OTP Group: 2020 first half year results

In addition to a substantial provision, OTP Group closed the second quarter with a consolidated profit of HUF 78.7 billion after tax. This performance is lower than in the same period last year, due to the economic impact of the virus situation, but is 19% higher than preliminary analysts' expectations. OTP’s management is committed to pay dividend after 2020 in such a magnitude that it also compensates shareholders for the originally proposed divident after 2019, for which the pay-out was stopped at the request of the regulator.

1H 2020 after-tax profit was shaped mainly by the volume of risk costs. The consolidated accounting profit for the first six months was HUF 74.6 billion which already incorporates HUF 3.2 billion profit contribution from the Slovenian SKB Banka.

The total volume of adjustment items in 1H represented -HUF 39.5 billion (after tax), of which -HUF 3.6 billion occurred in 2Q.

Since 6M results were heavily distorted by the volume of total risk costs (almost HUF 92 billion) made in 1Q, general trends are better illustrated and easier compared to base periods through the development of operating income.

In 1H 2020 OTP Group posted HUF 258.2 billion consolidated operating income (+11% y-o-y). Semi-annual total income increased dynamically (+14% y-o-y) with net interest income increasing by 18% y-o-y, while net fees & commissions income grew by a slower pace (+9%, respectively) and other net non-interest income declined by 10% y-o-y.

The consolidate NIM eroded substantially (1H 2020: 3.75%, -48 bps y-o-y) due to several reasons: on one hand the interest rate environment declined substantially in a couple of countries (Russia, Ukraine, Romania, Serbia and Moldova), furthermore, new subsidiaries consolidated into OTP Group usually operated with lower margins than the Group as a whole. Also, the increase of the balance sheet had a dilution effect which was only partially offset by the positive impact of FX moves.

The 6M net interest income adjusted by acquisitions grew by 6% y-o-y as a result of higher performing loan volumes. In 1H operational expenses nominally surged by 16% y-o-y, however adjusted by the acquisitions (2Q 2019: the Albanian subsidiary, 2H 2019: the Montenegrin, Moldavian, Serbian and from January 2020 the Slovenian subsidiaries) the FX-adjusted expense growth would be only 2.6% y-o-y.

In 2Q 2020 the Group posted HUF 82.2 billion adjusted profit, of which the Slovenian subsidiary comprised HUF 3.2 billion. The quarterly net results improved by 2.6 times q-o-q, but dropped by 27% y-o-y. The effective tax rate (11.5%) was practically the same as in the base period last year. In 2Q the adjusted ROE was 14.1% (1H 2020: 9.8%).

While in 1Q 2020 all Group members suffered a significant setback in profit both y-o-y and q-o-q as a result of the COVID-19 related risk provisions, in 2Q moderating risk costs elevated earnings. All Group members, but the Ukrainian subsidiary and Merkantil Group managed to post a meaningful q-o-q improvement in bottom-line earnings.

The profit contribution of non-Hungarian operations reached 50% in 2Q increasing substantially both y-o-y and q-o-q (+8 and 19 pps respectively).

In 2Q the pre-provision operating profit was HUF 131 billion (+3% q-o-q). Total income grew marginally, within that net interest income declined by 3% q-o-q as a result of further eroding NIM and stagnating performing loan volumes. The NII decline was more meaningful at the Bulgarian, Russian and Ukrainian subsidiaries where the erosion of local NIMs was coupled with lower performing loan volumes.

In 2Q the FX-adjusted performing portfolio grew by 2% q-o-q at OTP Core, OBR and OBH (+5% q-o-q in Serbia), but decreased in Bulgaria (-3%), Ukraine (-6%) and Russia (-14%). Following a 3% increase in 1Q, in 2Q the consolidated performing (Stage 1+2) loan volumes (FX-adjusted) declined marginally. As a result ytd organic volume growth was 2% (+HUF 315 billion). Y-o-y the organic volume growth was 11% (+31% with acquisition impact).

Regarding Stage 1+2 volume developments at Group member banks, during the first six month OTP Core excelled itself followed by the Croatian and Serbian subsidiaries. At the same time the Russian and Ukrainian operations suffered a meaningful volume contraction (-17% and -5% respectively). Also, given its absolute volume, the 2% ytd erosion in Bulgaria (-HUF 56 billion) was substantial, too.

The direct negative impacts of the coronavirus could be already observed in 2Q through increase in the DPD90+ volumes (1Q: HUF 30 billion, 2Q: HUF 53 billion adjusted for FX and the effect of sales and write-offs).The consolidated DPD90+ ratio increased to 4.4% (+0.2 pp q-o-q).

Total risk costs in 2Q represented -HUF 39 billion to cover the actual portfolio quality deterioration, as well as reflect the revision of forward looking economic assumptions. In case of exposures under the effect of payment moratorium bulk of the risk is expected to materialize only after the moratorium expires, however in line with IFRS 9 guidance the Bank also made the necessary provisions on them. Provisions for impairment on loan and placement losses declined to -HUF 31.5 billion in 2Q which was roughly 1/3 of those in the previous quarter; as a result 2020 1H risk cost rate was 1.73% (2Q:0.92%).

The FX-adjusted deposits grew by 2% q-o-q, as a result during the first six months volumes expanded by HUF 413 billion (+3% ytd). The consolidated net loan-to-deposit ratio slightly declined to 79% (-1 pp q-o-q).

At the end of 2Q 2020 the gross operative liquidity reserves of the Group comprised EUR 6.4 billion equivalent (practically no change q-o-q).

At the end of June 2020 the consolidated Common Equity Tier1 ratio under IFRS was 13.9% (no change q-o-q). This ratio equals to the Tier1 ratio and did not include either the retained earnings for the period or accrued dividend.