Summary - OTP Group’s result for 2022
The overall performance of 2022 was shaped mainly by the direct and indirect impact of the war between Russia and Ukraine broken out on 24 February. As part of the acquisition activity, in 2022 OTP successfully completed the purchase of Alpha Bank in Albania, and the third quarter results already incorporated the balance sheet and P&L numbers of the newly acquired entity. On 6 February 2023 the purchase of Nova KBM in Slovenia was financially closed, the balance sheet and P&L numbers will be consolidated in the first quarter figures. The transaction represented the biggest ever acquisition by OTP Group, as a result of the deal OTP will be the leading bank in five CEE countries in terms of outstanding loan volumes, namely in Hungary, Bulgaria, Slovenia (on a pro forma basis), Serbia and Montenegro. The purchase of Ipoteka Bank in Uzbekistan announced on 12 December 2022 is expected to be completed and the bank being consolidated in the second quarter 2023.
The direct and indirect impacts of the war between Russia and Ukraine, as well as the performance of the Hungarian economy and the related Government and Central Bank measures still pose risks in 2023. The expected financial performance of the Group especially depends on these factors, thus the management guidance involves higher than usual uncertainty. In case of Russia and Ukraine the management doesn’t anticipate material worsening in the operating environment, therefore the profit after tax in local currency terms may improve in both countries in 2023.
The consolidated net interest margin may remain stable in 2023, and the management doesn’t anticipate material deterioration in the risk profile, however elevated inflation puts pressure on the cost efficiency indicators. In line with the above assumptions the consolidated return on equity calculated from the adjusted profit after tax (adjusted ROE) may be close to the 2022 level. After the 2022 business year the Board of Directors is expected to suggest a dividend payment of HUF 84 billion (HUF 300/share). The final decision on the dividend proposal will be made at the Board meeting on 21 March, which will be publicly announced on 6 April.
In 2022 OTP Group posted HUF 347.1 billion profit after tax. The significant, per year 24% drop was due to the massive increase of the negative adjustment items. The annual ROE was 11% (-6.0 pps per year). The total volume of adjustment items amounted to -HUF 245 billion underpinning a per year six-fold increase. The major items were as follows:
- -HUF 91.4 billion tax on financial institutions including both the banking tax and the windfall tax (after tax);
- -HUF 59.3 billion on goodwill/investment impairment charges (after tax);
- -HUF 36.5 billion expected one-of effect of the extension of the interest rate cap for certain loans in Hungary (after tax);
- -HUF 35 billion impairments on Russian government bonds held at OTP Core and DSK Bank (after tax);
- -HUF 10.4 billion effect of the winding up Sberbank Hungary (after tax);
- -HUF 2.5 billion expected one-off negative effect of the debt payment moratorium in Hungary (after tax);
- -HUF 14 billion other items.
In the fourth quarter 2022 the balance of adjusted items put a drag of HUF 38 billion on profit after tax.
The weight of exposures towards Russia and Ukraine was shaped partially by FX moves, but also by deliberate or forced business policy measures. In Russia the profit after tax in local currency dropped from RUB 9.1 billion to 3.9 billion (-57% per year); the gross loan portfolio eroded by 12% per year in RUB, within that the corporate exposures decreased by 75%. In Ukraine the lending activity suffered a major setback after 24 February, gross loan volumes dropped by 16% per year, however the deposit book advanced by 21%, on an FX-adjusted basis.
In 2022 the Ukrainian operation posted almost HUF 16 billion loss, however after the negative results in the first half-year, the bank managed to turn that around and reached a positive result in the second half-year. In the case of Ukraine and Russia OTP management applies a „going concern” approach, however in Russia the management is still considering all strategic options, though a Russian presidential decree in October 2022 prohibited the sale of foreign owned banks.
The annual NIM remained flat per year (3.51%). Apart from the Russian market, in other geographies rate hike trend continued. In 2022 the Ukrainian, Moldavian and Hungarian policy rates closed at the highest levels (25%, 20% and 18%, respectively). The positive impact of higher rates on the interest income kicks in only gradually as a result of the different dynamics in deposit and loan repricing.
Total risk costs for 2022 amounted to -HUF 178 billion, two and the half times higher than in 2021. Within that the total volume of credit risk costs reached -HUF 135.2 billion versus -HUF 46 billion a year ago. The annual credit risk cost rate stood at 0.73% (+42 bps per year). Without the Russian and Ukrainian operations the yearly credit risk costs would be +HUF 7 billion implying a CoR of -0.04% versus 0.19% in 2021. In the fourth quarter OTP Group posted HUF 153 billion profit after tax, -19% quarterly. Operating income comprised HUF 223 billion (-10% quarterly). Total income stagnated quarterly with the net interest income growing by 2% quarterly, and net fee and commission income by 3%. Other income dropped mainly due to base effect: in the third quarter there was a significant one-off revenue item. The quarterly NIM declined by 3 bps quarterly (3.50%).
Operating expenses advanced by 12% quarterly. The volume of total risk costs surged by 31% quarterly, within that credit risk costs leaped by 24% to -HUF 33.7 billion. Out of the foreign subsidiaries DSK Bulgaria posted outstandingly strong in the fourth quarter earnings, also, OTP Fund Management increased its quarterly earnings four fold quarterly as a result of success fee income realized in the fourth quarter. The FX-adjusted consolidated performing (Stage 1+2) loan volumes increased by 12% per year.
Without the Ukrainian and Russian volumes, but incorporating the acquisition impact of Alpha Bank Albania the loan book advanced by 15%. As a result, the growth of the portfolio reached close to HUF 2,300 billion in 2022. Apart from the Ukrainian, Russian and Moldavian subsidiaries, all other operations posted an annual increase of around or above 10%, whereas in those three countries the decline was 27, 16 and 5% per year, respectively. It was positive that alongside the strong volume dynamics OTP managed to improve its markets shares in many countries and segments. As for the major segments, the fastest FX-adjusted performing loan volume increase was posted in the corporate sector (+20% per year), followed by MSE loans (+12%) which was also supported by the new subsidized structures in Hungary.
The consumer book grew by 3%, while the mortgage book by 10% per year, respectively. In the fourth quarter, however the volume increase decelerated substantially (+1% quarterly), mainly as a result of newly started or continued interest rate hiking cycles. At OTP Core the overall loan book increased by 2% quarterly, but the mortgage volumes already eroded and the corporate exposure grew by 4% which was a definite deceleration in the context of the annual 33% per year leap. The FX-adjusted deposits grew by 14% per year which corresponds to about HUF 3,000 billion increase. Without the Russian, Ukrainian volumes the growth was 13% per year. In the fourth quarter the deposit growth slowed down to 2% quarterly.
In 2022 OTP Bank issued two international public bond deals with EUR 400 million and 650 million face value, furthermore it also printed a USD 60 million private placement. In Hungary the Bank also tested the market with 2 additional transactions and raised HUF 36.2 billion in total. All issued bonds were MREL-eligible. In February 2023 OTP Bank issued USD 650 million Tier2 bonds.