OTP Group: first nine months 2020 results

OTP closed the third quarter with a consolidated profit after tax of HUF 113.573 billion, so the profit for the first nine months of this year increased to HUF 188.171 billion at group level. OTP’s management is committed to pay dividend after 2020 in such a magnitude that it also compensates shareholders for the originally proposed divident after 2019, for which the pay-out was stopped at the request of the regulator.

The 9M consolidated accounting profit exceeded HUF 188 billion which already incorporated HUF 7.6 billion profit contribution from the Slovenian SKB Banka being part of the Group since 2020.

The total volume of 9M adjustment items represented -HUF 43.5 billion (after tax), of which -HUF 4.1 billion occurred in 3Q with the following major items:

• -HUF 5.1 billion effect of acquisitions (after tax);
• HUF 0.3 billion dividends and net cash transfers (after tax);
• HUF 0.7 billion release (after tax) related to the moratorium in Hungary effective from 19 March until the end of 2020, based on the actual participation rate.

9M consolidated adjusted profit comprised almost HUF 232 billion (-26% y-o-y). The adjusted ROE for that period increased to 13.2%.

Since the after-tax results were heavily distorted by the volume of total risk costs (HUF 136 billion related mainly to the pandemic situation), general trends are better illustrated and easier compared to base periods through the development of operating income. In 9M 2020 OTP Group posted HUF 397.5 billion consolidated operating income (+7% y-o-y). 9M total income increased dynamically (+12%

y-o-y) with net interest income increasing by 16% y-o-y, while net fees & commissions income grew at a slower pace (+7%) and other net non-interest income declined by 4% y-o-y.

The consolidated NIM eroded substantially (9M 2020: 3.68%, -46 bps y-o-y) due to several reasons: on one hand the interest rate environment declined substantially in a couple of countries (Russia, Ukraine, Romania, Serbia), furthermore, new subsidiaries consolidated into OTP Group usually operated with lower margins than the Group as a whole. It was only partially offset by the positive impact of FX moves related to weaker HUF. The 9M net interest income adjusted for acquisitions effects grew by 1% y-o-y (FX-adjusted), as a result of higher performing loan volumes.

For the first nine months operational expenses nominally surged by 16% y-o-y, however adjusted for the acquisitions (2Q 2019: the Albanian subsidiary, 2H 2019: the Montenegrin, Moldavian, Serbian and from January 2020 the Slovenian subsidiaries) the FX-adjusted expense growth would be only 3.4% y-o-y. In 3Q 2020 the Group posted HUF 117.7 billion adjusted profit. The quarterly net results improved by 43% q-o-q and by 6% y-o-y. The effective tax rate (12.6%) grew by 1.1 pps q-o-q due mainly to composition effect (an effective corporate tax burden of 22% weighed on the strong Russian 3Q earnings). In 3Q the adjusted ROE was 19.7%.

Like the previous two quarters 3Q earnings were mainly shaped by risk costs. Their total volume was only HUF 5.1 billion (1/8 that of the 2Q amount), within that credit risk costs were practically zero, as a result of different size of positive risk costs at OTP Core, and the Russian and Ukrainian subsidiaries. As a result, in 3Q all Group members posted profits with the Ukrainian operation achieving its highest ever earnings (HUF 10.9 billion). The adjusted after-tax profit contribution of non-Hungarian operations represented 50% in 3Q, there was change neither q-o-q nor y-o-y.

In 3Q the pre-provision operating profit was HUF 139.3 billion (+6% q-o-q). Total income grew by 4% q-o-q, mainly supported by the 11% surge in net fee & commission income on the back of improving business activity; the net interest income improved by 1% q-o-q, while other net non-interest income advanced by 6% q-o-q.

Following a marginal decrease in 2Q, FX-adjusted consolidated performing (Stage 1+2) loan volumes in 3Q increased by 3% q-o-q. As a result, the ytd organic volume expansion reached 6% (+HUF 753 billion). Y-o-y the FX-adjusted organic volume growth was 11% (+19% with the Slovenian acquisition).

Regarding Stage 1+2 volume developments at Group member banks, during the first nine month out of major Group members OTP Core excelled itself (+13%) followed by the Serbian, Romanian and Croatian subsidiaries. At the same time the Russian operations suffered a meaningful volume contraction (-18%), whereas the Bulgarian and Ukrainian volume erosion has stopped, and the latter could already grow. The outstanding performance in Hungary was also coupled with further market share improvement in the key product segments. In 3Q the FX-adjusted performing portfolio grew the fastest in Ukraine (+8% q-o-q), followed by the Hungarian, Serbian and Romanian volume developments. After a 2.5% decrease in 2Q at DSK Bank, in 3Q there was an increase with a same magnitude, whereas in Russia after a significant drop in 2Q, volumes declined only marginally in 3Q (-1% q-o-q), and in September they already grew on a month on month basis.

As for the main credit categories in 3Q all segment enjoyed a growth: the micro and small enterprise loan book advanced 6% q-o-q (to a great extent due to the sharp increase in Hungary on the back of NBH’s FGS Go! scheme), the consumer exposure increased by 4%, while mortgages and large corporate portfolios by 3 and 2% q-o-q, respectively. Lending activity in 3Q to a great extent was shaped by easing/lifting lockdowns and limitations, but targeted Government programmes helped too. Lending markets suffering a major setback in 2Q demonstrated robust, sometimes even above 100% rebound in new flows (e.g. Russian and Ukrainian consumer loans, Croatian cash loans).

The quality of the consolidated loan book – partially due the existing or extended payment moratoria – remained stable: the growth in new DPD90+ volumes decelerated materially (1Q: HUF 30 billion, 2Q: HUF 53 billion, 3Q: HUF 12 billion adjusted for FX and the effect of sales and write-offs). The consolidated DPD90+ ratio declined to close to 1Q levels (3Q: 4.1%, -0.3 pp q-o-q). As for the loan moratorium introduced in all countries across OTP Group, but in Ukraine, the highest participation rate was registered in Hungary and Serbia, both using opt-out solutions. The Hungarian scheme is still effective (and was extended until 30 June 2021), while the Serbian one expired by 1 October. In other geographies where the moratorium was opt-in and conditional, the participation rate was low. Furthermore, in a series of countries the scheme has already expired (Albania, Moldova, Russia), however in certain countries local regulators recommended banks to offer easier payment conditions till the end of the year.

The Stage 1+2 exposures comprised 94.4% of total gross loans (HUF 13,583 billion). Within that Stage 1 loans represented 83.4% of total gross loans and the Stage 2 ratio was 11%. The Stage 3 ratio under IFRS 9 was 5.6% (-0.3 pp q-o-q, -1.2 pps y-o-y) at end 3Q. The own coverage of Stage 1, 2 and 3 exposures was 0.9%, 11.7% and 64.7%, respectively.

Consolidated total risk costs in 3Q represented -HUF 5 billion. In 1Q a significant volume of corporate exposure was shifted from Stage 1 into a riskier Stage 2 category, in 3Q similar practice was followed in case of the household portfolio. Mainly those exposure were reclassified where the Bank presumes higher potential risk, though an actual portfolio quality deterioration has not materialized yet due to the moratoria, in particular at the Hungarian, Bulgarian, Croatian, Romanian and Serbian operations. Simultaneously, significant portion of the impairments on those exposures already made in 1Q and 2Q was shifted into the Stage 2 category, i.e. the reclassification didn’t induce any meaningful provision need in 3Q. Provisions for impairment on loan and placement losses were practically zero in 3Q, as a  result 9M 2020 credit risk cost rate was 1.14% (1Q: 2.57%, 2Q: 0.92%, 3Q: 0%).

The FX-adjusted deposits grew by 4% q-o-q. As a result, during the first nine months volumes expanded by HUF 1,035 billion (+6% ytd). The consolidated net loan-to-deposit ratio slightly declined q-o-q, to 78%.

At the end of 3Q 2020 the gross operative liquidity reserves of the Group comprised EUR 7.2 billion equivalent (+EUR 0.7 billion q-o-q).

At the end of September 2020, the consolidated Common Equity Tier 1 ratio under IFRS was 14.6% (+0.7 pp q-o-q). This ratio equals to the Tier 1 ratio.