OTP Group: results for first nine month of 2021

For the first nine months Group-level trends played out overall positively. According to the management guidance:

• Based on the ytd performing (Stage 1+2) loan volume growth of 11%, the loan book might expand by around 15% (FX-adjusted) for the whole year.
• Assuming that positive risk trends continue to prevail, adjusted ROE for 2021 may end up between 18-20%.

OTP Bank’s management is committed to distribute dividends, including the HUF 119 billion dividend amount after 2019 and 2020, which had been already deducted from the regulatory capital. Regarding the dividend to be paid out after the 2021 financial year, the Bank so far has deducted HUF 64.8 billion.

The nine months consolidated adjusted profit of HUF 373.6 billion exceeded the base period by 61%. The total volume of 1-9M adjustment items represented -HUF 38.3 billion within the accounting earnings of HUF 335.3 billion (after tax), of which -HUF 7.2 billion was booked in 3Q.

The major items were as follows:

• -HUF 9.2 billion related to the Hungarian payment moratorium (after tax).
• -HUF 4.6 billion effect of acquisitions (after tax) related mainly to the integration costs of the Serbian, Slovenian and Bulgarian banks.
• +HUF
  6.4 billion related to the treasury share swap agreement between MOL and OTP, as the model calculation for the share price performance and the dividend pay-out practice has been updated.

Based on the first nine months consolidated adjusted profit of HUF 373.6 billion, the adjusted ROE for the period stood at 18.8% (+5.7 pps y-o-y). Apart from the Romanian subsidiary the nine months profit for all foreign subsidaries exceeded the 2020 full-year results. The profit contribution of foreign subsidiaries increased by 4 pps y-o-y to 52%.

For the first nine months of 2021 OTP Group realized HUF 483.5 billion operating profit (+22% y-o-y). Total income advanced by 10% y-o-y with net interest income growing by 8% and net fees & commissions income increasing even faster, by 13%. Other net non-interest income surged by 23% y-o-y.

Despite the nine months net interest margin eroded further (9M 2021: 3.47%, y-o-y -22 bps), the pace of decline was less than half of that in the base period and showed signs of stablisiation in the recent quarters. Despite the lower NIM the net interest income adjusted for FX and the sale of the Slovakian bank y-o-y surged by 10% due to the robust increase of performing loan volumes. The stronger business activity coupled with higher transaction volumes had a positive impact on net fee & commissions income, too. Despite the strong business activity nominal operating expenses in 9M remained basically flat y-o-y at Group level, though the reclassification of the Hungarian local business tax and innovation contribution (IPA) from the cost line into the corporate tax also took its toll. Adjusted for IPA and the sale of the Slovakian subsidiary the FX-adjusted y-o-y increase would be 6.1%. The nine months cost-to-income ratio fell below 50%.

In 3Q 2021 OTP Group posted HUF 127.3 billion adjusted profit after tax underpining a q-o-q 1% decline. The adjusted ROE for the period was 18.3%.

Similar to the last two quarters the pre-provision profit demonstrated a decent performance (+9% q-o-q, FX-adjusted) with all Group members demonstrating q-o-q improving results.

With the exception of the Romanian subsidiary all other Group members posted positive 3Q results, in most cases the profit after tax improved q-o-q. The profit contribution of foreign subsidiaries in 3Q comprised 53% remaining flat q-o-q, but increasing y-o-y by 4%.

It was positive that similar to the previous quarters consolidated NIM remained stable (3Q: 3.46%, q/q -2 bps). Out of the major Group members there was a marginal NIM erosion at OTP Core, as well as at the Serbian, Croatian and Slovenian subsidiaries, but it remained flat q-o-q in Bulgaria and improved in Ukraine. The lower q-o-q Russian NIM is reasoned by increasing funding costs and also, by structural changes within the loan book. Despite the higher rates the positive impact remained muted due to the slower repricing of 3 or 6M Bubor based assets; also, the massive deposit inflow increased total assets substantially and had a diluting impact on NIM.

The meaningful q-o-q surge in F&C is definitely explained by strengthening business activity and higher transactional volumes: in 3Q the Croatian operation posted an outstanding result (+21% q-o-q) on the back of the strong tourist season, but OTP Core also posted a decent performance (+9% q-o-q). Operating expenses grew marginally q-o-q (+1%); all the three major cost items increased in 3Q. As a result, in 3Q the cost-to-income ratio improved by 2.1 pps q-o-q to 47.2%.

The steady increase of FX-adjusted consolidated performing (Stage 1+2) loan volumes continued in 3Q: following a 5% growth in the previous quarter it expanded by 4% q-o-q. As a result, the growth of performing loan volumes ytd reached 11% (+HUF 1,421 billion). The y-o-y expansion demonstrated similar dynamism. During the first nine months, out of the major Group members the fastest loan growth was posted at the Ukrainian, Romanian and Hungarian operations (+31%, 17% and 15%, respectively). The Hungarian payment moratorium had a 1% positive impact on the consolidated portfolio volume, whereas at OTP Core it contributed to the loan growth by around 3%.

While in 3Q the volume growth at the three Group members remained steady (+10, 7 and 5%, respectively), the Russian loan book also expanded in a spectacular way (+8% q-o-q), true, such leap was mainly reasoned by an expansion of car loans and corporate exposures, whereas the POS, cash loan and credit card book increased only moderately. Apart from the stagnating volumes in Slovenia and the marginal decline in Montenegro, the loan book in other geographies kept increasing.

As for the major loan segments, during the first nine months the consolidated FX-adjusted performing corporate exposures increased by around 10% ytd, whereas the consumer and leasing loan book grew by 11% each and the mortgage portfolio by 12%, respectively. Out of individual performances the Hungarian consumer book surged by 25% ytd, the corporate portfolio by 14%, and the mortgage book by 11%.

The 3Q Stage 3 ratio under IFRS 9 was 5.2%, -0.2 pp q-o-q (-0.5 pp y-o-y). The own coverage of Stage 1, 2 and 3 exposures were 1.1%, 10.4% and 64.4%, respectively. By the end of 3Q 2021 material participation in payment moratoria amongst Group members was only in Hungary, but even there the ratio demonstrated a declining trend with 24.0% at OTP Core and Merkantil Group (versus 28% in 2Q). By 31 October 2021 the participation ratio comprised 6.8% and 1.0% of the retail and corporate gross portfolio at OTP Core in case of clients who optedin the extended moratorium. At Merkantil Group such ratio comprised 1.0%. In other countries, where the participation ratio was substantial, no meaningful credit quality deterioration occurred, Stage 3 ratio improved q-o-q in all those geographies.

The FX-adjusted deposits grew by 6% q-o-q, thus ytd volumes advanced by 10% or HUF 1 813 billion. As a result, in 3Q the trend observed for many quarters and temporary interrupted in 2Q came back again: in absolute terms the expansion of deposit volumes outpaced that of loans. The Hungarian deposit volumes surged massively in 3Q by 8% q-o-q (+HUF 710 billion).

As a result, the consolidated net loan-to-deposit ratio decreased from 77.1% to 75.6% q-o-q.

The volume of total risk costs in 3Q reached HUF 25 billion, as a result for the first nine months it comprised HUF 43.2 billion versus HUF 135.9 billion in the base period. The substantial q-o-q increase in 3Q was due mainly to one-offs and methodological fine-tunings.

At the end of September 2021, the gross operative liquidity reserves of the Group comprised EUR 8.2 billion equivalent (-EUR 0.4 billion q-o-q).

At the end of 3Q 2021, the consolidated Common Equity Tier 1 ratio under the scope of consolidation according to IFRS was 15.4% (-0.5 pp q-o-q). This ratio equals to the Tier 1 ratio.