OTP Group: 2016 Q1 results

The banking group still has strong liquidity and capital position, with significant profit improvement.

The consolidated accounting profit was HUF 34.3 billion in 1Q. As the management flagged earlier there was only one larger adjustment item: the HUF 13.4 billion banking tax (after tax). The amount incorporates the whole annual Hungarian banking levy recognized by the Hungarian group members in 1Q, as well as the prorated Slovakian banking tax. The consolidated accounting profit was HUF 34.3 billion in 1Q. As the management flagged earlier there was only one larger adjustment item: the HUF 13.4 billion banking tax (after tax). The amount incorporates the whole annual Hungarian banking levy recognized by the Hungarian group members in 1Q, as well as the prorated Slovakian banking tax.

OTP Group posted HUF 47,6 billion adjusted profit in 1Q 2016 which underpins a significant increase both y-o-y and q-o-q. The improvement was due to the reduction in risk costs; the operating income shrank both y-o-y and q-o-q. The adjusted profit before tax represented HUF almost 64 billion (+109% y-o-y and +167% q-o-q). The effective tax rate was 25.6%, the amount of the total corporate tax more than doubled. The higher tax burden was related partly to OTP Core as a result of the tax shield effect of the revaluation on subsidiary investments due to exchange rate moves.

After the declining trend of the FX-adjusted loan portfolio during the last couple of quarters, in 1Q the loan book already expanded by 2%, y-o-y it still eroded by 3%. Within that mortgages sank by 2%, however consumer loans already grew by the same magnitude. The large corporate portfolio advanced dynamically (+8%) and the micro and small loan portfolio kept growing, too (+2% q-o-q). As a result, OTP Bank’s corporate loan market share2 improved to 14.5% (+0.7ppt q-o-q and +1.4 ppts y-o-y).

With respect to the risk assessment of the loan portfolio the development of DPD90+ volumes is quite representative. As a result of the improving macroeconomic environment, but also due to FX household loans’ conversion and the portfolio cleanup at the Russian and Ukrainian subsidiaries in 2015, DPD90+ loan volume growth adjusted for FX rate movements and the effect of loan sales and write-offs amounted to HUF 35.4 billion. Since the base period was distorted by the massive volume developments in Hungary as a result of the FX loans settlement and conversion, the trend is better demonstrated by comparing DPD90+ formation in 2014 and 2015. In 2014 there was a record inflow with HUF 254 billion followed by HUF 133 billion a year later. Regarding 2016 1Q developments, in absolute terms the biggest inflow was registered in Russia (HUF 17 billion). At the same time the portfolio practically did not deteriorate in Ukraine and Bulgaria, whereas at OTP Core the formation was moderate (HUF 5.3 billion). The consolidated DPD90+ ratio remained unchanged at 17.0%, its coverage somewhat decreased (92.5%), but remained comfortably high.

Group level risk cost rate dropped to 1.3% (-1.7 ppts q-o-q and -2.4 ppts y-o-y).

The FX-adjusted deposit volumes shrank by 1% q-oq, but still increased by 4%y-o-y. Out of the major group members, deposit volumes at OTP Core and DSK Bank remained flat q-o-q, but dropped in Russia, Ukraine and Romania by 10%, 3% and 2% respectively.

The consolidated net loan to (deposit+retail bonds) ratio was 67% marking a moderate q-o-q increase.

The adjusted after tax profit of OTP Core (basic activity in Hungary) reached HUF 28.9 billion in 1Q 2016, underpinning a moderate y-o-y decline and q-o-q 4% increase. The operating profit without oneoff revenue items remained stable q-o-q.

Individual profit contributions changed a lot in 1Q due to the improving Russian and Ukrainian performances: OTP Core posted HUF 28.9 billion adjusted net profit, DSK Bank realized HUF 13.8 billion, whereas net earnings in Russia comprised HUF 2.6 billion and in Ukraine 0.9 billion, respectively. Other CEE subsidiaries contributed HUF 2 billion in total; none of them were in red. Touch Bank posted HUF 1 billion loss in 1Q.

As for the foreign subsidiaries’ performance, all foreign banks (but Touch Bank) posted profit with strong Bulgarian results and further improving operations in Russia and Ukraine.

By the end of March 2016 the consolidated Common Equity Tier1 ratio under IFRS was 13.2% (-0.1 ppt q-o-q). OTP Bank’s stand-alone Common Equity Tier1 ratio stood at 22.4% in 1Q 2016 underpinning a q-o-q 0.2 ppt decline.