Dear ladies and gentlemen, welcome to the first quarter 2021 conference call of OTP Group. This conference will be recorded. As a reminder, during the presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. May I now hand you over to László Bencsik, Chief Financial and Strategy Officer. László, the floor is yours. Thank you. Good afternoon or good morning, depending where you are. Thank you very much for joining us today for the 2021 first quarter OTP Group interim results presentation conference call. I promised my colleagues to be relatively short in the overall presentation. As far as I understand, we have received some gentle feedback that I'm sometimes too loquacious. I will focus on a couple of slides, maybe less than 10, just to highlight some messages which we consider particularly important. The presentation will be used is on the website. It was uploaded at 1:00 P.M. Central European Time, so hopefully you've been able to look at it, but we are also showing it on the screen while I'm talking. Let's start on page four, maybe, which shows the P&L, the major P&L lines for the group. There are some remarks which are worth making. Obviously, we had a good quarter, almost as good as the third quarter last year. That was driven by risk cost primarily, obviously. If you look at the last five quarters, the risk cost dynamics, the first quarter last year was quite high with this HUF 92 billion, and then it went somewhere lower, close to HUF 40 billion second quarter. Then the third quarter was really low, and therefore we actually achieved last year, third quarter, historic high profit level. Then the first quarter, last quarter, last year, we also provisioned more. Now all these provisionings last year were related to kind of forward-looking expectations, IFRS 9 methodology, not actual credit losses. What we identified were more like anticipations of potential future losses, which so far have not really manifested. Therefore, in the first quarter, we didn't provision much, because there was no need. If we look at the 90 days past due developments or the Stage 3 ratio or the 90 days past due ratios, they improved and did not deteriorate, so there was no reason to further provision. Putting aside the risk cost part of the story, I think the most important number here is the operating profit year-on-year adjusted growth rate. There are a couple of adjustments which we made here. First one for FX, exchange rates, and then you probably remember last year we divested Slovakia during the fourth quarter. We made a kind of classification methodology change in Hungary relating to operating expenses. There was HUF 4.4 billion equivalent of local taxes, which we pay in Hungary quarterly, roughly this amount. It's roughly HUF 16 billion-HUF 17 billion per year. It's quite a big amount. It has been so far, it used to be in operating expenses. It's really a tax based on revenues, not on profit, but revenue tax. It's paid on local municipality level. We learned now that we have changed auditors. By the way, we have now Ernst & Young. The figures what you see here are audited figures. No, sorry, for Hungary, it's audited. For the group, we have an audit review. Reviewed numbers by the new auditor, Ernst & Young. They kind of draw our attention to the fact that other banks in Hungary typically account for this local tax as corporate tax. It's very Hungarian specific, so we don't have that in any other country. Therefore, we classified it. If you make these two adjustments, then we end up with this 13% operating profit without one-offs growth year-on-year, using the first quarter as a benchmark. I think this is quite a good result given the difficulties what we have all had during the last year. That despite the COVID situation and the economic contraction, substantial economic contraction in some of the countries where we operate, all in all, we managed to increase our operating results by more than 10%. It was 13%. I think this is quite remarkable, and we are quite happy to see it, and especially because this was primarily driven by revenue growth. Revenues grew 8%. Each revenue line, including net interest income grew, and also net fees. Which is also remarkable given that the margin compression in case of the NII and the drop in business activity and transaction volumes during the COVID situation, which had a negative impact on fees. The next slide, I think I should talk a little bit more about is this page A, about margins. We have had this long story of margin compression. For many years now, we have experienced quarter-on-quarter, year-on-year compression in margins. When we talked about our expectations regarding this year net interest margin, we said that it may continue to decline. Indeed, if you look at year-over-year expectations, last year, the annual net interest margin was 3.61%, if we compare to this number, it was very likely that the annual number for this year will be lower. However, what happened during the first quarter compared with last quarter last year, fourth quarter, margin actually increased, not by five, but by four. These are rounding problems here, basically four basis points, primarily driven by margin increase in Hungary, which was then driven by the end of this temporarily lower APR of newly disbursed consumer loans last year. They jumped up to their market levels and also the moratorium-related negative adjustments, which were made last year, gradually come back to NII over the course of the duration of the portfolio. That was also lifting up the Hungarian margin. The question is whether this situation will continue over the course of the year or not. My short answer would be that we don't know exactly. There are a lot of factors at work here, and if all the factors work out for our benefit, then we can imagine a scenario where there will not be further quarterly decline in margin. Again, this would be a kind of lucky best scenario. Due to the very intense price competition, it is quite possible that we will see further slight decrease in margins. Let's move to volumes, page nine. Quarterly loan volume dynamics. Given again, that we had in the first quarter, the end of the second wave and the first half of the third wave of the virus in most of the countries where we operate. Operationally, and in terms of COVID-related restrictions and the negative ramifications on the economy, this was still a very much negatively affected period. Despite all these headwinds, we managed to grow the portfolio 2% just in one quarter. Hungary was particularly strong with 3%, and within Hungary, consumer loans 7%. Part of this was this Subsidized baby loan, this Subsidized baby loan. If you just look at market-based cash loans, their volumes grew 4.8%, so almost 5% quarterly growth in market-based cash loans in Hungary, which is quite a good number. Housing loan growth wasn't astronomical, but in fact, if we look at new submissions of loan applications, then year-over-year, if you compare this quarter with the first quarter of last year, then the increase was 35% in terms of housing loan applications by clients. Russia remained negative, but this is seasonal. In previous years without COVID, we had seen similar low growth in the first quarter or in the second quarter. This is the country where we expect the biggest recovery, the strongest adjustment in the trajectory of portfolio growth. You may remember that last year, Russian volumes declined by 11%. If all goes according to expectations, then second half of this year, we should see a very robust growth in our Russian volumes, maybe more than 200%. In the other countries, we expect marginal improvement and actually acceleration of lending activity. Some countries it might be quite robust, which were not so strong so far due to the improving economic conditions and the kind of petering out of the COVID-related restrictions. 2% in loan growth. If we go to deposit growth to page 11, it was actually 3% on a quarterly basis. Nominally, the difference was obviously much bigger. HUF 250 billion more or almost HUF 30 billion more HUF deposit growth than the loan growth. This last quarter was typical in a sense of the last five quarters, that deposit growth nominally was much stronger than loan growth, and therefore our excess liquidity further increased. This we hope to turn around second half of this year, and hopefully second half we are going to see larger nominal loan growth than deposit growth, and then we slowly again start to kind of improve and build back the efficiency of our balance sheet. Okay, maybe a few words about net fee income, 13. Here what you can see is that, year-on-year, we had 5% FX-adjusted net fee income growth without the divested OBS, the Slovakian bank. Here what you see is a very mixed picture. Some countries, Hungary, Bulgaria, were growing quite fast. Then you can see some negative numbers here. Then I think the overall 5% is not bad. It could have been better if some countries were not kind of laggards and not have actually negative growth. Let's have a look at this. We have Croatia and Montenegro with -3% and -17%. Obviously, these two countries, they have a very large exposure to tourism, and typically transactional revenues are related to tourism, tourist industry, tourists spending money, ATM withdrawals, et cetera. This did not happen during the course of basically last year, and that had an impact on the first quarter as well. In these two countries, I think we believe it's quite reasonable to expect improvement once the COVID situation is over. In Serbia, it was just a technical reclassification, which happened in the first quarter this year. If we'd had that technical change, it was actually positive. We have Russia, where again, it was the biggest negative nominally, the year-on-year change, and that is purely due to the loan volumes. The new loan generation, which is still lower than last year, and we typically generate fee income in Russia when we sell new consumer loans and we also sell insurance products and we get the commission. That's a large part of our revenue stream in Russia. As soon as volume growth turns around here and starts to increase again, we believe it's reasonable to expect fee income to grow as well. All in all, again, I think 5% growth in this environment year-on-year is not bad, but it could have been better if these countries were not underperforming. Once they do come back to normal performance after the COVID restrictions are over, hopefully we will see even higher growth rates. Maybe a few words about operating costs, page 15. Overall, if we do adjustments to the divestment of OTP Banka Slovensko, FX, and the spend of HUF 4.4 billion I mentioned, the reclassification of local taxes, the year-on-year growth for this quarter was 3%, which is, I think quite okay. Still here as well, you can see some negative numbers. We've actually managed to decrease the cost base, and it's primarily Bulgaria, Serbia, Montenegro and Croatia. These are the four countries where we have done mergers during the last three, four years. It started with Croatia, then Serbia, then Bulgaria, then Montenegro. The last one, the latest happened in Serbia just over the last weekend, was very successful. All of these were on time, on budget. As you can see, in each case, we still have some cost savings manifested. It's Serbia where we should see further cost synergies to manifest due to the last acquisition, what we did. The last line, what you see here, this growth in the first quarter, that was just related to a consolidation of an entity which used to be out of the consolidation, which required last year. Maybe page 19. I mentioned the Serbian merger, which was done successfully on time, on budget. In fact, this is the third merger which we finished during the COVID situation. Just to remind you, last year, end of April, we finalized the merger in Bulgaria, just in the middle of the COVID lockdowns, where we had very serious lockdowns. Back last year in December, we did the Montenegrin merger, and now we finished the merger in Serbia. With these, we actually completed the integration and merger process of this second wave, this last bunch of acquisitions, what we have made. The SocGen assets plus the NBG asset in Serbia. Now all the merger processes are over. With this last action, we actually created a bank in Serbia which has the largest loan volumes. This is the largest bank by loan volumes in terms of market share. By assets, we are number two, actually deposits are not making huge returns nowadays, so we are quite happy to have a leading position in lending volumes. The good thing is that actually, even during this merger process, we managed to substantially improve and increase our volumes, as you can see on this chart, and also our market shares actually in Serbia. Despite being busy with the merge during this period, we managed to increase our market shares as well, which is a huge credit to all our colleagues who worked on this to Serbia and brought together this fantastic performance. Maybe next slide, page 20, the long book. Not much happened in terms of Stage migration or credit portfolio quality change. Therefore we didn't provision much as you know. In fact, the Stage 3 ratio remained stable, and the provisioning levels also remained more or less stable. As you can see on this chart, we believe that we are very conservative with provision in terms of Stage 1 and Stage 2 loans, the performing loans compared to some other banking groups. We believe that there's a lot of reserve here in case our optimism related to future is not manifesting, which is unlikely, by the way. Finally, maybe a few words about the macro situation and expectations regarding to the macro situation, page 24. Across the countries where we operate, we expect a very robust economic recovery once the COVID situation is over, and we expect this to be over by the end of the second quarter. Maybe some countries will come out faster and some countries somewhat slower. By the third quarter, we expect all of these countries to be out of the negative effects of the COVID-related restrictions, and therefore we expect a very robust economic growth period to start with high consumption, high labor demand, increasing wage inflation, increasing inflation in general. In this environment, we expect new investments to start and new capacities to be built. Therefore, strong kind of investment cycles to start. That is, again, it's true for pretty much all the countries where we operate. Especially, if we talk about the timing, it's maybe worth noting that Hungary is the most advanced in terms of the vaccinations in Europe. We have vaccinated more than 40%. It's like 43% of the population in Hungary has received the first jab. Hungary is quite in the forefront of vaccination and we pretty soon should reach a level where this kind of herd immunity kicks in, and then we can safely operate without strong restrictions. In a nutshell, this was what I intended to present, but I'm very sure that you have a lot of questions which we will attempt to answer. Please, I'd like to ask my colleague to open the floor for questions. Thank you. Ladies and gentlemen, we will now begin our question and answer session. If you have a question for our speaker, please click on Raise Hand icon to indicate or press star nine on your phone's dial pad. The first question is from Andrzej Nowaczek, HSBC. Hello. I have a couple of questions. First, can you talk a bit about the Hungarian loan moratorium? The participation rate seems to have dropped somewhat, but that's probably because of strong loan growth, right? How do you gauge what will happen after this ends in June, July? What are the metrics to look at here? Indeed, maybe we can go to the slide where we had indeed, the number dropped, 32%, that's 32% of the gross loans. As you rightly pointed out, typically this number moves because the overall portfolio, so the denominator increases. What the experience from other countries where the participation rate was much less than Hungary, but where the moratorium ended already back last year during the COVID situation, so not in this dynamic economic growth environment that we expect to be there by July, but in the middle of the COVID situation. In Bulgaria, the Stage 3 ratio out of those clients who exited the moratorium is less than 3%. In Romania, it's 5%. We only see higher numbers in Croatia and in Montenegro, which were hit hardest by the whole COVID situation due to the large exposure to the tourism industry. In these countries, it's like 8%, 9%. Again, in these countries, the participation ratio was much smaller, between 5%- 10%. Out of this 5%- 10%, when the moratoriums ended, between 3%- 8%, 8%, 9% actually ended up in Stage 3. If you assume that in these countries where the participation ratio was much smaller, actually the kind of more exposed or higher credit risk clients entered the moratorium as a first place, and they ended up with these ratios, then I think it's fair to assume that in Hungary we should not see higher than probably lower, like in Bulgaria or Romania, 3%-5%, with moratoriums which were between 6% and 10% of total portfolios. I can't imagine that numbers will be higher in Hungary when in Hungary, first of all, a much bigger kind of participation rate we have. The timing of the moratorium ending will be in the middle of a kind of huge rebound in economic activity. Therefore it should be kind of low single digit, the actual default rate of the moratorium volumes in Hungary, based on former logic and experience that we have in other countries where the moratorium already ended. In that context, and given the low amount of loan loss provisions in Q1, why didn't you revise your cost of risk guidance? Because we believe that the cost of risk this year should be less than last year. Materially less, presumably? I think that's fair to assume, yes. Okay. Thank you. Quickly, just one other thing, I noticed the number of employees in Hungary is rising again. What is it due to, and what is the outlook for salary increases and bonuses in Hungary and across the platform? Thank you. It's increasing economic activity. We are extremely busy. If you go back-- maybe we can show these two slides. Hungary, Csaba, one on corporate and one on retail. This is corporate. If you just go to the corporate. Corporate lending, in fact, just the first quarter-- no, this is retail. If you go to corporate. Just in one quarter, first quarter this year, micro and small company loans increased 14% due to this Funding for Growth Go! program where we basically issued almost HUF 600 billion loans. These are small loans, right? A huge work, huge operational work. If you go back to the retail slide on 16, again, applications, we accepted 35% more mortgage applications, housing loan applications first quarter this year than first quarter last year. That's a massive growth of activity. That's more or less the reason behind the FTE growth or the fact that it's not getting less. In terms of wage dynamics, I think it's fair to expect, again, high, maybe even double-digit level of wage inflation coming back quite soon. Even today, the labor market is relatively tight. Unemployment levels are low. Once the heat will be on the second half of the year, I expect in general inflation to go up, but wage inflation will be for sure higher and stronger than CPI. Which is going to, again, generate pressure on the Hungarian efficiency. Actually, if you look at our cost-to-income ratio, group level first quarter, it was 51.2%. Obviously, if you want to compare it to previous quarters, then you have to adjust back with this HUF 4.4 billion, which we reclassified. If you make that adjustment, on group level, it was 52.7%. Right. The Hungarian cost-to-income ratio first quarter was 50.5%. These are not bad numbers, right. In such a low rate environment and low net interest margin environment. Okay. That's great. Thank you very much, László. Sure. Thank you. The next question is from Anna Marshall at Goldman Sachs. Please unmute your microphone and go ahead. Good afternoon. Thank you for the presentation. A couple of questions from me, please. Firstly, on the outlook, I've noticed that basically you've removed the outlook slide from the presentation, and I appreciate you've already commented on some elements like cost of risk or margin trajectory, but generally, is there anything else you can comment on the other elements of the previous outlook? Do you expect a more positive, less positive dynamics there? This is my first question, then the second one on M&A. You said that you've completed the merger processes that you initiated before. How does the picture look like going forward? In particular, can you comment on the attractiveness of some of the markets that have been mentioned in the past? Thank you. Well, in terms of outlook, we did not put the slide because we haven't changed the outlook. Basically, we made five statements. First was that the ROE may be higher this year than last year. Based on the first quarter, I think it's a very valid statement that it may be like this. In first quarter, we made the adjusted ROE was more than 18%, and the accounting ROE was almost 15%. You probably remember that we accounted for the entire bank tax for the whole year in Hungary. Therefore, typically, the accounting result of the group is lower in the first quarter. Then we said that we expect around similar levels of loan growth like last year. Last year we had 9%. Here, I think the first quarter results of 2% is actually quite positive and quite supporting to believe that indeed it will be at least as much as last year, given this narrative what we have, that we expect the loan growth to materially accelerate second half of this year, especially in places like Russia. net interest margin, again, the outlook was that it may continue to decline, and I said today that we still expect it to decline on a year-on-year basis. Quarter-on-quarter, it's another story. There are many factors here, and if everything goes extremely well, then it may actually not decrease further on a quarterly basis. risk cost, as I said, we said that we expected this year to be lower than last year. We continue to expect that. We said that the cost to assets ratio may be lower this year than last year. Last year we had 2.9%. The first quarter was 2.63%. Again, if we make this adjustment with the local taxes, then it's 2.71%. I think it seems possible that we can get to this level. That's the outlook. No change, basically. No change in general. I think the first quarter results made these statements what we made when we presented the last year results even more probable, I think. The second question was related to M&As. Indeed, we have completed the merger, so we kind of digested the last wave of acquisitions, and now they are firmly rooted in the group structure and the organization and churning out efficiently returns. We are very happy. It's not just the IT mergers and the system changes and the processes and organizations, but I think also culturally, we managed to integrate these entities in a positive way. In a way that OTP itself improved and reached a higher level by combining our strengths with the strengths of other organizations and actually creating something more than the two previous units. I think we have gained a lot also in terms of knowledge, culture, approach, diversity, which are extremely important for our future success. Indeed, we feel quite ready to continue and do further acquisitions and do the very difficult job of integrating and merging further banks into the group. Here, obviously, our intention alone is not enough. We need assets, good assets for sale, and we need buyers who agree with, or sellers who agree with our assessment of the values of assets. We are working on these stories. As always, we refrain from commenting press releases or something appearing in the press. If you excuse me, I won't make specific comments on any of these other than that we are working hard on various opportunities as we speak. Thank you. Thank you. Thank you. The next question is from an attendee joined via phone. I open the line. May I ask your name and the name of the company? Hi, good afternoon. This is Máté Nemes from UBS. Thank you for taking my question. I have two of these. Firstly, on net interest margin. I just like to refer back to what your comments on competitive pressure in some markets on net interest margin. I am just wondering if you could give us a bit more color on which countries and perhaps which markets do you see the most pressure that could influence for the group NIM. This in the context of obviously some positive developments on monetary policy rates in some jurisdictions like Ukraine and Russia. That's the first question. The second question is on Hungary mortgage lending, specifically. On slide 16, you're showing that OTP's market share and mortgage loan contractual amounts have declined slightly in Q1. It seems like this is really the first time for a long while. I'm just wondering if you can comment on the reasons for that. Are you seeing any, let's say, irrational behavior in the market from some of your competitors perhaps to pick up volume, or are there any specific reasons for that? Thank you. Yes. Okay. Price competition in different countries. Clearly, the most competitive environments from our perspectives are the ones which are either in the Eurozone or quasi Eurozone countries are kind of joining the Eurozone, especially Slovenia. As you can see on this slide, this is the lowest net interest margin country. Slovenian corporate loan pricing from our perspective is getting to a territory which we find hard to understand. To say, why our competitors are going to those levels. Bulgaria started to continue to experience this margin pressure and very high competition. Bulgaria last year joined ERM II and they're moving closer and closer joining the Eurozone. I think our kind of Eurozone-based competitors already consider it Eurozone and Eurozone risks. We see quite much decline there as well. On the other side, just as you mentioned, in Russia, Ukraine, where the rate environment started to increase and where we have rate hikes and inflation pressure. It seems that the margin environment is somewhat more accommodating. I think these are the two kind of ends of the spectrum. On one end, Russia and Ukraine, which now seems somewhat better from a margin perspective, and Bulgaria and Slovenia on the other end, which is fiercely competitive and declining. The mortgage market share, can we go to that slide on Hungary? Maybe 16, I think. I would not try to read into this any kind of tremendously meaningful story. It's still quite high. Disbursement, in our case, was lower in the first quarter. This is partially due to the fact that December, November was weak due to the restrictive measures regarding the second wave of the COVID situations. The first quarter was extremely active in terms of new applications, as you can see here is 35%. What happened that new subsidized structures kicked in and also the VAT decrease for new residential developments, and there is a new subsidy type for refurbishments. I think what happened that our clients kind of waited, and they postponed their real estate kind of purchasing and mortgage applications from the fourth quarter last year, when already these new measures were known but not yet introduced, and they actually made the applications in the first quarter, benefiting more from these subsidized structures. In general, whenever we talk about subsidized structures and clients who use them, we typically have a much higher market share. A good proxy to that is on the second following page 17, you see our market share from the It's not housing loan, but it's the most prominent subsidized structure at the moment. As you can see, we have 44%, 45% market share from Baby loans, much higher than our overall market share. Maybe this somewhat explains the first quarter, somewhat lower volume market share, but it doesn't mean that we are losing ground at all. Okay. This is very helpful. Thank you. Thank you. Thank you. The next question is from our kindly joined via phone again. I open the line, you will receive an automatic message about it. Thank you. This is Olga Veselova from Bank of America. Thank you very much for taking my questions. My first question is about potential provision releases. You say that you have provisioned quite a bit last year, you do not see major reasons to add provisioning now. Do you think there can be agitation for potential releases in the next quarters? If yes, then in which regions or segments you anticipate to see that? This is my first question. The second question is about the fiscal stimulus in Hungary. Earlier this year, you mentioned there was a new program launched in Hungary, Lending for Renovation How substantial this program currently is, or is it still small? Is it a nice addition to the programs which are already in operation, and do you think this will evolve into something material over time? This is my second question. My third question is about your cost outlook. You mentioned you anticipate higher CPI, and also some wage inflation in the regions over time. Can you possibly quantify your expected cost growth this year, maybe even next year, or at least trajectory? Do you think it will be mid-single digits, higher, lower? Thank you very much. Okay. It may happen that we will release provisions. I think it is very too early to talk about this. First, we should see what we expect to happen by the end of the COVID related restrictions. If we are right, then for instance, in Hungary, we expect no further restrictions starting from June. Hopefully the tourist season will be very strong in the countries which were hit hard last year, like Croatia and Montenegro. Having said that, they already lost the pre-season. That we already know that they lost the pre-season, so April, May, even June may not be too strong, but July, August, and hopefully the post season, after season turnout will be strong in these countries. If all goes very well and there's no further wave of the virus, a new version of the virus and so on and so on, then I think it can happen that we will end up releasing provisions. What you see today as provision levels, they reflect our best judgment and based on the models and our discussions with the auditors. We always tend to be conservative, and we are not going to give this up, so we believe that that's the right approach to be always on the conservative side as much as possible, given the different accounting and tax regulations. Within this context, if all goes well, yes, then there's a potential, but it's too early to count on that or kind of forecast it for sure. The Lending for construction just started, so this is quite new. Again, this is one of the reasons why I think applications were lower in the fourth quarter, and therefore actually new loans generation was somewhat less in the first quarter. Applications jumped up in the fourth quarter because people were waiting for that. It is a meaningful volume. The new volumes we expect are around HUF 50 billion for this year. We will see. It's important. But cost situation in general, cost growth. First of all, we have this 3% year-on-year growth with all the adjustments, in an environment which was somewhat muted or moderate in terms of cost development actually, because wage inflation was not strong during this period. I would be surprised to see lower levels of cost growth than this. Surely, if anything, cost trajectory should be somewhat higher than what we have seen last year. Having said that, again, we are not in a cost-cutting mode. It's really a very active growing period, what we expect to happen. In itself, how much cost grows is not a good proxy. It's more like cost to assets or cost-to-income ratios, which matter. In terms of cost to assets ratio, which is independent of the margin development and therefore we just started to use that more, we said that we expected improvement year-on-year. Indeed, if this kind of strong economic activity kicks in and hopefully revenue growth will be strong, then I think the cost efficiency ratio should, if anything, improve despite whatever cost growth we are going to see. In general, we are going to have a higher inflation environment. That's what we believe. That should have an impact on the revenue side as well. I appreciate. Thank you. Thank you. Thank you. The next question is from an attendee joined via phone. I open the line. May I ask your name and company, please? Good afternoon, everyone. This is Robert Brzoza from PKO BP Securities. I have the four following questions. Number one, you are mentioning in your report that the first time consolidation of the other subsidiaries in Hungary, taken together with the improvement in the equity consolidated entities, added about HUF 4 billion to the quarterly net profit. My question is, should we think of it as one of our new additional run rate contribution to the net profit of the group? Question number two is about cost of risk. You're commenting that the first Q recoveries at OTP Factoring were lagging previous quarters because of the upward revaluation of factoring claims, which was performed in the 4 Q 2020. Essentially, you recognized some future expected recoveries already in the 4 Q. The question being, is the new level of the recoveries seen at OTP Core, perhaps plus this HUF 1 billion reclass into other income, should it be thought as a new run rate compared to the HUF 9 billion of recoveries generated in the third and the 4 Q of 2020? Question number three, on the technical impact the HUF 2.5 billion attributed to the loan repayment moratorium on the NII. My question is, what will happen after the moratoria expire? What would be the potential impact on the NII? Finally, question number four, I was reading that there is potential for the government to cut by two percentage points the employer's contribution share of the social contribution in Hungary. Would you expect that to happen? If so, when, and would it help you to keep the labor cost in Hungary growth at a more maybe lower level than you discussed during the call or you haven't included this in your guidance yet? Thank you. Wow, okay. Starting from the first one, this first quarter. These are two very independent events, what happened. We included into the consolidation a new entity. It is an agribusiness which we acquired last year, and it has an impact on other income because its total revenues classify as other income. There was a close to HUF 2 billion positive line on the other income side, and there was roughly HUF 2 billion on contribution to the cost. The overall profit was relatively small in the first quarter coming from this entity. These two gross lags, the revenue and cost lags will stay with us. That is structural. The other one, which we said that was the result of entities which were equity consolidated. These are basically evaluations coming from our private equity type investments. We have funds. We have investments fund, we have a digital fund, we have a VC fund, we have a private equity fund, and they do generate quite good returns. There is just a kind of appreciation of the value of one of these funds and the assets in the funds. It's more of a one-off. It's not going to happen every quarter, but in a sense, structurally, we expect them to contribute substantially. They have actually quite good returns. Time to time, we expect from them meaningful profit contributions. In a way, it's one-off that this part, in a sense, that it's not going to be repeated every quarter, but it's not one-off in a sense that we expect further gains coming from these portfolios in the future, but maybe not regularly or quarterly. OTP Faktoring. Factoring recoveries and the one-off appreciation we made last year. It has some effect, not a big one. Actually, there was a structural change as well, where we reclassified HUF 1 billion to other income from risk cost. We still expect quite a robust recovery coming from the factoring volumes. The first quarter was actually better that what we planned. This value adjustments which we made last year doesn't have a big material impact on the recoveries that we are going to book this year. Indeed, we made this one-off adjustment, the impact for this year recoveries accounting wise is not that big. That means actually that we may do in the future further adjustments in the value of these volumes in factoring. You had an NII. This NII increase due to the moratorium. The moratorium was announced at the end of the fourth quarter, we accounted for this one-off net present value loss. This net present value loss is kind of spread over the duration of these loans. The positive NII impact is kind of one-off negative is going to be less and less, and we book an NII positive number to compensate for that. That should be there for the duration of the loan. This has been already done for this extension of the moratorium. There's no further impact expected, actually. You won't see much in NII when the moratorium ends. The social contribution percentage, it has decreased. This is actually the fourth year, I think, that it decreases. It has decreased actually in steps over the last couple of years. There's some further decrease. At the moment, it's 17.5%. I think it came down from something like 20. It has already kind of came down quite materially. The further decreases, I'm afraid, may not be quite strong. Pretty much the current level, I think overall, something to expect, especially now that actually, if you look at the budget deficit, it sort of exploded last year and also this year. Even for next year, the newly accepted budget includes a 6% budget deficit. This kind of special period from the EU perspective that temporarily they allow member states to run much higher deficit than the 3% expected. I think next year will be the last one where they accept that. Some kind of fiscal adjustment will need to be done after next year, and therefore, I don't think there will be a lot of room to further decrease these social contributions. Thank you. Very helpful. Thank you. Thank you. The next question is from Simon Nellis, Citigroup. Hi, everyone. Hi, László. Thanks for the call. Actually, my first question would be on Stage 2 loans. I see that they've gone down for most divisions. There was a big jump at Merkantil. If you could talk about Stage 2 loan developments generally and Merkantil in particular. Maybe I'll go one by one, just makes it easier maybe for you. Merkantil. Yeah. This new requirement, the requirements by the Central Bank, we applied for OTP Core at the year-end, but not in Merkantil. At Merkantil, we apply the requirements of the Central Bank only at the end of the first quarter. It's kind of a catch-up of what you did. That was the real expectation. In the rest of the Hungarian book, we actually did it earlier than we were supposed. That's the rationale behind the Merkantil increase. The fact that the OTP Core, so the other non-Merkantil Hungarian loan book Stage 2 decrease, is also because of the denominator is growing, right? We have a growing Stage 1 portfolio. Okay. Why generally elsewhere have Stage 2 loans been going down? It's not migration to Stage 3, so is it just improving ratings or what's happening? I'm looking at the numbers. In Romania, there is some decrease, but there also the Stage 3 ratio decreased. There's a small increase in Serbia, 30 basis points in Stage 2. Actually, it's Croatia where we had a decrease. Croatia was the other country where we had a Stage 2 decrease, and it's due to the fact that you probably remember there was an earthquake in the first quarter in Croatia, in part of Croatia. It was actually quite severe in certain parts of Croatia. We actually classified loans from that region to Stage 2 year-end, just to be on the safe side because of the impacts of the earthquake. Really, there wasn't much problem manifesting from those portfolios. In the end of the first quarter, we put most of these loans back to Stage 1 because we have not experienced fundamental deterioration. As far as I can see, it's just Hungary Core where we had decrease and it's Croatia where we had decrease, which is material in Stage 2. Okay. What is the right level of Stage 1 and Stage 2 provisioning coverage, do you think, in a more normalized environment? I think you kind of hinted that it was around 1.6%, the level you had at the end of 2019. Is that still valid or what's your thought there? That's a quite new territory, so to say. The whole Stage 1 and Stage 2 classification. Can we go to that slide, maybe, Csaba? Where we have this. This is something new. The whole IFRS 9 was basically introduced in 2019. Then already in 2020, there was a huge shock, right, to the system and an enormous challenge to the methodology. This was nothing but. It was not at all a normal kind of cyclical economic recession. It was a very special event, what happened during the COVID. Therefore, it was an extreme challenge for the models, which were obviously built on kind of normal economic cycles and their impact on portfolio qualities. I think it's very difficult. We started with 1.6%, but whether 1.6% was the right one or not, maybe our competitors are right when they have just 0.5%, right? Okay. It's still kind of work in progress. We will only know when we are through. Through a cycle Two economic cycles. Maybe in 15 years we will know quite well how much it should be, right? Yeah. Okay. Just two other quick ones. The effective tax rate going forward for OTP Core, I think it was 16% because of the tax change. Yes. Is that the likely ongoing kind of effective tax rate going forward? Yes. My other one is just on this treasury share swap, the loss. I guess that was driven by the fact that your dividends are restricted, right? Yeah. What has to happen? Basically, once you're allowed to pay dividends, that could reverse, so that would be maybe a fourth quarter event? Yes. Once this ban on dividend payments is lifted, even if we don't pay dividends in that period, this can be. This is just a valuation, right? It's valuation-based. We had to take out this year. Once the restriction is over, this should turn back. Okay. For the next couple of quarters, it'll remain negative. It will remain as it. There won't be further negative numbers. I don't think there will be material number coming in second or third quarter. Well, actually, third quarter it can, because end of September we. Okay. Yeah. There shouldn't be much in the second and third quarter. If the ban is lifted as it should by end of September, the fourth quarter, more or less, this amount should come back automatically. We can again count on this amount to be paid out as a dividend. Right. Okay. That's all from me. Thanks very much. Thank you. Thank you. If you have a question for our speaker, please click on Raise Hand icon to indicate or press star nine on your phone's dial pad. The next question is from attendee joined via phone. I open the line. You will receive an automatic message about it. Please press star six to unmute. May I ask your name and company? Sure. Again this is Robert Brzoza. Seeing that there are no further questions, I decided to maybe ask one more. It's about the Funding for Growth Scheme. Do you have any expectations regarding the volumes of this program in the following quarters? Do you think that the first quarter was rather a peak in lending, or is this rate of lending of new corporate lending sustainable for at least a year or so? So far, if you talk about the whole market, basically HUF 2 trillion was already kind of used up from a total volume of HUF 3 trillion. Two-thirds of the total program as it is defined. Obviously, I don't know what the intentions of the central bank are. Obviously, there's a chance that they further increase the overall size of the program. Originally, it started from HUF 1.5 trillion, and today it's HUF 3 trillion. They have already increased it gradually. I don't know whether they will further increase or not. Roughly, last year, again, we talk about the market, roughly there was like per week, there was like HUF 50 billion new loans issued under this refinancing program. This year it's already somewhat lower, it's back to kind of HUF 30 billion per week new loan issuance. We already see a kind of decrease in the weekly or monthly amounts of loans generated under this refinancing scheme. So far, the banking sector used up two third of the total program. I think it's reasonable to assume that for the rest of the year, the current level of lending activity can continue. Then, I think if I were the central bank, I would kind of consider the program subject to the economic growth and the economic recovery, what we see in the second half of the year. Obviously, if we reach a certain level of GDP growth and economic activity increase and investment intensification, then there will be less and less need for this specific program to continue. It's up to the Central Bank, and so far they have kept on increasing the program overall scale when we kind of were getting close to the limits of it. Okay, fair enough. Thank you. Thank you. Thank you. If you have a question for our speaker, please click on raise hand icon to indicate, or press star nine on your phone's dial pad. The next question is from Gábor Kemény, Autonomous Research. Hello. Just a quick one from me on fee income, which was growing, I think, in the mid-single digits in the first quarter. I think you previously talked about fees growing at the rate of the nominal GDP as a run rate. Is this guidance still valid? When do you think we are heading towards those levels? Thank you. Well, look, year-on-year, we grew again 5%. Given that we had a recession during this period and we had inflation, the blended inflation in the group is probably around 2%-3%. In fact, during last year overall, we grew more than the nominal GDP in these countries. That was a very exceptional year. I kind of try to explain why we did not grow actually more than what we did. It was one specific issue in Serbia, which was a reclassification. As you see on this slide, one item we reclassified from fee income to cost. That was just one technical item. More importantly, Russia specifically had a big decline, and that's a material amount what we generate typically in Russia for fee income. Fee income generation in Russia is not so much linked to transactions because we are not really a transactional bank, but the generation of new consumer loans, especially, POS loans. That was not going well last year. We had a year-on-year 11% decline in volumes, and therefore it's not surprising that actually the fee income declined. We had Montenegro and Croatia, where we had lower levels of transactions, transactional revenues due to lack of tourist activity. If these countries recover, so if tourism recovers and Russian volume growth kicks in second half of this year, then we should get to kind of higher single-digit numbers. Again, last year was exceptional because we had recessions and a relatively low inflation, and we had 5% growth. This year, obviously, especially second half, we will have very high GDP growth levels and growing inflation. It might happen that for a short period, maybe nominal GDP growth can be higher than that fee income growth. If we look midterm, I think this assumption still holds that above the nominal inflation growth. Okay, thanks. Thank you. If you have further questions fo r our speaker, please click on Raise Hand icon to indicate or press star nine on your phone's dial pad. As there are no further questions, I hand back to the speaker. Thank you very much. Thank you for joining us today. Thank you for your very good questions. I wish you all the best. Take care of yourself. I hope we'll soon see the end of the COVID situation and life can go back to normal. Have a very nice weekend, and be well. Thank you. Bye-bye. Thank you for your participation. The first quarter 2021 conference call is closed now.