Hungary OTP seen gearing up for something big

We wrote in 2017 that OTP had essentially a become a 'money factory'. But back then it was only about the unprecedented quarterly profits delivered by the banking group. In that year, the bank's profit was HUF 281 billion forints, a new record. In the following years the profit just kept on rising, but it was nothing compared to what came in 2023:

the banking group's profit was almost huf 1,000 billion.

If we can believe analysts' expectations, we will see something very similar from OTP in the coming years.

If we called the bank a money factory in 2017, OTP is now almost four money factories.

Of course, it's great to have a huge pile of cash, but it's not the best way to achieve an optimal capital structure if the bank is just sitting on it.

What can be done in this situation? There are several options for spending/investing money, creating shareholder value:

• It can be used to make acquisitions, as OTP has been diligently doing in recent years, such as buying a bank in Slovenia, NKBM, which was the largest acquisition in its history, or the first acquisition outside Europe, the purchase of the Uzbek Ipoteka, and there are plans to do more, even Luminor in the Baltics could be the next target.
• The money can also be spent on dividend payments, and OTP is becoming more and more active in this area, with a record HUF 150 billion dividend paid out to its shareholders from last year's profit.

OTP may also buy back its own shares. The bank has been rather active in this area this year, and in mid-February it received a single permission from the central bank (MNB) for the repurchase of Common Equity Tier 1 (CET1) instruments. Accordingly, OTP is entitled to repurchase its own shares in the amount of HUF 60 billion until 31 December 2024. It has been making these purchases so enthusiastically that the buyback scheme has ended on 13 August.

During this phase, OTP's purchases accounted for nearly 9% of daily turnover, and by the end of the programme, the number of own shares had increased to 4.4 million, or 1.6% of OTP's 280 million shares.

The most recent news is that OTP is launching its next HUF 60 billion buyback programme, for which it has already received permission from the MNB, and so repurchasing own shares to the tune of HUF 60 bn is a go until 15 May 2025.

How does this benefit shareholders?

• Firstly, because the bank's purchases of its own shares represent a sustained buying power, which can drive the share price higher.
• Secondly, the own share buyback may also send the message that it's worth buying OTP shares, which could result in additional buyers on the market.
• Also, the smaller the free float is, the higher the dividend per share (the bank does not pay dividends on its own shares), i.e. for the same amount of shares, shareholders receive a higher dividend.

Anyhow, at the current share price, OTP could buy an additional 3.3 million shares under the new HUF 60 billion programme.

Cover photo: Ákos Stiller/Bloomberg via Getty Images