Equity 14 February 2007, 8:47am

Hungary OTP Bank Q4 pre-tax profit worst in 2 yrs - New era ahead?

Portfolio

Hungary's largest commercial bank OTP has on Wednesday reported HUF 40.93 billion net profit and HUF 103 billion net interest income for the fourth quarter of 2006, practically fully in line with analysts' consensus forecast. With its HUF 187.4 bn full-year net profit the bank has surpassed its target of HUF 184.7 bn. The October-December period, however, brought about substantial changes in the life of OTP Bank, as three newly acquired banks (Zepter, Investsbergank, OTP Ukraine) were consolidated, while the Ukrainian unit contributed to group results only with two months of operation. Return indicators deteriorated considerably in Q4, with the cost-to-income ratio jumping to 60.8% from 53.7% in Q3. The quality of foreign subsidiaries' credit portfolio also worsened a lot. OTP Bank's Q4 pre-tax profit was the worst in the past two years.

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Summary.

While OTP's HUF 103 bn net interest income was in line with expectations, the figure cleaned of swaps was only HUF 81.9 bn against the consensus forecast of HUF 85 bn.

The group's provision generating policy turned out to be rather interesting again, with 70% of provisions accumulated in the second half of the year. Provisions for possible loan and placement losses were 24.6% higher than in Q3 reaching HUF 11.4 billion.

The quality of the loan portfolio - mainly due to the consolidation of new subsidiaries - deteriorated significantly in Q4, Non performing loans (NPLs) were 5.6% of total, up 130 bps from Q3, 59.2% of qualified loans and 55% of NPLs were in the books of foreign subsidiaries.
The total qualified portfolio increased to 20.4% from 14%. Loan loss provisioning grew by 5.9% q/q to HUF 130.7 bn.

The reaction of the market is likely to be neutral, as investors are holding their breath for management comments. While exceeding the annual target is a positive development, the marked worsening of the loan portfolio's quality does overshadow this performance. Quarterly CIR (cost/income ratio of 60.8%), ROE (return on equity of 22.8%) and ROA (return on assets of 2.47%) were not too strong, but these indicators may improve with the entry of the new subsidiaries.