Hungary's OTP Bank posts record Q3 net profit (2)

Note that while in full-year figures OTP's net profit and after-tax profits are virtually the same, the difference in quarterly reports tends to be some HUF 100 million.

OTP boosted provisions in the volume of HUF 5.8 billion in Q3 to HUF 9.2 bn, and while the quarter-on-quarter growth came to 168.2%, the size of provisions in July-September was not bigger than in H1 altogether.

The heavy fluctuations of the forint exerted a heavy impact on results. Swap deals brought a positive impact on the net interest income line, while non-interest income dented it.

DSK remained the brightest star on the OTP sky. Apart from the record Q3 profit, OTP also made history by the fact that its loan-to-deposit ratio increased to over 100% (102.8%, +3.4 percentage points q/q and +7.4 ppts yr/yr).

Irrespective of one-off items on or off, OTP Bank is en route to meet its annual goals. The onus will now be put on 2007, where the gap between the management's views and analysts' expectations is still rather large.

Domestic performance of OTP will be hit hard by the government's fiscal adjustment package, while the consolation of newly acquired units (Investsbersbank, Raiffeisen Ukraine) is also to shift into focus.

Key items in the Q3 earnings report

• One-off items helped OTP reach the record profit


• Lending activity remained largely dynamic, while deposits hardly grew, therefore the loan-to-deposit ratio climbed to over 100%


• DSK boosted Q3 profit by 39% yr/yr


• Full-year profit target got confirmed


• Swap deals had an impact on profits; net interest income rose outstandingly, while non-interest income dropped substantially

OTP's Q3 results were helped by the following:

• the sale of tangible and intangible assets resulted in a revenue of HUF 4.2 billion


• refound of VAT after real estate transactions brought HUF 1.4 billion


• the proceeds from the sale of MasterCard shares amounted to HUF 1.7 billion


• these items had a positive pre-tax earning effect of HUF 7.2 billion, and HUF 6.1 billion PAT

Swap deals helped net interest income

Total loans and advances jumped by 24.5% yr/yr and climbed 4.2% q/q in July-September at the OTP Group. Total deposits expanded by 15.6% yr/yr and 0.8% q/q. This led to a 102.8% loan-to-deposit ratio ((+3.4%-point q-o-q and +7.4%-point y-o-y), which is above 100% for the first time in OTP's history. The majority of OTP's local peers have this ratio above 100% for quite a long time now.

OTP's total assets grew by 25.7% yr/yr or 7.7% q/q to HUF 6,175 billion in the third quarter. The bank's equity rose by 24.2% yr/yr to HUF 651 billion.

Quality of OTP's loan book under IFRS was good. At the end of September 2006 performing portion represented 86.0% of total, 9.7% was to-be-monitored. Non-performing loans (NPLs) were 4.3% of total, by 10 bps higher than in the previous quarter. 24.5% of qualified loans and 28.9% of NPLs were in the books of foreign subsidiaries.

The 46.2% q/q growth of net interest income is deceptive, as the rise to HUF 106.9 billion in Q3 was down to swap deals. Without the swap results, however it was almost flat (HUF 81.9 billion, -0.7%) to Q2.

Due to this, the net interest margin in 3Q 2006 increased sharply by 195 bps, reaching 7.18%, while the swap-adjusted figure (5.50%) showed a 40 bps drop.

Volume of provisions grew by HUF 5.8 billion (+168.2% q-o-q), reaching HUF 9.2 billion. Such significant quarterly growth is manly due to the low base. The increase in provisions may be considered positive despite the deteriorating loan portfolio because it evaporates even the faintest suspicion that OTP wants to reach its full-year target by keeping provisions low.

Swaps and one-off items repainted the picture of non-interest income. Because of the significant losses on the FX-line, the volume of non-interest revenues (HUF 56.8 billion) was by 20.6% lower than in Q2 and by 11.0% yr/yr.

The bank's total non-interest income grew by 18.9% yr/yr, contributing to a 28.3% pre-tax profit increase (to HUF 62,946 m). Net income went up 30.6% and even without extraordinary items, the rise came in at nearly 16%.

OTP Bank's ROA (Return on Assets) was 3.43% (-2 bps), the ROE (Return On Equity) was 32.6% (-0.1%). Although the values are quite massive, the one-off items make them irrelevant.

OTP's Q3 cost-to-income ratio was 53.7%, down 2.2% q/q and 3.1% yr/yr.

Subsidiaries

The most significant contribution to the Group's total earnings came once again from DSK Bank: though its net interest margin of 5.34% shows a 125 bps decline yr/yr, its HUF 5.6 billion profit after tax grew by 45.9% on a yearly base. The gross loan portfolio grew by 34.3% q-o-y (-1.6% q/q), deposits increased by 28% (+1.4% q/q), respectively. Adjusted by the volume of loans sold and co-financed, the gross loan portfolio grew by 5.2% q/q and 49.1% yr/yr, respectively. As a result, the bank managed to keep, even increase its dominant market position in terms of total assets, retail loans and deposits.

OTP Banka Slovensko while keeping its market share managed to significantly increase its deposit book (+4.4% q/q, +34% yr/yr). Due to a significant prepayment item loans decrease both only on a yearly base (-0.7% yr/yr and on q/q -0.3%). Its profit after tax of HUF 628 million represents a 36.1% improvement on a yearly base.
OTP banka Hrvatska kept its position in case of major balance sheet indicators: its loan book grew by 42.9% yr/yr, deposits increased by 25.6%, respectively. The profit after tax of HUF 856 billion represents a 18.3% quarterly decline.

OTP Bank Romania dynamically increased its loan book; it grew by 362.8% yr/yr and 47.3% q/q. The loss after tax of HUF 334 billion was smaller by 69.2% q/q, but still reflected the costs of ongoing network enlargement (8 new branches opened) and staff hiring.

OTP Garancia Insurance pre-tax profit for Q3 2006 reached HUF 2.0 billion, which was by 3.5% higher than in Q3 2005. Premium income was 9.2% higher than in Q3 2005 and accounted for HUF 22.1 billion (Q3 2005: HUF 20.2 billion).

IFRS pre-tax profit of OTP Fund Management for Q3 2006 was HUF 1.4 billion, after tax profit reached HUF 1.2 billion, an increase of 9.4% and of 8%, respectively over the same period of 2005. Total assets exceeded HUF 12.3 billion and shareholders' equity was close to HUF 9.9 billion.

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