Hungary OTP reveals dividend proposal - Huge surprise!

Dividend

The OTP is not a dividend stock, so investors are not buying it for the dividend on earnings, but it is an interesting question how much dividend OTP can pay in the current situation. The bank was not allowed to pay dividends on its 2019 and 2020 profits due to the central bank's pandemic-related measures. However, the MNB did not extend the restrictions on dividend payments, share buybacks and performance bonuses previously imposed on the credit sector at the end of last year, which means that OTP, like other Hungarian banks, can pay dividends again.

It has now emerged from the proposals just published by the General Assembly that

• the general reserve will be increased by HUF 12.53 billion;
• HUF 120.25 billion will be paid as dividend from the net profit for the period of which the amount for 2019 and 2020 is HUF 119.25 billion and the amount for 2021 is HUF 1 billion.

The first part of the second point is not a surprise, as the management has already communicated several times about the dividend to be paid on the 2019 and 2020 profits, and in the latest earnings report and at the subsequent press conference they announced that they plan to pay the amount, which is the dividend amount already deducted from the equity capital. According to Portfolio's calculations, OTP can pay out HUF 434.6 per share adjusted for treasury shares.

The big surprise (which the bank has not previously communicated) is the dividend payable on last year's profits, which analysts projected to be HUF 386 per share, but instead the HUF 1 billion in 2021 translates into only HUF 3.6 per share, i.e.

OTP WILL PAY VIRTUALLY NO DIVIDEND ON LAST YEAR'S RESULTS.

The fact that the bank pays virtually no dividend on last year's results sends two messages:

• the positive message is that, presumably largely in response to the war in Ukraine, OTP's management is preparing for expected losses by building up reserves, and
• the negative message is that there really is trouble.

In view of the fact that the Russian army is practically erasing Ukrainian cities one after the other and brutal sanctions have been imposed on Russia, it's not a bad idea to prepare for an extremely bad scenario for the two OTP operations involved.

Overall, we do not think that the share price should react sensitively to the sharp cut in the dividend, as the move has a positive connotation, even though it has not yet been communicated by the bank, but there will be many who bought OTP shares partly because of the dividend and are now facing the news. It is a logical move by management to slash the dividend, thereby somewhat strengthening the capital adequacy of the banking group in preparation for expected losses in Ukraine and Russia.

Share buybacks

Shareholders will also decide on share buybacks. It was defined as the purpose of the authorization for the Board of Directors to acquire treasury shares in the interests of, for instance,

• supplying the shares necessary for the management incentives system that is in place at the Company
• developing and maintaining the Company’s services provided to its customers and
• implementing transactions related to the optimisation of the Company’s capital. 

The Board of Directors is entitled to acquire up to a maximum of 70 million OTP shares, provided that the number of treasury shares does not exceed 70 million.

The current treasury stock is 3.3 million shares, meaning there is plenty of room for share buybacks.

Should the acquisition of own shares take place in a reciprocal transaction, then the consideration applied in such transaction may be a minimum of the share’s nominal value, and a maximum of 150% of the highest price recorded on the Budapest Stock Exchange on the day preceding conclusion of the transaction, or, in the case of a stock-exchange transaction, 120% of the closing price recorded on the Budapest Stock Exchange on the day preceding conclusion of the transaction. The Board of Directors may exercise its rights set forth in this mandate until 13 October 2023.

Cover photo: Ákos Stiller/Bloomberg via Getty Images