OTP Group: 9M results

Although in the 3q OTP Group’s profit has decreased, the first nine month showed positive developments on y-o-y. The banking group has still strong liquidity and capital position.

The 9M accounting after tax profit was HUF 36.5 billion versus HUF 113.2 billion loss in the corresponding period of last year. However, those periods are hard to be compared since adjustment items varied a lot. In 9M 2015 within the Group’s accounting result the 9M adjustments represented more than HUF -67 billion in total against HUF -221 billion in the base period.

In 9M 2015 OTP Group posted around HUF 104 billion adjusted after tax profit which underpins a y-o-y 4% decline against the base period. The corporate tax burden declined by HUF 4 billion. The adjusted profit before tax in 9M represents HUF 122 billion (-6% y-o-y). The lower profit is mainly reasoned by weaker operating profit: the 9% drop in total income was only partially offset by lower operational expenses (-6%). Risk costs declined materially (-15% y-o-y).

The consolidated risk cost development demonstrates volatility on quarterly basis: while in 2Q there was a massive (30%) q-o-q drop as a result of lower risk costs in Russia and Ukraine, in 3Q on the contrary, risk costs elevated by 28% q-o-q. The increase was mainly related to Ukraine: as the management flagged earlier, the Ukrainian subsidiary allocated significant risk costs for the corporate portfolio, mostly for the legacy book which was originated before the crisis. With such a step this portfolio’s provisioning level is basically commensurate with the outcome of the recent AQR and stress test conducted under the local central bank’s supervision. In 4Q the management is still expecting high risk costs in Ukraine.

The FX-adjusted consolidated loan portfolio contracted by 10% y-o-y and by 1% q-o-q. The y-o-y erosion of the retail book was similar; however the portfolio remained flat q-o-q. The large corporate portfolio declined by 9% y-o-y and by 2% q-o-q. Only the SME sector demonstrated growth: +4% y-o-y and +2% q-o-q mainly due to a good performance of OTP Core (+12% and 5%, respectively). Within the Group the most remarkable y-o-y loan growth was achieved in Romania and Serbia (22% and 7%, respectively), the former is mainly the reflection of the acquisition. As for the particular product segments, in the y-o-y increase of corporate volumes DSK and OTP Bank Romania (OBR) posted outstanding results (+8% and 40% respectively; without the acquisition effect OBR managed to increase volumes by 8%). Within consumer lending OBR and OTP Bank Slovakia turned to be the most successful (+19% and +40%, respectively).

The DPD90+ ratio increased to 19.2% (+0.8 ppt q-o-q). There were technical reasons behind the apparently accelerating q-o-q portfolio deterioration. In 1Q 2015 at OTP Core as a result of the settlement DPD90+ mortgage volumes technically dropped by around HUF 38 billion (FXadjusted). However, the one-off refund did not change substantially the financial position of those clients and in 3Q many of them re-defaulted. resulting in a HUF 29 billion DPD90+ inflow. It was encouraging, however that in Russia the new DPD90+ volumes decreased substantially, whereas at DSK and the Ukrainian subsidiary practically no new inflows occurred.

The FX-adjusted deposit volumes increased by 3% q-o-q and by 5% on a yearly base. The biggest y-o-y volume growth was achieved in Bulgaria (16%), Serbia (20%) and Romania, the latter being supported by the acquisition effect (+57%, without acquisition still +18%). In Russia deposits eroded by 17% as a reflection of weaker lending activity, but also deposit pricing measures. In Ukraine deposits kept increasing (+2% y-o-y).

The consolidated net loan to (deposit+retail bonds) ratio dropped below 70% by 3Q.

The adjusted after tax profit of OTP Core(basic activity in Hungary) in 9M 2015 amounted to HUF 95.5 billion underpinning a 6% y-o-y decline. The pre-tax earnings dropped by 5% on the yearly basis. The key driver behind lower pre-tax profit in 9M was the weaker operating income (-9% y-o-y), as lower risk costs (-21% y-o-y) could only partially mitigate this setback.

Against a profit of HUF 8.7 billion in 2Q, the 3Q results turned into negative with a loss of above HUF 2 billion. Strong quarterly performance in Bulgaria and profitable operation in all other smaller subsidiaries was off-set by surging losses in Ukraine and by moderating, but still negative earning in Russia. As a result, for the first nine months the overall profit contribution of foreign subsidiaries dropped to HUF 4 billion.

The Group constantly enjoys strong liquidity position: by end of September the gross liquid reserves at OTP Core reached EUR 7.4 billion equivalent. At the end of September 2015 the consolidated Common Equity Tier1 ratio was 13.5%, while OTP Bank’s standalone Common Equity Tier1 ratio stood at 24.5%.