Bulgarian, Ukrainian operations drive OTP earnings higher

Higher-than-expected revenue and profit

OTP’s total revenues came in nearly HUF 5 billion higher than what analysts expected, although the bank’s net interest income, and fee and commission income were almost exactly as projected. The difference should be sought in other net non-interest income which leaped 51% to HUF 19.8 bn. Operating expenses beat the consensus forecast, but operating profit was still nearly 3% or HUF 3 bn higher than projected. OTP’s risk costs also turned out lower than expected, as a result of which the bank’s Q1 after-tax profit excluding adjustment items beat the consensus by nearly 5% and the consolidated after-tax profit came in nearly 4% higher than what analysts projected.

New banks

OTP has acquired several financial institutions over the last few months, and their numbers will be gradually consolidated into group results. OTP’s Q1 P&L statement already includes the results of the bank’s new Bulgarian operation, Expressbank (and its subsidiaries), bought from SocGen. The Albanian transaction was closed on 29 March 2019, thus the 1Q earnings of the Albanian subsidiary was not reflected in the consolidated P&L, it has been booked directly in the shareholders’ equity of the Group.

Leap in total income and profit

The group’s total income rose 16% close to HUF 240 billion in Q1, which marks a new quarterly record. The increase stems mainly from the inclusion of Bulgaria’s Expressbank, but total income at the bank’s Hungarian operation (Core) also rose 9% yr/yr or over HUF 8 bn (in HUF terms), and the Ukrainian arm recorded a major growth as well (+59% or HUF 5.5 bn).

At OTP Core, total income went up 9% (excluding adjustment items), predominantly driven by the 8% improvement in net interest income. Gross interest revenues benefited from dynamic organic loan volume growth, and the placement of additional liquidity generated by the deposit inflow. Net interest income increased by 2% q-o-q, reflecting partially a base effect4, and the one-off gain realized in 1Q on intra-group swap transactions. The net fee and commission income rose by 8% yr/yr. On one hand, growing volumes and transactional turnover resulted in stronger card, deposit and transaction-related fee revenues. However, securities fee income declined further because the distribution fees on household targeted government bonds were reduced by the Government Debt Management Agency (ÁKK).

At the Ukrainian operation, net interest income shot up by 73%, net fee and commission income rose by 36% in HUF terms, but the expansion in hryvnia was also substantial at 56% and 23%, respectively. The yr/yr NII dynamics were positively influenced by the higher loan volumes as well as the increase in net interest margin (2.6 pps to 10.5%). Net F&C income jumped by 23% yr/yr supported by corporate transactions and deposit-related fee income; on the quarterly basis net F&C income was stable. On a group level, other net non-interest income increased by HUF 5.1 billion q/q (+35%). Of that around HUF 1 billion was related to the consolidation of Express Group and +HUF 2.5 billion to OTP Core.

With Expressbank incorporated, the growth of the performing loan portfolio was the largest at the Bulgarian operation, but the stocks grew also in Montenegro, Ukraine and Romania, while there was a moderate contraction at the Hungarian, Croatian and Slovakian units.

The consolidated net interest margin remained fairly stable. The NIM rose in Hungary (Core), Ukraine, Croatia and Montenegro, but it was down at the Russian, Bulgarian and Romanian operations. Without the consolidation of Express Group the consolidated NIM would have increased by 4 bps q/q.

No only income, but operating expenses also increased, by 15% on an annual basis. Adjusted for Express Group the FX-adjusted growth was 11%. Costs were fuelled by IT and digital developments, as well as by wage inflation: in Hungary for the January-February period financial sector wages nominally increased by 10% yr/yr. Also, the average number of employees at OTP Core grew by 5% yr/yr.

Shareholders may be interested to see how the synergies promised by the management after the acquisitions are materialising. The Croatian unit shows signs of success in this respect. In Q1, operating expenses decreased by 11% yry/yr and 6% q/q (FX-adjusted). Such a trend was shaped by the network rationalization (in total 52 branches were closed down in 2018), as well as by the continuing staff reduction6 (q/q 366 people, -15%, based on FTE). The cost synergy benefits were manifested through lower administrative expenses: hardware, office equipment, real estate, telecommunication costs, as well as ATM and POS-related expenses were reduced, too.

Consolidated risk costs amounted to HUF 6.2 bn, but two factors need to be highlighted here. Firstly, on the total risk costs line a positive amount of HUF 6.6 billion was recognized in Q1 in the Hungarian operation, 2% more than a year ago, but 62% lower than in the previous quarter. Secondly, risk costs grew by 54% in RUB terms and 46% in HUF terms at the Russian unit.

The group’s after-tax profit grew 12% to HUF 72.6 bn in Q1, which is a new all-time quarterly high. OTP Core delivered nearly HUF 40 bn. What should be highlighted here is that the Bulgarian operation which - supported by Expressbank - posted a larger profit than the HUF 17.4 bn after-tax profit in Q1 only once, in Q1 2015. The Croatian unit also fared well (HUF 8.2 bn) and the Ukrainian arm showed a splendid performance (HUF 8.3 bn, a new record).

The group’s return on equity (ROE) declined both on yr/yr and q/q bases.

The subsidiaries

It’s worth putting the spotlight on some of OTP’s foreign subsidiaries. The Bulgarian unit deserves our attention for its figures now include those of Experssbank; the Ukrainian should be looked at more closely for it posted a record profit; and the Albanian subsidiary should be checked out for it is now consolidated.

Bulgaria
The financial closure of the Expressbank deal was completed on 15 January 2019, thus the Q1 financial statements already included the full quarterly contribution from Expressbank and its subsidiaries. The Bulgarian banking group reported HUF 17.3 billion adjusted after tax profit in the first quarter, of which Express Group’s 3-month result represented HUF 5.2 billion. As a result of the acquisition the gross loan portfolio grew by 60%, while performing (Stage 1+2) loans expanded by 65% q/q and deposits by 46% (FX-adjusted). The Bulgarian unit now provides 22% of the Group’s total assets, gross loan and deposit portfolio and one quarter of its equity.

Ukraine
OTP Bank Ukraine posted HUF 8.3 billion an all-time high after tax profit in Q1 marking a 42% yr/yr increase (in local currency terms), while on the quarterly basis it grew by 34%. Outstanding Q1 earnings due to improving operating profit and moderate risk cost due to favourable credit quality trends. In hryvnia terms, the bank’s net interest income jumped 56% yr/yr, while net fees and commissions increased by 23%. The yr/yr NII dynamics were positively influenced by the higher loan volumes as well as the increase in NIM by 2.6 pps to 10.5%. Operating expenses grew by “only" 21%, and operating profit was up 56% yr/yr. Risk costs were marginal, as a result of which the bank posed an all-time high profit of HUF 8.3 bn.

Albania
The Albanian transaction was closed on 29 March 2019, thus the 1Q earnings of the Albanian subsidiary was not reflected in the consolidated P&L, it has been booked directly in the shareholders’ equity of the Group. Therefore this Summary does not contain a detailed stand-alone section about the Albanian operation, it will be included first in the 1H report. As a result of the Albanian transaction, consolidated total assets grew by HUF 218 billion, performing (DPD0-90) loans by HUF 121 billion and deposits by HUF 176 billion. The bank’s net loan-todeposit ratio was 70%. Within the performing (DPD0-90) portfolio the retail book represented almost half of the total - bulk of that is mortgage exposure -, 53% was corporate loans and the rest was MSE loans. This unit is small within the group, delivering only 1.3-1.4% of total assets, loans and deposits and 1.1% of equity.

Cover photo b Ákos Stiller/Bloomberg via Getty Images

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