OTP Group: 2021 1Q results

Despite temporary lock down measures introduced in many countries the operation of OTP Group remained uninterrupted in 1Q. The second Serbian integration has been progressing smoothly and was successfully completed on 30 April 2021. The total volume of 1Q adjustment items represented -HUF 24 billion within the accounting earnings of HUF 93.3 billion (after tax) which is around half of the magnitude of whole year 2020 adjustments. There were three major items occurring in 1Q:

• almost -HUF 19 billion banking tax at the Hungarian operation;
• -HUF 3.5 billion effect of acquisitions (after tax) related mainly to the Serbian, Slovenian and Bulgarian banks;
• the impact of the treasury share swap agreement between MOL and OTP, previously shown as a one-off item, is presented amongst adjustment items starting from 1Q 2021 and this line represented -HUF 2.4 billion. Such volume is shaped by the share price performance of those individual stocks, but more so by the dividend pay-out practice. Given that in case of banks NBH asked them not to pay dividend until 30 September 2021, if the dividend ban is lifted, that particular item might reverse later this year.

1Q consolidated adjusted profit comprised HUF 117.3 billion, almost four times higher than in the base period. The adjusted ROE for the period increased to 18.6% (+13.1 pps y-o-y).

The size of profit after tax to a great extent was shaped by the significant drop in total risk costs (1Q: -HUF 8.5 billion, -91% y-o-y). Within the quarterly profit the contribution of foreign subsidiaries comprised 47% (+16 pps y-o-y). All of them turned to be profitable, in absolute terms the biggest y-o-y improvement was demonstrated by the Bulgarian and Russian operations.

The 1Q operating income shows favourable picture by improving 16% y-o-y, while adjusted by OBS and FX the increase was 16.7% y-o-y. Total income grew dynamically, +6% y-o-y (w/o OBS and FX-adjusted +8%) with net interest income increasing by 1% (w/o OBS and FX-adjusted by 3%), while net fees & commissions income grew at a faster pace (+4%, w/o OBS and FX-adjusted by 5%). Other net non-interest income surged by 81% y-o-y.

The consolidated NIM improved by 5 bps q-o-q reaching 3.47% (-40 bps y-o-y). The higher net interest margin was mainly due to the Hungarian and lesser extent to the Croatian, Ukrainian and Russian operations.

Apart from OTP Fund Management in 1Q all operations enjoyed q-o-q improving net earnings mainly because of lower risk costs. 1Q profit contributions by foreign subsidiaries were less distorted by FX moves: the average HUF rate against UAH depreciated by only 0.2% q-o-q, whereas against RUB by 1.5%, respectively. As for the whole Group, it was again the Ukrainian subsidiary posing the highest ROE for the period (1Q: 29%).

Operating income in 1Q improved by 5% q-o-q. Total income eroded by 2% q-o-q, within that the net interest income grew by 3% mainly due to OTP Core, whereas net fee & commission income dropped by 13% q-o-q as a result of base effect (in 4Q OTP Fund management results were boosted by HUF 7.3 billion success fee revenues), and seasonality. Other net non-interest income was marginally lower q-o-q.  1Q operating expenses were seasonally lower and coupled with the shifting of certain deductible taxes in Hungary this line dropped by HUF 13.3 billion q-o-q (-8%).

Like previous quarters bottom line earnings were shaped to a great extent by risk costs. Total risk cost volumes in 1Q dropped by 84% q-o-q (1Q 2020: HUF 91.7 billion, 4Q: HUF 52.1 billion, 1Q 2021: HUF 8.5 billion). As a result, the quarterly risk cost rate melted down to 0.3% (1Q 2020: 2.57%, 4Q: 1.17%).

The FX-adjusted consolidated performing (Stage 1+2) loan volumes in 1Q increased by 2% q-o-q (+HUF 233 billion, w/o OBS divestment), following a 3% growth in the previous quarter. Regarding Stage 1+2 volume developments at Group member banks, during the first three months out of major Group members the fastest increase was posted by the Hungarian, Ukrainian and Romanian operations (+3-3 and 4% q-o-q, respectively). As for the Russian subsidiary volumes eroded by only 1% q-o-q compared to a 3% q-o-q decline in 1Q 2020.

As for the major loan segments, the consolidated FX-adjusted performing mortgages and consumer loans organically grew by 2%, whereas the corporate exposure increased by 1% q-o-q. Out of individual performances OTP Core excelled itself by the 7 and 14% surge in consumer and SME segments q-o-q.

The consolidated loan portfolio quality remained stable in 1Q: the DPD90+ volume growth (adjusted for FX and the effect of sales and write-offs, as well as for the revaluation of Factoring claims in Hungary) decelerated significantly, the HUF 9 billion growth is well below the quarterly average seen in 2020. The consolidated DPD90+ ratio declined further (1Q: 3.73%, -0.5 pp q-o-q). The Stage 1+2 exposures comprised 94.3% of total gross loans (HUF 13,772 billion) by the end of 1Q 2021.Within that Stage 1 loans represented 81.1% of total gross loans and the Stage 2 ratio was 13.2%. The Stage 3 ratio under IFRS 9 was 5.7% at end 1Q, unchanged q-o-q (-0.1 pp y-o-y). The own coverage of Stage 1, 2 and 3 exposures was 1.0%, 10.8% and 63.0%, respectively.

Participation rates in payment moratoria everywhere demonstrated a declining trend. One could see a material participation rate only at OTP Core (32.5%), Merkantil Group (21.3%), the Croatian operation (5.2%) and SKB (4.7%) by the end of March 2021.

The FX-adjusted deposits grew by 3% q-o-q (+HUF 474 billion). Similar to the loan volume pattern, the fastest deposit inflow was registered at the Hungarian, Ukrainian and Romanian operations.

The consolidated net loan-to-deposit ratio declined by 1 pp q-o-q, to 75%.

At the end of March 2021 the gross operative liquidity reserves of the Group comprised EUR 8.9 billion equivalent (flat q-o-q).

At the end of March 2021, the consolidated Common Equity Tier 1 ratio under IFRS was 15.6% (+0.2 pp q-o-q and +1.7 pps y-o-y). This ratio equals to the Tier 1 ratio.