OTP Group: First half 2021 result

• On the back of the ytd performing (Stage 1+2) loan volume growth of 6%, for the whole year the loan book may expand by more than 10% (FX-adjusted), provided that the favourable trends seen in 1H remain in place;
• In case the positive risk development trends manifested in 1H continue, the adjusted ROE for 2021 may end up between 18-20%.

1H profit after tax was partly shaped by steadily moderate risk costs, but also by increasing core banking revenues on the back of strong business activity, as well as improving cost management. 1H accounting profit reached HUF 215.1 billion.

1H consolidated adjusted profit comprised HUF 246.3 billion, more than twice as high as in the base period (+116% y-o-y). The adjusted ROE for the period increased to 19.1%, roughly double that of in 1H 2020.

The profit contribution of foreign subsidiaries increased by 6 pps y-o-y to 51%.

For the first six months of 2021 OTP Group realized HUF 307.5 billion operating profit (+19% y-o-y). Total income advanced by 9% with net interest income growing by 5% and net fees & commissions income increasing by 12%. Other net non-interest income surged by 38% y-o-y. While the consolidated NIM (1H 2021: 3.47%) fell short of the base period by 28 bps, it stabilized during the last two quarters.

In 2Q 2021 OTP Group posted HUF 129 billion adjusted profit after tax which underpins a q-o-q 10% improvement (+57% y-o-y). The effective tax rate was 14.5%, +3.1 pps y-o-y as a result of booking IPA on the corporate tax line starting from 2021 (shifted amount in 1Q 2021: HUF 4.4 billion, 2Q: HUF 5 billion). The adjusted 2Q ROE was 19.6% versus 14.1% a year ago.

Like 1Q 2021, due to lower risk costs all subsidiaries made profit in 2Q; the most significant q-o-q improvement was realized at the Bulgarian, Croatian, Slovenian and Romanian operations, as well as at Merkantil Group. The profit contribution of foreign subsidiaries in 2Q comprised 53% demonstrating a decent y-o-y and q-o-q increase (+4% and 6%, respectively).

In 2Q the operating income reached almost HUF 161 billion (+9% q-o-q). Total income grew dynamically, by 5% q-o-q with net interest income increasing by 4% on the back of q-o-q stable NIM and surging performing loan volumes. The consolidated net interest margin remained flat q-o-q (3.47%), thus compared to 4Q 2020 NIM level (3.42%) this manifested a stabilization over two consecutive quarters already.

FX-adjusted operating expenses grew marginally q-o-q (+1%). On a Group level expenses grew sharply at OTP Core (+11% q-o-q), partially due to one-off items, however other operations managed to cut their expense base (also due to base effects).

In 2Q the cost-to-income ratio dropped below 50% (49.3%, -1.9 pps q-o-q). The FX-adjusted consolidated performing (Stage 1+2) loan volumes increased by 5% q-o-q, following a 2% growth in the previous quarter. As a result, the organic growth of performing loan volumes ytd exceeded 6% (+6.4%, HUF 860 billion) within that the positive impact of the Hungarian payment moratorium was 0.7 pp. The FX-adjusted y-o-y organic performing volume increase reached 10% (without the effect of OBS sale).

During the first six months, out of the major Group members the fastest loan growth was posted at the Ukrainian, Hungarian, and Romanian operations. Given its size, there was a spectacular 10% ytd increase realized at OTP Core. It was also positive, that practically all subsidiaries achieved volume growth, whereas in Russia the erosion experienced during the recent quarters has stopped. During the first six months, out of the major Group members the fastest loan growth was posted at the Ukrainian, Hungarian and Romanian operations. Given its size, there was a spectacular 10% ytd increase realized at OTP Core. It was also positive, that practically all subsidiaries achieved volume growth, whereas in Russia the erosion experienced during the recent quarters has stopped.

Lending dynamics to a great extent were shaped by the gradual lift of restrictions imposed upon the pandemic situation. In certain countries and particular segments, one could see massive uptick in new origination: new mortgage underwriting at OTP Core surged by 70% q-o-q and by 38% at DSK, but corporate loan origination also grew by above 60% in Bulgaria, Ukraine and Croatia. New leasing volumes jumped by more than 40% in Croatia and Ukraine q-o-q.

The Stage 3 ratio under IFRS 9 was 5.3%, -0.3 pp q-o-q (-0.5 pp y-o-y). Apart from Croatia and Serbia the Stage 3 ratio declined in all other countries. The Stage 2 ratio stood at 13.1% at end 2Q. The own coverage of Stage 1, 2 and 3 exposures were 1.1%, 10.3% and 63.3%, respectively.

By the end of 2Q 2021 material participation in payment moratoria amongst Group members was only in Hungary, but even there the ratio demonstrated a declining trend with 28.7% at OTP Core (versus 32.5% in 1Q) and 20.5% at Merkantil Group (versus 22.2% in 1Q). In Bulgaria and Serbia where the moratoria came to end, the share of exposures migrating into Stage 3 category marginally increased, however their ratio is still below 4 and 5%, respectively, of the original exposures being part of the moratorium.

The FX-adjusted deposits grew by 1% q-o-q, thus ytd volumes advanced by 4% or HUF 709 billion. As a result, in absolute terms the expansion of loan volumes exceeded that of deposits for the first time in several quarters.

The consolidated net loan-to-deposit ratio increased by 2 pps q-o-q to 77%.

Total risk cost volumes in 1H comprised HUF 18.2 billion underpinning a 82% y-o-y drop. In 2Q total isk cost volumes were HUF 9.7 billion (+14% q-o-q), of which credit risk costs amounted to -HUF 0.6 billion (1Q 2021: -HUF 10 billion). As a result, 1H risk cost rate was 0.14% (2Q: 0.02%).

At the end of June 2021, the gross operative liquidity reserves of the Group comprised EUR 8.6 billion equivalent (-EUR 0.25 billion q-o-q).

At the end of June 2021, the consolidated Common Equity Tier 1 ratio under IFRS was 15.9% (+0.3 pp q-o-q). This ratio equals to the Tier 1 ratio and reflects the net earnings for the period, as well as the accrued and deducted dividend.