Business 7 March 2025, 10:11am

OTP's profit exceeds HUF 1 trillion in 2024

Portfolio

For the first time in its history, OTP achieved a profit of more than a thousand billion forints. The bank's managers have long been counting in billions of euros, whether in terms of balance sheet total, revenue or even profit, and last year's result in euro terms was very close to an important milestone. Sándor Csányi told Portfolio in 2021 that the €2 billion profit is expected to be reached relatively quickly, with the next step obviously targeting €3 billion. Well, €3 billion was almost reached last year. In addition, OTP shareholders can be pleased that the bank can substantially increase its dividend, continue to buy back shares and, of course, continue to explore acquisition opportunities.

Profit of one trillion forints

This time, let's not start with the quarterly figures, but with the annual ones, because

in 2024, for the first time in its history, OTP's profit exceeded HUF 1 trillion.

In 2023, it almost reached it, but last year it exceeded it by HUF 76 billion. The Hungarian core business contributed a quarter of the HUF 1,076 billion, HUF 270 billion, and the foreign subsidiary banks added HUF 730 billion, i.e. their share of the total profit was 68 percent. The Bulgarian bank made a stable profit of ~200 billion for the second year in a row, the Uzbek bank made a profit of HUF 53 billion after a loss a year earlier, the Russian bank contributed HUF 137 billion and the Ukrainian HUF 41 billion.

Sándor Csányi, the head of OTP, said in an interview in 2021 that

the €2 billion profit is expected to be achieved relatively quickly, with the next step obviously targeting €3 billion.

Then came the war in Ukraine, so profits fell again, but in 2023 the group not only reached, but far exceeded €2 billion, and last year it added a shovelful.

(The results in EUR are only approximations, based on the HUF profit converted at the annual average EUR/HUF exchange rate.)

Strong end to the year with large provisions

But then let's look at the quarterly figures! Total income, net interest income and fee and commission income all hit new records, while operating profit was slightly below the third quarter record because operating costs soared.

The banking group posted better-than-expected revenue and operating profit figures, but because OTP set aside one and a half times the provision that analysts had expected, profit was only a touch better than expected.

The year-on-year growth is impressive, with revenue up +13%, operating profit up +21% and profit up +88% compared to a year earlier.

Only the Ukrainian bank was loss-making in the quarter, with a loss of HUF 1 billion largely due to a surge in corporate tax.

Risk costs are also worth a special mention, not only because they were much higher than analysts had expected, doubling from a year earlier, but also because this HUF 92.5 billion is

the highest quarterly provisioning ever at the bank.

Credit risk costs amounted to HUF 58 billion, mainly incurred by the Russian, Serbian, Hungarian and Bulgarian subsidiaries, while the extension of the interest rate freeze on mortgage loans in Hungary had a risk cost impact of nearly HUF 5 billion.

Other risk costs amounted to HUF 34 billion, with 3 important items: provisions were mainly made for litigation at the Croatian subsidiary, but the impairment of Ukrainian government securities was also a big item, and the provision coverage of Russian bonds in the Hungarian and Bulgarian books was also increased. The latter, by the way, is an important issue, as the total gross exposure to Russian bonds amounts to HUF 135 billion, where the provision coverage is already 73%, and if the situation there were resolved,

OTP could release provisions of up to HUF 100 billion.

Retail credit expanded strongly, portfolio quality stable

At the group level, outstanding loans increased by 4% (9% net of the sale of the Romanian bank), with retail loans up 11% and corporate loans down 7%. Corporate loans increased by 2% excluding the Romanian sale and the impact of the repayment of a large corporate loan of HUF 317 billion held on the balance sheets of Hungarian, Bulgarian and Slovenian banks.

The quality of the consolidated loan portfolio is stable, with the share of overdue loans declining to 3.6% and the own provision coverage of loans falling to 59.5%.

Improving margins

On both a quarterly and annual basis, margins improved.

Consolidated margins were mainly helped by improving margins in Hungarian operations: since the low of Q1 2023, OTP Core margins have gradually strengthened, with last year's Q4 margin already exceeding the pre-war and extremely high interest rate environment. In contrast, the recent erosion of interest rate spreads in the euro area and ERM 2 countries has continued.

What does the management expect?

In 2025, management expects a slight improvement in the operating environment:

The organic rate of growth of performing loans could exceed 9% in 2024 at constant exchange rates.
The net interest margin should be close to 4.28% in 2024.
The operating cost/income ratio could exceed 41.3% in 2024.
The risk profile could be similar to that of 2024.
The ROE could be lower than 23.5% in 2024, due to the expected decline in leverage.

How will the HUF 1 trillion profit be spent?

The big question in the coming years will be how OTP will spend the annual profit of more than one trillion forints, but analysts expect the banking group to generate a similar level of profit after tax in the coming years as last year.

What can be expected in this respect is described in a separate chapter in the management summary. The bottom line:

the top priority remains to maximise the bank's opportunities for profitable organic growth,
while acquisition opportunities are also being explored,
with the bank potentially paying a dividend of HUF 270 billion on last year's results
and the purchases of own shares may continue.

In accordance with the Management Committee's decision, a dividend of HUF 270 billion, or HUF 964 per share, has been included in the calculation of the fourth quarter capital adequacy ratios. Importantly, the final dividend proposal will be decided by the bank's Board of Directors in March and published on 3 April.

The dividend yield of 3.9% based on the HUF 964 dividend and Thursday's closing price.

Regarding capital allocation considerations, it was reported that

the bank may continue to repurchase its own shares.

Given the relatively low level of treasury shares, the cancellation of treasury shares already bought back is not on management's agenda at the moment.

With regard to target levels for capital adequacy ratios, management is committed to maintaining a strong capital position in both absolute and relative terms, and the bank aims to maintain a level of Tier 1 and CET1 ratios comparable to those of relevant regional peers.

In terms of capital allocation, the group's top priority remains to maximise profitable organic growth opportunities. At the same time, the Bank will continue to explore value-enhancing acquisition opportunities.

Pricing

OTP's share price has tripled in two and a half years and the stock is still not expensive. With a P/BV of 1.1, OTP is at the top of the mid-range of European bank shares, and if you take return on equity into account, it is still cheap. If we look only at the region, OTP is in the middle of the pack. At roughly the same pricing as Erste or Pekao, one gets a higher return on equity bank share with OTP.

OTP is also cheap on a P/E basis, with the banking group's earnings per share now close to HUF 4,000, and a P/E ratio of 6 at HUF 24,000. According to the latest recommendations, 12 analysts have a buy recommendation on OTP, 1 a hold and 1 a sell.

The average target price is close to HUF 25,000, with the highest target price above HUF 28,000.