OTP Group: 2016 results

The banking group has still strong liquidity and capital position, with defining Hungarian and Bulgarian performance.

The consolidated accounting profit was HUF 202.5 billion in 2016 versus HUF 63.2 billion posted in 2015. Against the last couple of years this time adjustment items had a limited impact on the annual accounting profit.

In 2016 OTP Group posted HUF 201.2 billion adjusted after tax profit (+67% y-o-y). The tax burden increased by almost HUF 18 billion y-o-y, but the effective tax rate remained almost unchanged (17.8%). The operating income eroded by 7%, however it was comfortably offset by lower risk costs which plummeted to around one third in the base period.

Within the annual consolidated adjusted after tax profit significant shift has happened in case of individual contributions: after posting losses in the last two years, the Russian subsidiary realized above HUF 20 billion profit after tax, while the Ukrainian bottom line result reached HUF 10.2 billion. The y-o-y improvement was HUF 35.6 billion and HUF 50.5 billion, respectively, which mainly drove the y-o-y earnings improvement on Group level.

Despite a y-o-y decline in their net results, OTP Core (HUF 122.2 billion) and DSK Bank (HUF 47.4 billion) still maintained their dominant position. Material improvement was realized in Croatia (HUF 3.8 billion), as well as at Merkantil Group (HUF 2.6 billion) and OTP Fund Management (HUF 6.7 billion). Out of foreign subsidiaries Slovakia and Montenegro turned into red (-HUF 2.2 billion and 1.8 billion, respectively) as a result of higher risk costs. Furthermore, the Russian online operation, Touch Bank remained a loss maker in 2016, too with -HUF 5.9 billion.

The adjusted after tax profit of OTP Core (basic activity in Hungary) reached HUF 122.2 billion in 2016, underpinning a 1% y-o-y decline. 4Q the profit comprised almost HUF 24 billion (-39% q-o-q). The profit before tax improved by 2% y-o-y, within that the operating income declined by 16% as a result of lower net interest income (-6%) and higher operating expenses (+7%).

The FX-adjusted consolidated loan portfolio grew by 3% both y-o-y and q-o-q. Given the significant volumes of sold and written off non-performing exposures, volume trends in performing book would give a more realistic picture. Accordingly DPD0-90 volumes increased by 6% y-o-y and by 4% q-o-q. Within that the performing portfolio at OTP Core advanced by 12% y-o-y, true, also reflecting the impact of the AXA portfolio take-over in 4Q. Without the AXA-effect volumes would have increased by 1% q-o-q and 3% y-o-y respectively. In Ukraine and Bulgaria volumes expended quite remarkably (+5% and 4% y-o-y), whereas in Russia the strong 4Q loan sales (+10% q-o-q) broke the declining trend and the overall portfolio started growing again even in y-o-y comparison.

The loan portfolio quality demonstrated further improvement: the FX-adjusted DPD90+ volume formation (without sales and write-offs) was HUF 12 billion (versus a decline of HUF 11 billion in 2015), however HUF 15 billion growth was related to the AXA portfolio consolidation in 4Q 2016. The total volume of DPD90+ book declined by around HUF 34 billion y-o-y as a result of sales and  writeoffs. Consequently, the DPD90+ ratio dropped below 10% (9.8%, -2.3 pps y-o-y) for the first time since 2010. The coverage of DPD90+ loans by total allowances for loan losses declined to 82.7% from end-3Q 86.5%. If the AXA portfolio hadn’t been taken over net of allowances for loan losses, the coverage would have stood at 86.3% in 4Q.

Despite the ongoing interest rate reduction the FX-adjusted deposit volumes grew by 6% y-o-y. As a result the consolidated net loan-to-(deposit+retail bonds) ratio remained almost flat (66%).

By end-December 2016 the Group’s liquidity position was comfortably stable: the operative liquidity reserves of the Group comprised EUR 8.1 billion equivalent.

By the end of December 2016 the consolidated Common Equity Tier1 ratio under IFRS was 13.5%, +0.2 pp q-o-q. Neither the annual net result was included, nor was the accrued dividend amount deducted from the regulatory capital when calculating the IFRS consolidated capital adequacy ratios. Including those items the CET1 ratio would be 15.8%. OTP Bank’s standalone Common Equity Tier1 ratio stood at 24.8% in December 2016, the accrued dividend amount and retained earnings are already reflected in this number.