OTP Group: results for 2021

Currently it is difficult to quantify the ramifications of the Russian-Ukrainian conflict on the Russian and Ukrainian operations, potential scenarios vary over a wide spectrum. Assuming that the conflict doesn’t exert a material negative effect on the rest of the Group, the 2022 performance of the rest of the Group, i.e. without the Russian and Ukrainian operations, might develop as follows:

• Performing (Stage 1+2) organic loan volume growth might be around 10% y-o-y (FX-adjusted).
• Following the steady erosion during the last couple of years the net interest margin may stabilize.
• The adjusted profitability indicator, the credit risk cost ratio and the operating cost efficiency ratio may be similar to 2021.

OTP Bank’s management continues to reckon the payment of HUF 119 billion dividend set aside after 2019 and 2020 as reasonable. However, the Board of Directors will decide on this and the proposed amount of dividend to be paid after 2021 on its March 2022 meeting, taking into account the development of the Russian-Ukrainian conflict.

In 2021 the total amount of adjustments comprised -HUF 40.5 billion within the accounting earnings of HUF 456.4 billion (after tax), by HUF 10 billion less than in 2020. Of that -HUF 2.2 billion was booked in 4Q.

The major items were as follows:

• -HUF 6.7 billion effect of acquisitions (after tax).
• +HUF 2.6 billion tax shield related to the recognition or reversal of impairment charges booked in relation to the revaluation of investments in certain subsidiaries (after tax);
• +HUF 2.2 billion related to the treasury share swap agreement between MOL and OTP, reflecting the share price changes and the updated model calculation for dividend pay-outs.
• a smaller, -HUF 255 million one-off effect was related to the extension of the Hungarian payment moratorium until 30 June 2022 (after tax).

The Group posted HUF 496.9 billion consolidated adjusted profit in 2021 (+60% y-o-y), the adjusted ROE for the period reached 18.5% (+5.5 pps y-o-y). The size of the bottom-line profit to a large extent was shaped by total risk costs, their volume of HUF 72.5 billion was around a third of that in the base period. The operating profit showed a decent picture: in 2021 the Group posted HUF 660.4 billion, 23% more than in 2020. Adjusted for FX, the sale of OBS and IPA reclassification the increase would be 19.5% y-o-y.

Total income advanced dynamically, by 13% y-o-y (without the effect of the sale of the Slovakian unit, FX-adjusted) with net interest income growing by the same magnitude, whereas the net fee & commission income grew somewhat slower (+12% y-o-y). Other net non-interest income surged by 17% y-o-y.

Despite the annual net interest margin eroded further (2021: 3.51%, y-o-y -11 bps), compared to 4Q 2020 levels (3.43%) the quarterly NIMs demonstrated either a stable or improving trend (1Q 2021: 3.47%, 2Q: 3.47%, 3Q: 3.46%, 4Q: 3.62%).  At the same time, there were several developments affecting the net interest margin negatively. On one hand FX changes had negative impact on annual NIM: during 2021 the HUF was 2.7% stronger y-o-y against the Ukrainian hryvna and by 3.8% against RUB, respectively. Also, NIM was negatively affected by the steady increase of deposit volumes through the dilution impact of higher total assets and the higher weight of low margin liquid assets. As for the whole Group, the annual NIM improved y-o-y at OTP Core, Ukraine and Russia, whereas other Group members suffered margin erosion at different scale.

As for the overall performance of the Group, all operations but the Hungarian Fund Management and CKB (Montenegro) posted y-o-y improving adjusted profit after-tax. The profit contribution of non-Hungarian Group members leaped from 41% to 51% y-o-y. In 4Q 2021 OTP Group posted HUF 123.3 billion adjusted profit after tax underpinning a 3% q-o-q decline. Regarding the individual performances the picture was quite mixed: due to the higher risk costs and seasonally higher operating expenses the quarterly profit declined in 4Q at OTP Core, DSK, OBH, OBU, CKB and SKB.

In 4Q the operating income reached HUF 177 billion, a marginal improvement q-o-q. Total income advanced by 9% q-o-q mainly due to the 11% q-o-q increase of net interest income supported by strong volumes and improving NIM. The consolidated NIM in 4Q increased by 17 bps q-o-q to 3.62%. Net fee and commission income grew only moderately, by 2% q-o-q. Two operations suffered meaningful setback in 4Q: in case of the Croatian subsidiary is was reasoned by base effect, whereas at OTP Core the usual year-end refund to credit card holders booked in a lump-sum took its toll. At the same time success fees booked at OTP Fund Management partly offset the negative impact of the above two factors. Other net non-interest income increased by 13% q-o-q.

The volume of total risk costs in 4Q grew by 17% q-o-q, within that credit risk costs surged by 45%. Following the extension of the payment moratorium in Hungary the Bank reclassified certain retail and corporate exposures into Stage 2 and Stage 3, which induced additional risk provisions.

The profit contribution of foreign subsidiaries in 4Q declined by 2 pps q-o-q and comprised 51%: the Serbian, Russian and Romanian operations posted strong quarterly net earnings. It should be noted that in 4Q FX-changes also had a distorting effect: the HUF on average weakened by 3% q-o-q against most of the currencies.

2021 performing loan volumes grew 15% y-o-y (FX-adjusted). The Hungarian payment moratorium had a 1 pp positive impact on the consolidated portfolio growth (the principal is not amortizing, and the accrued interest adds to the outstanding principal). As a result, in 2021 the performing loan portfolio expansion exceeded HUF 2,000 billion. Last year all Group members posted y-o-y volume increase. Out of the major Group members the fastest loan growth was posted at the Ukrainian (+41%), Hungarian (+19%), the Russian (+18%) and Bulgarian (+11%) operations.

As for the major loan segments, during the last twelve months the consolidated FX-adjusted performing corporate exposures increased the fastest (+19%), followed by the expansion of the mortgage portfolio (+15%) and the consumer book (+14%) and leasing exposures (+11%).

In 4Q performing volumes grew by 4% q-o-q. Out of individual performances the Russian portfolio grew by 9%, the Ukrainian by 7%, the Bulgarian by 4% and the Hungarian by 3%, respectively.

The 4Q Stage 3 ratio under IFRS 9 was 5.3% underpinning a 0.4 pp y-o-y improvement. The 0.1 pp q-o-q increase was attributable to the Hungarian payment moratorium extended in November: certain exposures remaining under the effect of the moratorium were shifted into the Stage 3 category. The own coverage of Stage 1, 2 and 3 exposures were 1.0%, 10.1% and 60.5%, respectively.

The FX-adjusted consolidated deposits grew by 16% y-o-y or HUF 2,916 billion, i.e. increased faster than loan volumes.

At the end of December 2021, the gross operative liquidity reserves of the Group comprised EUR 9.1 billion equivalent (+EUR 0.8 billion q-o-q).

At the end of 4Q 2021, the consolidated CET1 under the accounting scope of consolidation according to IFRS was 16.8% (+1.4 pps y-o-y and q-o-q). This ratio equals to the Tier 1 ratio and includes the net earnings for the period and the deducted dividend.