Equity 9 August 2019, 9:58am

Hungary's OTP posts record Q2 profit

Nagy Viktor

OTP Bank posted HUF 105 billion revenue for the second quarter, a new record for the company. Revenue and profit were both boosted to record levels by earlier acquisitions including Bulgaria's Expressbank and the Albanian unit of SocGen, but OTP was also growing its stock of loans and deposits organically, the bank said in its earnings report early on Friday. The high results were also helped by a weaker forint, the positive effects of a share swap with Hungarian oil and gas group Mol, and low risk costs due to a reversal of impairment provisions, while negative effects included a goodwill write-off in Romania and the conversion of outstanding CHF mortgage loans in Serbia. Overall, OTP had a very strong second quarter, outperforming analyst expectations.

Well above expectations

OTP posted better results than the market had expected on all major lines as revenues were 4% higher than expected, operating profit 9% higher, while after-tax profit was 10% above the median of forecasts.

The group's total revenue grew 18% year on year to HUF 259 bn, and since operating costs rose only 11%, operating profit was 26% higher than a year earlier. After-tax profit excluding adjustments was HUF 112 bn, up 23%, while adjusted after-tax profit HUF was 105.4 bn, 18% higher than in Q2 2018.

New banks added, more to come

OTP has made a number of acquisitions in the recent period, and these are gradually being added to the group's results. Second quarter results included Bulgaria's Expressbank, which was already incorporated in the first quarter, and SocGen's former Albanian unit. Acquisitions in Montenegro and Moldova will close on 16 and 25 July, respectively, so these are not yet included in the Q2 report.

A jump in revenue and profit

The OTP group increased its revenues by 18% year on year, within which net interest income rose 17% (7% excluding the effect of new acquisitions), while net fees and commissions were 18% higher than a year earlier. The Hungarian operation posted a nearly 10% increase in income, the Ukrainian unit 40%, Romania and Montenegro nearly 20%, while the Bulgarian operation increased its revenue by 50% after the acquisition. In the second quarter, the Hungarian operation only accounted for 41% of all revenues, with the Bulgarian bank contributing 15% and the Russian unit nearly 14%.

When looking at income, it is worth noting that OTP's lending stock has grown substantially in recent quarters and the stock of performing loans was nearly 25% higher now than a year earlier. The biggest growth in lending was in Bulgaria due to the acquisition, but the stock of loans grew significantly in Russia, Ukraine and Serbia as well. Within lending, the stock of corporate loans grew 7% quarter on quarter (7% excluding acquisitions), loans to microbusinesses and SMEs rose 5%, consumer loans 4% and mortgages 2%. The stock of home loans increased by 3% in Hungary.

At the group level, net interest margin continued to decrease and was 4.2% at the end of the second quarter, although it would have been 4.33% excluding acquisitions, or 8bp higher than a year before.

Net interest margin decreased at all operations except in Romania. The biggest drop was in Russia and Ukraine, countries where the local central bank has lowered its interest rate.

In contrast, operating costs rose 3% quarter by quarter. Personal expenses were 5% higher, amortisation costs rose 7%, and administrative costs remained flat compared to the first quarter, while marketing costs rose 30% as business activity surged, and rental fees also grew substantially, OTP said in its report.

The quality of the loan portfolio continued to improve as the ratio of non-performing loans only grew in Romania, stagnating or decreasing in all other markets.. Group-level coverage was nearly 122%.

Risk costs came to HUF 4.4 bn in the second quarter, compared to the average forecast of HUF 7.8 bn. At several operations, risk costs were positive, amounting to HUF 11.2 bn in Hungary. Risk costs of the Russian operations continued to increase both year on year and quarter on quarter and came to nearly HUF 12 bn, largely as a result of a bigger performing portfolio and a change in its quality, but it also included a one-off item regarding loans sold to third parties.

As a result of a massive growth in revenue, keeping operating costs in hand, and low risk costs, the OTP group's profit grew 18% and reached a new quarterly high of HUF 105 bn. (Quarterly profit was higher in Q2 2018, but that figure include the sale of OTP Garancia.)

As usual, the Hungarian operation contributed most (HUF 58 bn), its second-highest quarterly result eve, but the Bulgarian unit also performed strongly (HUF 17 bn), while OTP's Ukrainian operation posted a HUF 8 bn profit for the second successive quarter (which was partly due to exchange rate changes).

There were also a number of one-off factors worth keeping in mind.

The average price of the Hungarian forint fell against virtually all currencies involved in the second quarter, as much as 5% against the Russian rouble and nearly 6% against the Ukrainian currency, so the revenue and profit figure was helped along by a weaker forint.
A share swap agreement between Hungarian oil and gas Mol and OTP boosted profit by HUF 7 bn in the second quarter, including Mol dividend payments of HUF 5.7 bn in June
In the second quarter, accounting after-tax profit was adjusted -HUF 6.9 bn by several items, the largest of which was a HUF 4.4 bn goodwill write-off and investment impairment, mainly related to the Romanian subsidiary. OTP also incurred a HUF 1.9 bn loss on the optional conversion of the Serbian CHF mortgage exposure into EUR.

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OTP's ROE also grew to near record level at 21.9% in the second quarter.