Equity 21 March 2012, 10:59am

ANALYST VIEW - Morgan Stanley downgrades Hungary's OTP, cuts target price 16%

Portfolio

Hungary’s OTP Bank could face more severe macro environment pressures in Hungary and Ukraine. The main risks in Hungary’s eastern neighbour is currency devaluation, while a potentially negative outcome in the IMF/EU bailout talks weigh the most on the bank locally, Morgan Stanley said in a research note on Wednesday. MS analysts see little upside risk over the next 10-12 months and downgraded OTP to relative ‘Underweight’ within their EEMEA banks portfolio, and cut their target price by 16% to HUF 3,600, implying a 9% downside. The analysts, however, acknowledge re-ratign potential on a longer-term horizon.

The analysts said they would turn more constructive on the outlook for the shares on credit inflection points in Bulgaria and Ukraine.

“We believe OTP remains, to a degree, a “macro" call and the most exposed stock to Hungarian sovereign deterioration," the analysts added.

Morgan Stanley’s economist applies a 30% probability of currency devaluation in Ukraine in early 2013 and the analysts noted IMF/EU support for Hungary has weakened over the last month. “We see this translating into higher risk for spreads and funding costs."

Net interest margins (NIMs) in Hungary, Bulgaria and Ukraine remain challenging, yet Russia offsets in part for an overall group marginal contraction of 10bps to 450bps in 2012e.

“In Hungary, key pressures stem from repayment/fixing programs, CHF/HUF spread delta of 100bps, shaves cc. 10 bn of NII (3% NII) and swap re-pricing. In Ukraine and Bulgaria, negative restructured migration pressures loan yields."

“FX repayment scheme (net loss HUF 34bn) and FX fixing scheme (net loss HUF 11bn) pressure margins as balances decline and HUF/CHF spread differential costs 100bps. While there are still a lot of moving parts, we believe the additional impact is likely at HUF10-15bn pa," the analysts said.

The cumulative results of FX mortgage programs and swaps cost OTP 50bps off its Hungarian NIMs, they noted.

In the analysts’ view, provisions are a key driver of earnings as credit cycle improves: they believe “impairment curves are showing signs of inflection in many parts of OTP’s portfolio."

Whilst they do acknowledge some markets will continue to face pressure in 2012e, they see group level cost of risk declining to 281bps from 418bps in 2011. “This will further decline in 2013 reaching more normalized 255bps levels."

Morgan Stanley cut its target price for OTP 16% to HUF 3,600 from HUF 4,300 previously. “We see little upside risk over the next 10-12 months and downgrade OTP to relative Underweight within our EEMEA banks portfolio."