OTP Group: 2019 3Q results

9M 2019 consolidated accounting after tax profit of OTP Group was HUF 309.6 billion (+29% y-o-y), of which 3Q represented HUF 131.6 billion (+25% q-o-q). The total volume of adjustment items in 9M represented -HUF 3.5 billion (after tax), of which +HUF 21.2 billion arose in 3Q.

In 9M 2019 OTP Group posted HUF 313.1 billion adjusted after-tax profit underpinning a 19% y-o-y increase. Without the contribution of the newly acquired Bulgarian, Albanian, Moldavian and Montenegrin banks the profit would be HUF 294 billion (+14% y-o-y). The profit of OTP Core improved by 4% y-o-y and comprised HUF 145.7 billion. DSK Group’s net profit (HUF 53.8 billion) is still the second largest across the Group; the y-o-y profit improvement is reasoned by the consolidation of Expressbank.

In the 9 months, there was a substantial earnings improvement at the Croatian (HUF 26.5 billion, +27% y-o-y), the Ukrainian (HUF 25.6 billion, +40% y-o-y) and the Russian subsidiaries (HUF 22.1 billion, +17% y-o-y). Those three operations already posted more profit ytd than their total annual earnings in 2018. The Romanian ytd profit (HUF 5.4 billion) showed similar dynamics. Besides, all other foreign banks, as well as most of the local subsidiaries improved their 9M earnings y-o-y.

Out of the new acquisitions made in 2019, the Bulgarian Expressbank added HUF 15.1 billion to the first nine months consolidated profit, the Albanian subsidiary brought in HUF 2.2 billion in 2Q and 3Q, whereas the 2 months contribution of the Moldavian and Montenegrin operations comprised HUF 1.2 and 0.5 billion, respectively. As a result, in 9M 2019 those newly acquired subsidiaries added HUF 19 billion into the Group’s total profit.The share of the non-Hungarian operations’ profit contribution to the Group’s profit improved y-o-y (9M 2018: 41%, 9M 2019: 47%).

In 3Q 2019 OTP Group posted HUF 110.5 billion adjusted after tax profit (+19% y-o-y, -2% q-o-q) which marginally fell short of the all-time high quarterly result posted in 2Q 2019. The profit contribution of the newly consolidated Moldavian and Montenegrin subsidiaries comprised HUF 1.2 and 0.5 billion, respectively. The consolidated adjusted 3Q ROE decreased to 20.9% (-2.4 pps q-o-q). The profit contribution of foreign operations reached almost 50% (+4 pps y-o-y).

The adjusted operating profit for 3Q improved by HUF 13 billion or +10% q-o-q (+9% q-o-q without the Moldovan and Montenegrin subsidiaries), At the same time the volume of total risk costs (-HUF 11.6 billion) increased by HUF 7.2 billion q-o-q. Furthermore, the effect of the MOL-OTP treasury share swap agreement (-HUF 2 billion) presented amongst one-off items explains -HUF 8.3 billion out of the quarterly profit dynamics. For the fair assessment of 3Q earnings one should consider that the average HUF exchange rate against all subsidiary currencies weakened q-o-q: by 1.6% against the Bulgarian, 1.9% against the Croatian currencies, by 7.9% against UAH and by 2.7% against RUB.

The growth of the FX-adjusted performing (Stage 1+2) loan portfolio accelerated in 3Q, as a result the FX-adjusted loans organically expanded by HUF 830 billion, or +10% ytd in the first 9 months. Including the impact of the five completed acquisitions (the Bulgarian, Albanian, Moldavian, Montenegrin and Serbian) the performing portfolio grew by HUF 2,710 billion ytd (+33%, FX-adjusted).

As for the major credit categories in 3Q the Stage 1+2 consumer book grew the fastest (+19% q-o-q, +10% without acquisitions), the corporate portfolio advanced by 13% q-o-q (+3% w/o acquisitions), whereas the mortgage exposure increased by 11% q-o-q (+2% w/o acquisitions). OTP Core demonstrated an exceptionally strong quarterly growth in consumer loans (+43% q-o-q) explained by the origination of the subsidized baby loans starting from 1 July 2019. During the first three months the contracted volumes at OTP Bank comprised HUF 124 billion, which was around 45% of the whole market. Within the Hungarian mortgage portfolio the housing loans grew by 3% q-o-q (+HUF 29 billion). Simultaneously, the home equity loans kept further eroding (-3% q-o-q).

In line with the improving macroeconomic environment and the steadily good recovery results of the work-out activity, risk indicators in total improved. At the end of 3Q 2019 the ratio of Stage 3 loans was 6.9% (-0.8 pp q-o-q); the own provision coverage of Stage 3 loans was 65.9% (+0.1 pp q-o-q). The DPD90+ ratio dropped to 5.0% (-0.6 pp q-o-q). In 3Q the DPD90+ volume growth (HUF 23 billion adjusted for FX and the effect of sales and write-offs) was smaller than in 2Q 2019, bulk of the q-o-q increase was related to the Russian subsidiary, and to a smaller extent to the Ukrainian, Core and Bulgarian consumer loan portfolio.

Stage 1+2 volumes comprised HUF 10,975 billion, their ratio to total gross loans was 93.1%, of which the Stage 1 ratio stood at 88.1% and Stage 2 at 5.0%. The consolidated 3Q risk cost rate was 25 bps (1Q 2019: 24 bps, 2Q: 15 bps). Thus the 9M risk cost rate stood at 21 bps, basically matching the 2018 average (23 bps).

The FX-adjusted deposit portfolio grew by 13% q-o-q and by 29% y-o-y; adjusted for the acquisitions, volumes increased by 6% and 12%, respectively. The organic deposit growth was 9% ytd (+HUF 1,103 billion, whereas with acquisitions deposit volumes grew by HUF 3,011 billion. In Hungary a new type of retail-targeted Government bond was introduced from June, the so called MÁP Plusz. Despite its outstanding success – the security generated more than HUF 2.5 trillion demand between its launch in early June and October – deposit volumes at OTP Core advanced by 16% y-o-y and by 9% q-o-q. Within that retail volumes grew by 9% and 2%, respectively.

The consolidated net loan-to-deposit ratio grew 1 pp q-o-q and reached 76%.

At the end of 3Q 2019 gross operative liquidity reserves of the Group comprised EUR 6.6 billion equivalent.

At the end of September 2019 the consolidated Common Equity Tier1 ratio under IFRS – including the nine months’ net result less dividend – was 14.3%. This ratio equals to the Tier1 ratio.