first quarter.
The other big kind of one-off hit on us were the various policy measures, which had quite sizable negative impact on our activities. Most of these manifested in the second quarter, namely the big extra tax, which is named as extra profit tax despite the fact that, in fact, in Hungary, our kind of core Hungarian operations without dividends is still negative because most – all of these negative one-offs manifested in the core activities in Hungary. The adjusted profit first 9 months, 18% higher than last year, and this one includes Russia and Ukraine, so including the two countries immediately affected by the war, we are 18% up compared to last year.
So if you move to the next slide, it’s pretty much the same info here. Maybe the main performance indicators had some flavor to the picture. So with that one-off adjusted ROE, but including Russia and Ukraine was about 19%. Cost to income ratio improved and risk cost ratio, including Russia, Ukraine was 0.75%. Overall income growth 18% and operating profit grew 24% year-on-year.
Now on the board, if you go to the following slide, when the war broke out, we – and when we made our guidance in early March, we thought that it would be useful for all of us to present our guidance and also our numbers as OTP Group without Russia and Ukraine given the high level of uncertainty in those two countries. So therefore, we included this view, the overall group performance without Russia, Ukraine. And as you can see, this is actually quite okay with that adjustment, 30% year-on-year growth and compared to the originally guided expectations, basically on all lines, we do better, but I’m going to come back to this on the last page when we talk about guidance and guidance on that.
Moving on to Russia and Ukraine, in Russia, our operations stabilized in the third quarter in the sense of resuming more or less normal levels of lending activity. Just to remind you, we are not a universal bank in Russia. We focus in the small segment, which is unsecured retail consumer lending. And even in that segment, we focus on point of sales loans, which we sell through agents. So we are kind of very small retail consumer lender in Russia. Now that – this activity and the demand for this type of purlins, increased compared to the second quarter in the third quarter and pretty much the sales level third quarter were close to where they were last year. So that’s one thing, so pretty much this kind of volume dynamics started to restore to more normal features.
The other thing is that the excessive provisioning, what we made in the first quarter, expecting a major deterioration in the portfolio at that time did not manifest and a), the macro situation turned out to be somewhat better than we originally expected; b), we are – the portfolio itself, we did not – has not shown any sign of this stressful deterioration. Therefore, we made the required adjustments in the forward-looking provisioning models. And therefore, we released a substantial part of the provisions that we created after the first quarter.
Here, actually, in HUF terms, we realized an FX gain because we created those provisions on a much, much weaker ruble rate to the HUF and we released those provisions, which were made in ruble in a much stronger rate – ruble rate to the HUF term and actually in HUF terms that generates [indiscernible]. And with this provision adjustment, in fact, we are getting to a level in terms of earnings again in HUF terms, which is similar to last year first 9 months. In fact, HUF terms, the profit after tax is exactly the same HUF24 billion.
In Ukraine, we are still loss-making, looking at the whole year, but the third quarter was slightly positive. And the expectation is that unless there’s further deterioration of the situation and escalation of the worst situation. It is possible that in the forthcoming quarters, we are not going to see further losses on a quarterly basis. Having said that, it is very, very likely that we will end this year in Ukraine in negative, but it might even be slightly less than what we have accumulated so far by the end of September.
We included these numbers, I mean, the share in the portfolio and so on and so on. But the situation, now I think is very much different from where we were some times in March right after the breaking out of the war, starting the war. We are now more or less under the type of challenges that we have in these two countries and the magnitude of potential losses and neither of these countries seem to be kind of high risk in terms of questioning the sustainability of operation there or realizing losses in the magnitude, which would question the ongoing sustainability of these businesses without external support. In fact, some repayments have been done from Russia from the group funding. So that not by the end of September, but it started in October, November. So we are actually reducing some of the exposure to Russia in this way.
The coming slides show the kind of overall kind of foreign performance or the subsidiaries banks performance. And I think the very good news is that with our Russia and Ukraine, the CEE subsidiaries of OTP Hungary seemed to perform very well. The overall profit improvement is more than 30%. And that leads us to Page 7, where we can see the kind of one by one performance of these banks. As you can see, we see quite strong improvement in some cases, and some of these banks are actually getting quite substantially in terms of contribution to the overall performance of the group. For instance, in Bulgaria, 7% growth, but more importantly, Croatia, 40%, Serbia 45% and Slovenia 36%. And even the smaller banks started to make meaningful and improving profit contributions to the group even Montenegro contributing positively despite the fact that this is really a country, which is very directly negatively exposed to the situation or war situation in Ukraine. And now we have Romania, which is still kind of zero profit. But as we have explained it so many times, this is not – this is reflecting this kind of strategic approach that we have had for the last couple of years that we wanted to invest into organic growth as opposed to focusing short-term profitability. The focus remained on profitability, but more kind of middle and longer term. And the expectation is that by next year, we are going to see kind of meaningful returns on these portfolios. And it can actually turn into kind of measurable and material levels of profits.
So talking about the group and the growth of the group, maybe if we go to Page 8, we can see the acquisitions. We did one in the third quarter. In August, we closed the acquisition of Alpha Bank Albania. It’s a small bank even compared to our Albanian presence, and it does not kind of substantially change our position in Albania. But certainly, this is a country which we very much like and find attractive and the performance of the bank, what we previously acquired there has been outstanding.
So we are very, very happy that we were able to buy this bank and the kind of merger process already started. And soon, we are going to conclude the legal merchant and the operational merger will follow soon. And then we have the Slovenian story, which has been dragging on for prior long. The good news was in September – early September at the European Central Bank, who is the direct supervisor of NKBM in Slovenia, given Slovenia being a Eurozone country, approved the transaction, but we are still waiting for the approval of the local Competition Authorities. We are not aware of any outstanding major issue, which could impede the approval.
Having said that, we have not so far received the results, we are very hopeful that we are going to hear from them soon. And we are very hopeful that we can close this transaction before the end of the year because it’s not good for anyone. It’s not good for the bank to be in this situation, and NKBM is not good for the client. It’s not good for the salaries, not good for us as a buyer. So we really don’t understand why. And this process takes so long. It started somewhere beginning of last year. But again, we hope that we are very close to the end of this discussion as well.
There is a new development on the Ipoteka Bank in Uzbegistan opportunity side. We just recently actually announced that there was a letter of memorandum of understanding signed in October between Uzbegistan state parties who are responsible for the process in our bank. So we restarted the process we are doing another confirmatory due diligence. And we think that it’s high probability that the transaction can be made, and we are actually very motivated and interesting in this – in the country. And specifically in Ipoteka Bank, we believe that this provides a very, very attractive investments opportunity. And if anything, this attractiveness improved an increase since we kind of put the process in haul signing March this year after the war broke out.
Then I mean, going to kind of more details and starting with Page 9. I mean, we are just going through these stages without going into very much into details. You can very much find most of the information here. I think what important is on this slide and the following slides that we have the – when we have the percentage change numbers than the first numbers are the nominal changes in the second one numbers where we have two numbers reflect the FX adjusted change. And in some cases, it’s going to be quite substantial. For instance, Russia is a prime example, where in, I don’t know, HUF terms, even net interest income grew year-on-year. But in ruble terms, by 22%, but the ruble terms declined. So this is important to look at.
Overall, year-on-year 16% growth with Hungary being at 24%, which is almost the highest growth, basically more – only model of which is very small Romania, where we have this kind of – as I mentioned, this kind of organic growth strategy focusing on revenue growth. Actually, results are quite good. And then Ukraine, which is obviously a very special situation. And the net interest income growth year-on-year and quarter-on-quarter despite the strong volume decline is actually due to the very high rate environment. So the Central Bank is paying 23% on Central Bank deposits from that use, and NII quite strong.
Net interest margin, a slight kind of wobbling or noise during this quarter, Hungary went down somewhat, but Russia went up, Bulgaria went up and some FX impact and composition impact, but all in all 4 basis points. So that’s rather noise has been a major change. In terms of volumes, we had a very strong quarter. I don’t remember many, many quarters, which were so strong. So in just one quarter, we grew 5% and in some cases, namely Croatia, Hungary, it was even higher, 10%, 7% growth, and especially in corporate, Hungarian corporate grew 13%. Croatian corporate grew 17%. So, some of these growth rates are pretty strong. I mean, this is primarily related to, a), these economies, especially Croatia, Slovenia, Serbia, Bulgaria, Romania actually do quite well, and there are very few signs of kind of slowing down or immediate problems despite high inflation. But the high inflation environment makes what kind of creates additional corporate demand.
Corporates are stocking up inventories in order to buy kind of cheap inventory before prices go further up. And in general, working capital loan requirements increased substantially. So this was – I mean, this is – I don’t think this is going to be repeated, this very high level of growth. I think it’s rather kind of an exceptional quarter, especially in terms of corporate growth, but in some countries, it’s really quite strong. The other important message here is that the Russian portfolio dynamics change. So as you can see, consumer loans increased by 3%. That’s a substantial difference. We had two quarters of steep decline. And then during the third quarter, we had this turnaround in the trend.
If you look at the first 9 months loan development numbers, this is – the guidance was – original guidance beginning of March was kind of maybe close – kind of close to 10% growth for the whole year with a Russia-Ukraine. Now without Russia-Ukraine, 9 months, we have been growing 13% and even including the big drop in Russia and Ukraine, by the end of September, we were at 11%. So, exceeding the original expectation in every sense, so this is clearly a better picture than we originally believed in the earlier part of the year. Again, some countries show quite good performance there.
Deposits 5% growth in one quarter, and Russia, Ukraine actually started to decline, but this is because we don’t – just don’t need liquidity for SEK in Ukraine. We are down to 70%, 70% loan-to-deposit ratio, and it cannot take out money from the country. So we really don’t miss so much more or kind of deposits at higher prices, likewise, Russia. By the end of the second quarter, the loan-to-deposit ratio went down to 105%. And kind of half of the net loan book is actually financed by equity. So the level of capital in Russia is very, very high. So there’s not much we can do with the excess liquidity. Therefore, we started to kind of price the level of – deposits to the level where we don’t have much more growth in deposit levels in these two countries. But again, this is due to the very strong liquidity situation in both countries.
I think the other interesting number is the Hungarian REIT growth, which already stopped in the second quarter, but continued in the third. I mean, this is something which is due to the fact that the rate environment in Hungary is extremely high. And then retail clients have access to very, very attractive and basically almost 100% liquid retail government bonds, tax-free, above 10% and fixed or inflation plus percent. So these papers are actually attractive to the level that is very much impossible to complete – compete with them with deposit rates. This is a kind of understandable phenomena.
Due to the deposit growth, again, overall, I mean, to say here, other than that overall, I mean, in certain volume wise, we still kind of deposits grew more year-to-date HUF2.2 trillion, HUF2.3 trillion and without Russia and Ukraine and loans by HUF2.1 trillion. So even without Russia and Ukraine, we had higher deposit growth and loan growth and including Russia and Ukraine, it’s the difference is even bigger. So that means that, overall, this year, we increased our – the difference between loans and the deposits.
Page 15, fee income, 14% overall growth, FX adjusted. If you don’t adjust with FX, it was actually much more, but I think it’s fair to provides a better picture if you look at the FX adjusted numbers. And I mean, in general, this reflects the net fee income growth, the higher inflation, high economic activity, GDP growth, typically in all the countries, etcetera, Russia, Ukraine and Moldova has been strong for this year so far, plus relatively high levels of inflation, it’s not surprising. The fee income is growing quite strongly. And in countries like Ukraine and Russia, where economic activity declined, it’s also not surprising that fee income actually declined.
If you go to the next page, which is other non-interest income, there I mean, I think the most important line is the last one, because this was actually material a one-off transaction. We have a venture capital/private equity, asset management company, which manages fund portfolio, and they actually sold one of their investments with a large – very large or exited from one of the portfolio companies with a large one-off gain return, and this is reflected in this strong third quarter number in the other line, right? Service is 21, which was kind of substantial increase quarter-on-quarter is driven by this one-off. And then in Russia, we had FX gains, and we had kind of derivative transaction gains, but albeit much, much lower than – smaller than the other foreign owned banks, so to say present in the country. We don’t do much of those activities and actually, it’s less and less. So it’s getting close to zero.
Operating costs, if you look at the overall number 12% year-on-year, close to 20% growth without the Albanian acquisition. And yes, I mean, high inflation, unfortunately, means high cost growth, especially, if we want to maintain the level of service and competitiveness, what we have. And then if we want to maintain the capacity to sell and to increase market share. So this is something which is the result of the higher inflation environment. But the good news is that the kind of cost efficiency of the group improved despite this year-on-year cost increase. So the cost-to-income ratio went down from 49.1% to 46.5% year-on-year. So that’s actually sizable. And this is, I think, the important indicator to look at how cost efficient we are in this high inflation environment.
Going further to capital, capital situation was stable third quarter, which is – it might be somewhat surprising that despite the large profit, there was not – was less improvement, but I have to remind you that the loan growth in this quarter was also exceptionally high. And therefore, this created assets grew, and there is also some FX movement, which had to be compensated to this kind of 5% growth rate growth in one quarter required some capital contribution put it this way. Nevertheless, this is quite a strong position, I believe, in some assets [indiscernible] and compared to our risk profile and also compared to maybe to some of our peers.
Looking at the risk parameters, yes, the portfolios have been stable with the exception of Ukraine, obviously. So in Ukraine, we are continuously increasing the Stage 3 and Stage 2 –sorry, ratios. But for the rest of the group, it’s actually declining. And as you can see, the Stage 3 ratio declined a little bit during the last quarter from 5.3% to 5.2%. Without Russia, Ukraine, the ratio is down 4.3%. Obviously, Russia, Ukraine are kind of high Stage 3 ratio countries. And the coverage has remained relatively robust, I think, especially for the performing portfolio, including and even without Russia and Ukraine.
Two more slides – and kind of three more slides and some detail on the Hungarian performance. Some notable changes here, for instance, in our kind of market share in new production and mortgages have dropped in the third quarter. That’s due to the fact that two factors, basically, one that the green housing loan subsidized program, where we had, as usual, a much higher market share than from kind of market-based products, started to decline third quarter as we run out of the allocated or the amounts that we could disburse. And also with the current rate environment, mortgage lending is actually a negative margin activity in Hungary. So you can only sell mortgages lower than the relevant – mortgages lower than the relevant sovereign bond rates for 5 or 10 years, which makes this activity, somewhat less.
Okay. So the other important thing here that I mentioned that there was some households – some decline in the small or it didn’t grow the Hungarian deposit book. And this is also somewhat proved for the rest of the market, as you can see, our market share actually increased during this year from household savings. So it’s not that we – that other banks took retail savings and deposit volumes for us – from us, rather the opposite compared to end of last year, we increased our market share in the first 9 months from household savings.
Page 21, baby loans still strong, now this is a very attractive and very profitable product now. The last vintages, the third quarter vintage and the loans that we are selling now, they pay well above 10%, closer to 15% kind of subsidy levels. You can see the clients don’t pay for the first 5 years and the interest. So that is actually by far the most attractive product and profitable product in the group given state guarantees in the [indiscernible].
Corporate, Page 22, again, we were quite active third quarter, and we have been quite active since the beginning of the year in corporate lending despite a somewhat more difficult environment. But the whole market grew fast. So our market share only increased by 30 kind of bps in the third quarter and the kind of year-to-date increases 90 basis points. This is actually something we continue to do. We believe that this is a long-term profitable segment despite the kind of interim difficulties, especially with the new developments related to the interest rate caps, which were, a, expanded for mortgages selling end of June next year, extended to 5 and 10 years fixed mortgages, which will reprice during this period and also to SME loss, the impact of this, we did not book in the third quarter because these measures were announced second part of October. So it’s kind of subsequent to that, but we included the expected potential loss from this in the interim reports – so in the report itself. This is included and the expected amount is roughly HUF40 billion after tax loss calculated on last day or 2 days ago.
Reference rate levels in Hungary, which we have to book this quarter, so the amount will be booked in the fourth quarter. Having said that, obviously, the expected loss, due to these measures depend very much on the kind of rate environment and rate level. And just as we speak or soon after the U.S. inflation data came out today, Hungary and U.S. started to plummet. So I think there is a fair chance that this very extremely high rate environment in Hungary and has only been temporary. And very soon, we hope to see a moderation in the rate environment.
Our ESG activities remain in strong focus. That’s one good development. I mean, or reflection, objective external reflection of our efforts, Sustainalytics improved our rating from medium to low risk. So our efforts have been for some extent, acknowledged and the results of our ongoing efforts to improve on this front and being somewhat acknowledged by Sustainalytics.
And then going to Page 24, this is some – let’s call it update, but it’s more a kind of small pragmatics on the guidance that we made at the beginning of the year in March. Again, at that time, given the very high level of uncertainty, we decided to focus the numeric guidance on the group without Russia and Ukraine. So we continue that kind of practice despite the fact that actually no more today, more or less, I think the Russian and Ukrainian business activities falling more back to the kind of more predictable framework. So we could actually extend and include them as well. And certainly, very much hopeful next year, we will include them, and we are not going to have separate ones because I hope they will be much closer to normal levels of operation than we thought beginning of this year.
Nevertheless, a few words on this, where we have clearly need to update our previous expectations as the volume growth, we started the year, suggesting that maybe we can be close to 10%. We are above 13%, and we will course very likely to reach in 15%, so now we say around 15% performing loan growth without Russia, Ukraine. Russia started to grow, Ukraine continues to decline.
Net interest margin stabilized group level. Hungarian margins still not so strong and short-term, not growing, rest of the operation margins rather improving due to the higher rate environment. In Hungary, we are still stuck with this large fixed sovereign bond portfolio and that series – I mean – and that makes basically our interest rate risk, very, very low. So we don’t so much – earnings don’t so much react in HUF terms to rate changes in Hungary. But they do react to any changes in Hungary in terms of the euro position. So therefore, some improvement might actually happen, but that will be rather next year than short-term. So I think we kind of remain at this guidance level that it’s basically similar to last year.
Cost efficiency, we have seen some improvement, and we hope that this improvement will last for the rest of the year. Risk cost rate, again, without Russia, Ukraine, actually, we had write-backs first 9 months, especially the first and second quarters this year. Third quarter, as you can see, we started to provision that’s due to the deterioration in the forward-looking macro expectations, IFRS 9 type provisioning we made in many countries. This was not due to kind of portfolio deterioration. It was more due to the expected slowdown in GDP growth for the – for next year. And then profitability, again, it’s – it seems to be higher than last year so far, and we’re very much sure that it’s going to remain there.
That was pretty much the formal part. I’m very sure you will have many good questions. So please, I’d like to ask my colleague to open the floor for questions.
Question-and-Answer Session
Operator
[Operator Instructions] The first question is from Gabor Kemeny, Autonomous Research.
Gabor Kemeny
Hello. Thank you for the presentation. Firstly, can we talk a bit more about the Hungarian NII dynamics? And I would be interested both in your comments on the margin and the volume outlook. If I understood correctly, you were saying that some margin improvement might be possible next year, if you could elaborate on that? Yes, it seemed to me that some of the factors you mentioned like the large treasury portfolio or the negative lending margins are likely here to stay. And the other question would be on the rate caps. I understand these are moving – I mean, the impact is moving as the rates move. But perhaps can you give us some sensitivities here and what would be the possible impact of extending this rate cap until – I mean for the second half of next year if rates stay here? Thank you.
Laszlo Bencsik
Okay, sure. So I mean we – as usual, we don’t give guidance for next year at this point of time. So and I think it’s – we’re going to keep that tradition. So kind of explicit – more explicit guidance we are going to give, as usual, when we talk about the year-end results early March. Also, we have – I mean we are still working on next year budget. So we won’t even have the numbers, especially not approved. So it would be quite premature to give you guidance, and we usually don’t do that. Having said that, yes, we have corporate sovereign fixed portfolios when they mature, right, not the entire one, but some part of it will mature. We done in terms of Europe, I mean, FX – in FX, we don’t have so much fixed portfolios. We have an open kind of interest rate position there. So we are actually benefiting from increasing euro rates in Hungary and in the other countries as well. And well, I mean, when I said negative margin, it is still kind of the new mortgage production today is still double twice the yield or 3x the year what it was a year ago. So it’s lower than the current benchmark, but kind of 2x, 3x more than last year production and kind of almost 2x more than the total book. So it doesn’t mean that for a NIM perspective, this is actually not positive, but more to come in March, so please.
The rate caps, again, I said that HUF40 billion plus. And it’s pretty much – it’s not entirely linear, but linear, but I think that’s the best proxy study. And the base rate was or the reference rate was fixed at 7.7%. And today, it’s around 16.5% from 2 days ago. And that’s – and so basically, if we go down the reference rate, BUBOR goes down to kind of 8% and it tomorrow then it’s zero for corporate. But also for the – and it’s a bit more complicated for mortgages, but this is also kind of similar. And between those two, I mean, you – the best proxy is just a linear near-term function. So I hope the eventual loss will not be HUF40 billion, but probably this is the number where we will have to book now and then we will see if there is a decline in the rate environment. But by the way, which I really expect to happen then it’s going to be less than that.
Gabor Kemeny
Got it. Thank you, Laszlo. And just to follow-up on the euro rate sensitivity. What is it now roughly? And what is it going to be if Croatia joins the Eurozone soon?
Laszlo Bencsik
I mean, it’s already – I mean, Bulgaria, Croatia, these are already despite not formally being in the Eurozone, the rates there pretty much moved together with the Eurozone. So it’s like 1 percentage point is roughly €100 million, €150 million per year in terms of NII.
Gabor Kemeny
Got it. Thank you.
Operator
Thank you. The next question is from an attendee joined via phone. I opened the line. You will receive an automatic message about it. [Operator Instructions]
Robert Brzoza
Hello. Good afternoon, everyone. Can you hear me?
Laszlo Bencsik
Yes. Loud and clear.
Robert Brzoza
Thanks for the presentation. This is Robert Brzoza from PKO BP Securities, Warsaw. I have a question on prospective capital requirements. Where do you think within, say, 2 years’ time, the minimum requirement will be on the consolidated level, also including the combined buffer requirement for MREL. And where do you see the MREL issuance going forward? And finally, maybe how – and if that’s going to affect the prospective dividend payout policy?
Laszlo Bencsik
I mean the MREL requirements, the obligatory one from starting from January ‘24, including the buffers and the expected development of the buffers that we are aware of is 24.2%. Having said that, either today or maybe tomorrow, we are going to have a new resolution from the Resolution Board, maybe exactly the same, it might be somewhat different, but we are going to update and make an announcement once we receive that. But we don’t expect a major change here. So it’s roughly 24%. That’s our ultimate MREL requirement level. And the other kind of change in the requirement is basically the other systemic buffer in Hungary, which was temporarily when COVID hit for 2021, it was reduced from 2% to zero. And this year, it went up to 2.5%, next year, it’s going to be 1%. And in ‘24, it goes back to 2%. So, that’s the kind of biggest moving part. In terms of capital adequacy ratio, again by ‘24, the requirement is going to go up to 15%, including these.
Robert Brzoza
And regarding the dividend policy, do you think that will affect somehow the payout compared to, let’s say, average?
Laszlo Bencsik
Let’s say, I mean in terms of requirements, we don’t have – there is no news, right. So, we don’t have any major changes in the requirements. So, therefore the level of the capital requirements does not trigger any change in the expected level of dividends. What is different is the kind of, in a way, cost of Tier 2, a Tier 1. So, it is currently, there is, in my view, an extraordinary unique level of risk conversion on the fixed income front. And therefore, rates are exceptionally high. So, that can have some impact, but we have not – but again, I think this is temporary, and I expect the bond – corporate bond rates to start to normalize again, once the overall BUBOR rate kind of development trajectory changes, which might do soon. So, in terms of kind of short-term dividend payments, again, this is something we have not – structure is fold about for next year. So, there is not much I can say on this front. This – I mean there are a lot of moving parts. And personally, I am very optimistic regarding the potential changes in the environment, and I expect a much smaller slowdown in GDP activities in the countries than currently usually expected, but we will see. So, again, update on the dividend payments will be done next year, but I mean, what we will suggest to pay with the AGM.
Robert Brzoza
Understood. Thank you.
Laszlo Bencsik
Thank you.
Operator
Thank you. The next question is from the analyst of Morgan Stanley, Otto Szilagyi.
Otto Szilagyi
Good afternoon. Thank you for presentation and taking my questions. I wanted to ask about your proposed transaction in Uzbekistan. Namely, what changed sees April when you postponed the deal? What made you turn more positive? And generally, what’s your view – thoughts on the macro in the country, they have quite ambitious targets in terms of privatization, FDI is generally liberalizing the economy. So, interested to hear your thoughts about the transaction in the general economy as well?
Laszlo Bencsik
I mean the general economic situation improved, and they actually very rapidly progress on the part when they – we go through. And this is very visible. I mean since the beginning of the year, in terms of new developments, I mean real estate prices, economic activity in general. The value proposition of the bank itself improved a lot. They came up with a very, very modern state-of-the-art mobile banking solution, which is I think I mean competes with the best in Europe, I think in terms of service level on their own, very, very fast. And that was just the development during the last kind of eight months, right. So, I think geopolitically I think Uzbekistan positioned itself very wisely in this conflict. And if anything, I think they are attractive in geopolitical – attractiveness of the country improved, and they – if anything, they accelerated their efforts to move the economy into a kind of market-based environment. They seem to do what they say, right. And evidence is accumulating as saying goodbye. And I think this is a very good sign. Numerically, I mean we expect more than 5% GDP growth for the next year as well, where most of Europe is going to slowdown strong. They have inflation, which they consider high, but it’s already lower than 10%, but they think it’s high. I mean when looking at European inflation levels, it’s actually almost – I mean it’s lower than Eurozone. But nevertheless, the expectation is that it’s going to be further reduced. They have somewhat compared to the inflation level, somewhat higher base rates environment, which again, we expect and they expect it to moderate. I mean just today, our Prime Minister and the big Hungarian delegation, including my colleagues from OTP are there in a big kind of regional forum. There are a lot of bilateral discussions between Hungary and Uzbekistan. And Uzbekistan and other countries, they improved their political relationship with the neighboring countries dramatically. I was there last week, and I was quite impressed.
Otto Szilagyi
Do you have any target timeline of closing the deal?
Laszlo Bencsik
If it’s up to us, sooner the better.
Otto Szilagyi
Great. Thank you. And if I – speaking of inorganic opportunities, earlier, you mentioned also something in China. If there is any update that you could share at this stage?
Laszlo Bencsik
This is potential for setting up a joint venture, where we would be a kind of minority investor. We are still focusing on trying to get the license to where we are still in this early stage, having said that, the most difficult seem to be getting the license. And so no, there is nothing I could tell you as an update, but we are still working hard on this, and we have – we are making small steps, but it’s the long run.
Otto Szilagyi
Thank you. And lastly, continuing on the same path. On Slovenia, are you aware of any issues, that is holding off the final approvals, or do you feel you are on track for closing?
Laszlo Bencsik
We are not aware of any issues. They communicated to us that they don’t require further information. We are not aware of any issue. Now, there was one concern they had. It was kind of a year ago, and they told us that we have completely changed the structure of this transaction. And so – and we addressed this, but that addressed that particular concern, but there was like, I don’t know, eight months, nine months ago. So, since then, we haven’t heard any tangible kind of problem, right.
Otto Szilagyi
Understood. Thank you very much.
Operator
Thank you. The next question is from Alan Webborn from Societe Generale.
Alan Webborn
Sorry. Hi. Could you just elaborate a little bit more on the trends in provisioning in Hungary in the core business in the third quarter? Was this a sort of preemptive cautionary IFRS 9 related? Can you just give us a little bit of a flavor there, I mean I know overall, you are talking about risk costs being made below what they were in the full year of 2021 now. But just to give us an idea of what was going on in Hungary in Q3 would be helpful?
Laszlo Bencsik
Yes. It was exactly what you just mentioned. It was a forward-looking IFRS 9 related provisioning due to the GDP – I mean, unfortunately, and I hope this is going to be better, but the consensus view is that Hungary will not perform as good as the neighboring countries in terms of GDP next year put in this way. And we had to reflect it in the IFRS 9 forward-looking provisions. So, that was – having said that, I am more optimistic than this. But obviously, we have to rely on typically external sources when we talk to our auditors regarding the macro expectations.
Alan Webborn
But would it be fair to say that you have perhaps done in Q3 what you would traditionally tend to do in Q4?
Laszlo Bencsik
It is – I mean I don’t know. I mean this was just – I mean every quarter, we have to do this exercise, right?
Alan Webborn
Yes. Okay. But I guess the – what happened in Q3 was more unusual in terms of what happened to rates and so on.
Laszlo Bencsik
Yes, absolutely. This was just related to the kind of worsening macro expectations, not just in Hungary, but across the countries, but in Hungary, it was unfortunately, again, Hungary is expectations are more negative in Hungary than, let’s say, in Slovenia, Croatia, Romania, Bulgaria, Serbia, right. In these countries, we also as we expect some slowdown in GDP growth. But in Hungary, I mean the slowdown will be according to the especially external forecast are going to be much more pronounced and maybe even recession is going to happen in Hungary. So, that – and this happened – these expectations were formed during the third quarter, and therefore we had to reflect it in the IFRS 9 provision.
Alan Webborn
Could I also ask…
Laszlo Bencsik
The portfolio did not deteriorate. It was not because I mean there was a strong migration to Stage 3 or something like that as well.
Alan Webborn
Okay. Understood. Could I also ask – I think you mentioned that you have been able to reduce the sort of group funding to Russia. Did I hear that right? And if so, how did you actually do that? I mean I didn’t think it was possible to repatriate anything from Russia at the moment? Could you just say how you have managed and what you did to do that? That was the second question.
Laszlo Bencsik
Well, I mean somewhat since kind of late summer authorities should become more open to actually close expiring deals. So, it’s not that we kind of took out something. It’s just there were some loans which expired and it was possible to pay them back.
Alan Webborn
So, what you are saying is, so the Russian business was allowed to pay back loans to the group?
Laszlo Bencsik
Yes. It started, yes.
Alan Webborn
Okay. That’s interesting. And I guess sort of finally, just to come back on Uzbekistan. I mean I hear your enthusiasm clearly. And clearly, there is a broader agenda between Hungary and Uzbekistan. But when you sort of put the – you slowed down the idea of that deal earlier in the year, you referred to it as being outside your comfort zone in more difficult times. And clearly, the situation as far as the geopolitics in Russia haven’t changed and I think you have reiterated what you think the cost of having to walk away from Russia would be in terms of your CET1? And the chances of that happening don’t seem to have really changed. So, this is moving ahead. And do you have a – are you now an exclusive partner? Because I think when you slowed it down, I think the state was quite could go and sell it to somebody else if they wanted to. So, it sounds as if you are more committed now. And what has changed? Is it just that the operation and the business is so much better than it was when you first looked at it, or are you more comfortable with the group’s level of core Tier 1? What’s changed? Because the geopolitics, if anything is worse, it’s not really better, is it?
Laszlo Bencsik
For Uzbekistan, I think the geopolitical situation, and obviously, I guess it’s objective and depends from where you look at the situation. But I think from a geopolitical point of view, Uzbekistan became more attractive than before. I think the way they position the country in this vis-à-vis Russia during this period. If anything, I think improved their geopolitical attractiveness. And this is – I think it’s I mean, it’s not just my view, I mean when I talk to other investors, who consider the country and it is actually kind of visible or robust related to the country. You are absolutely right that the war is going on. If anything, it has escalated and reach really tragic levels. But compared to where we were let’s say, at the end of February, where we temporarily put the process on hold, we have much more understanding now in terms of how this conflict develops and what the implications on our businesses are in Russia and Ukraine. As I have said, in Russia the business is going okay. I mean it’s a very basic plain vanilla business focusing on consumer lending, makes money. It doesn’t require capital, doesn’t require funding, which is quite profitable. And in Ukraine, unless there is a major deterioration of the situation compared today, which I clearly do not expect, then we might not have more losses. Expect more losses in Ukraine. I think this is a major change compared to where we were in March, right. We didn’t know what was going to happen with our banks in these two countries. So, yes, you are absolutely right. The overall geopolitical attention and problems have not – they have not been resolved, but the very specific situation of our banks in Russia and Ukraine, there is much more visibility, clarity and they more or less stabilized and adapted to the new environment.
Alan Webborn
Okay. And I guess…
Laszlo Bencsik
There is much less uncertainty from my point of view…
Alan Webborn
Okay. And – but at the same time, markedly, it’s going to be a more expensive acquisition, isn’t it?
Laszlo Bencsik
I mean. If you forgive me, I am not – I mean, it’s a deal which have not been made, right?
Alan Webborn
Yes. But I mean it’s going to be more expensive?
Laszlo Bencsik
That we share so – but we talked openly about something which we have not concluded yet. And I don’t think I should disclose kind of this type of detail.
Alan Webborn
Okay. But the HUF is weaker and their business presumably is developing more strongly.
Laszlo Bencsik
I mean yes, HUF is weaker and they develop strongly to improve. Those statements are true. On behalf, we will appreciate you. And their businesses continued to develop. So, yes, that’s true.
Alan Webborn
Okay. Thank you.
Laszlo Bencsik
Thank you.
Operator
Thank you. The next question is from Mehmet Sevim, JPMorgan Securities.
Mehmet Sevim
Good afternoon. Thanks very much for the presentation and the comments. I have just one follow-up on the Hungarian NIM, if I may. I do appreciate you are unable to provide too much color on 2023. But from a quarterly perspective, maybe how would you see it evolve in the fourth quarter after this sizable 23 basis point drop, particularly because there seems to be a loan pricing delay among others, as you provided in the comments?
Laszlo Bencsik
I don’t expect a similar drop in the fourth quarter. There is a time like we have between the deposits and loan re-pricing. Now, does this kind of cap on the interest of the variable loans are part of the portfolio. But actually, that doesn’t appear in the NIM, because we – the tax – the introduction of the cash, we have to book the full expected amount or impact when they are announced, right. So, we show them as one-offs. So, the actual cash don’t have an impact on the NIM, what you see. They have – they come through as one-offs. But I don’t expect similar decline.
Mehmet Sevim
But certainly, some further decline is possible. Is that correct to assume?
Laszlo Bencsik
And there is always some noise, but not similar level for sure.
Mehmet Sevim
Okay, great. Thank you. And if I may, just the second question, and that will be on Croatia. Do you see any opportunities or pressure points across the P&L lines once they enter the Eurozone? And maybe, for example, in the fee line, FX fees, etcetera?
Laszlo Bencsik
Very clear Yes, absolutely. The conversion, I mean this is – FX conversion fee income is meaningful there given the tourism, and this is going to be there. But I think the benefits we are far outweigh this negative, especially mid to long-term.
Mehmet Sevim
Okay. Great. And if I may, just finally, any color you can provide on the NIM drop in – sorry, in Romania and Croatia finally, and particularly Croatia, I was interested, given obviously, the rate trajectory in the Eurozone at the moment.
Laszlo Bencsik
I mean it’s related to the past corporate loan growth, right. Corporate loan growth is extremely strong. And corporates have typically lower margins than the retail.
Mehmet Sevim
Okay, great. Thanks so much.
Laszlo Bencsik
Thank you.
Operator
Thank you. The next question is from Hai Thanh Le Phuong, Concorde Securities.
Hai Thanh Le Phuong
Hi. Thanks. Can you hear me?
Laszlo Bencsik
Yes.
Hai Thanh Le Phuong
Yes. Okay. So, thanks for the presentation. I have a question on your asset quality moving to 2023. And I know that it’s pretty hard to forecast anything or to say anything. But ex-Ukraine, Russia and particularly Hungary, could you share with us like what is your view on non-performing loans? I mean are we talking about in the worst case, the doubling NPL or it will grow but maybe not significantly, or what is your view on that? Thanks.
Laszlo Bencsik
Certainly, the expectations are very far from double venture. So, I don’t see that scenario. I mean the risk cost rate this year for ex-Russia, Ukraine countries was quite low, right. And so far, and it’s going to remain low and last year was quite low. So, compared to last year, this year, there will be an increase in the risk cost rate, but we don’t expect anything dramatic.
Hai Thanh Le Phuong
Okay. Thanks.
Operator
[Operator Instructions] As there are no further questions, I will hand it back to the speaker.
Laszlo Bencsik
Thank you very much. Thank you so much for joining us today and listening to the presentation, and thank you for your very good questions. The next conference call will be when we present the year-end numbers, early March. So, I hope you will join us for that occasion as well, until then, all the best and goodbye. Thank you very much.
Operator
Thank you for your participation. The third quarter 2022 conference call is closed now.
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