Eastern engine pulls Hungary OTP Bank's train in Q1 (2)

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Hungary's largest commercial bank OTP has on Tuesday reported HUF 50.38 billion net income for the first quarter of 2007, up 9.1% year on year and 1% higher than the consensus forecast for HUF 49.78 billion in a Portfolio.hu poll. The Q1 result creates a good basis for OTP Bank to meet its full-year profit target of HUF 211.6 billion. On the other hand, we do not believe the earnings report will be enough in itself to give a boost to the share price, while negative reactions are also unlikely.

This was the first quarter when all of OTP's new subsidiaries contributed to group profits, although the bulk of it was still generated by units in Hungary and Bulgaria.

We must also underline that the Russian and Ukrainian arms are already visible to the naked eye and management have high faith in these units in respect of their contribution to group profits in the future. Main markets, however, have slowed down. If OTP had not carried out the acquisitions it had, there would be no profit growth to talk about now.

With regard to Q1 figures, OTP's net income came in higher than expected. This overperformance, however, can be regarded as usual. We do not believe management will provide any specific novelty today at a press conference, since we are only three weeks after the Investor Day and two weeks after the AGM.

We believe the earnings report will have a neutral market reaction, but could still play a role in market processes, as some investment banks are now expected to update their OTP model, opening the door for modifications to target prices. The only question is whether they will “have the guts" at a share price around HUF 10,000 to raise TP's in merit.

Key items in the earnings report:
- growth of retail lending slows - due to mainly seasonal impacts;
- loan to deposit ratio rises further;
- net interest margin excluding swaps rose at group level on a q/q basis, but erosion was observed on this line in Hungary;
- provisions leaped to over HUF 20 bn, but thanks to other incomes, actual provisions came in only at HUF 11 bn;
- dynamic growth in non-interest income, but a rise in expenses led to a pre-tax profit rise of “only" 12.1% yr/yr
- net income grew by 9.1%, a single-digit figure;
- cut-throat competition was also the case abroad, DSK's growth rate is low, Romania is still making losses, market share of the Ukrainian unit - a good performer - has eroded;
- CIR, ROE and ROA all improved in quarterly terms.

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