Hungary OTP Q1 performance exceeds expectations (3)

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Quite oddly, Hungary’s OTP Bank has come out with its own consensus estimates on its first quarter this year. And its Q1 performance turned out better than expected; OTP reported higher numbers than what the market projected on the main profit rows. The bank’s corporate tax was smaller than the consensus, and its provisions also came in below the median estimate. This is the main reason why the after-tax profit exceeded expectations in Q1.

The ratio of 90+ days overdue loans has risen further, and this is bad news for those market players who expected not a deterioration but an improvement in the loan portfolio. It seems they’ll have to wait a little longer for that. The loan portfolios at OTP’s Serbian and Montenegrin units have shrunk further and their quality got brutally worse. It did not help either that management has been cutting operating expenses drastically; they just cannot keep up with the pace of the revenue erosion and the net interest margin is decreasing further too.

But let’s not be overly gloomy about these things. We see a number of positive developments when we take a closer look at the Q1 earnings report. Firstly, we have a new superstar, the Russian subsidiary, the after-tax profit of which grew sixfold (!) compared to the base period and delivered about 20% of the group’s pre-tax profit. Secondly, every subsidiary bar the Serbian and Montenegrin arms have contributed to consolidated pre-profit. While this may be attributed to one-off items in certain cases, a superficial look at the numbers could be enough for investors to think about buying OTP shares now.

OTP Bank’s loan/deposit ratio improved further and its capital position grew even stronger. OTP does not fail to emphasise in the report that its capital adequacy and Tier1 ratios are “significantly higher than that of for OTP’s main competitors in the region."

The main points of the earnings report are the following:

• Higher-than-expected numbers on the main earnings rows
• Accelerated deteriorating in the quality of the consolidated loan portfolio
• NIM rises at group level
• Lower provisioning
• Outstanding performance in Russia
• Problematic operation in Serbia and Montenegro
• CAR, Tier1 ratios improve further
• HUF 7.2 bn special bank tax was paid in Q1 (the levy, which is the same as in 2010, is due in four equal parts every quarter this year)

OTP Bank reported better-than-expected figures for the first quarter in its preliminary earnings report on Thursday. Its after-tax profit overshot the consensus estimate by 9%, partly because provisions were smaller than projected and partly because consolidated tax burden turned out smaller than what the market has foreseen. Effective tax rate dropped to 14% from 22%.

Revenues (excluding provision revaluation) was only 1.5% below the consensus and both net interest income and net fee and commission income grew in annual terms.

On net profit level OTP has - as usual - overshot analysts’ expectations. It has done so in seven of the past nine quarters.

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