Equity
Moody's upgrades Hungary's OTP Bank
Upgrade, affirmation
Moody’s said it has- upgraded OTP Bank’s long-term and short-term local currency deposit ratings to Baa2/Prime-2 from Baa3/Prime-3; and
- affirmed the bank’s Baa3/Prime-3 long-term and short-term foreign-currency deposit ratings.
The outlook on OTP Bank's local-currency deposit rating is changed to stable from positive, whilst on the foreign-currency deposit rating the outlook remains stable.
Concurrently, the rating agency has upgraded the bank's baseline credit assessment (BCA) and adjusted BCA to ba1 from ba2 and its junior subordinated debt rating to Ba3(hyb) from B1(hyb). The bank's long-term and short-term Baa2(cr)/Prime-2(cr) Counterparty Risk Assessments (CRA) were affirmed.
Moody’s has also upgraded OTP Jelzalogbank Zrt.'s (OTP Mortgage Bank) backed issuer rating to Baa3 from Ba1. The upgrade, it said, is driven by the upgrade of its parent OTP Bank's ratings and reflects the high level of integration, the full ownership and the guarantee from its parent.
OTP Mortgage Bank's Baa2(cr)/Prime-2(cr) CRAs were affirmed in line with the CRAs of the parent bank.
Ratings rationale
- The upgrade of OTP Bank's BCA reflects improvements in the bank's asset quality and profitability, as well as maintaining adequate capitalisation and good funding profile.
- OTP's non-performing loans (NPL), defined as all loans 90+ days past due, declined to 12.2% of gross loans as of end-June 2017 from 14.7% at the end of 2016 and 17% at the end of 2015. The decline in NPL ratio was driven by a reduction in the NPLs stock in all core markets of the group.
- Risks stemming from the still large stock of NPLs are mitigated by a high level of cash coverage, with loan loss reserves standing at 97.7% of the NPLs as of June 2017.
- OTP's capitalisation is adequate with consolidated CET1 ratio of 14.1% as of end-June 2017, rising from 13.5% in December 2016. Moody's expects the bank's capital adequacy to moderate at lower levels over the next few years due to planned acquisitions and a stronger lending growth.
- OTP Bank's funding remains primarily based on deposits, which account for 87% of total liabilities as of end-June 2017. The bank's loan to deposit ratio increased slightly to 80.4% as of end-June 2017 from 78.2% as of year-end 2016. The group's largest Hungarian and Bulgarian operations are market leaders in their respective countries for retail deposits.
- OTP Bank's net income for H1 2017 amounted to HUF134 billion, an increase of 44% from the corresponding period of 2016 (excluding income from the VISA sale transaction recorded in 2016). Consequently, the bank's return on assets (ROA) rose to 2.2% in the first six months 2017 from 1.74% in the first six months 2016.This improvement was mainly due to a sizable reversal of loan loss reserves but also rising net interest and fee incomes.
What could move the ratings up/down
An upgrade of OTP's Baa2 local-currency deposit ratings could be prompted by- (a) an upgrade of its BCA, or
- (b) an increase in uplift resulting from Moody's LGF analysis;
- the bank's Baa3 foreign-currency deposit rating is constrained by the respective country ceiling for Hungary and will be upgraded if the ceiling is raised.
- OTP Bank's BCA could be upgraded in the event of a further material improvement in asset quality while preserving adequate capitalisation and good profitability.
A downgrade of OTP Bank's Baa2 local-currency deposit ratings could be triggered by
- a downgrade of its BCA and/or
- a reduction in rating uplift as a result of Moody's LGF analysis;
- OTP Bank's BCA could be downgraded in case of a material erosion of the bank's capital or a significant deterioration of asset quality.
