OTP Group: growing profit contribution of foreign subsidiaries

In 1H 2011 OTP Group posted HUF 74.5 billion after tax accounting profit, including the negative effect of the Hungarian banking tax. Excluding this item, the adjusted net earnings reached HUF 88.7 billion, underpinning a 5% y-o-y growth. The 2Q adjusted profit represented HUF 44.6 billion (+1% q-o-q). The size of the banking tax remained the same (HUF 7.2 billion) and similar quarterly levy is expected for the rest of the year.

It was a positive momentum that similar to previous quarter, in 2Q the profit contribution of foreign subsidiaries kept further growing. Due to the improving Russian performance, as well as the decent Ukrainian, Bulgarian, Romanian and Croatian operation, out of the total 2Q profit HUF 15.7 billion was made outside Hungary (+HUF 4.5 billion q-o-q). Thus in 1H 2011 foreign subsidiaries made up 30% of the adjusted consolidated profit (HUF 26.8 billion which was 36% of the non-adjusted one) versus a HUF 3 billion loss in the base period. Within the same period OTP Core (basic activity in Hungary) suffered a 24% decline in net earnings from HUF 83 billion to HUF 63 billion, which demonstrates that the improving performance of the Group was entirely due to the better results of the non-Hungarian business.

In 2Q the Group posted HUF 107.3 billion adjusted operating profit (-1% q-o-q), whereas the 1H figures remained basically flat y-o-y.

The FX-adjusted loan volumes somewhat declined q-o-q (-1%) with deposits posting a 1% q-o-q growth. As a result, the net loan/(deposits + retail bonds) ratio (102%) further improved (-7%-points y-o-y and -2%-points q-o-q).

In the past 12 months the fastest portfolio growth was achieved in Russia: the FX-adjusted loan book advanced by 31% y-o-y, within that the retail consumer book grew by 68%. Romania captured a y-o-y growth of 5%, while in Bulgaria and Slovakia the portfolio grew by 1%. Other markets witnessed a smaller yearly decline. Bigger scale contraction was registered in Serbia (-9%) and Montenegro (-9%), as well as in the Hungarian car financing (-13% y-o-y).

As for the deposits, it was the Serbian subsidiary that captured the biggest y-o-y volume increase (+14%), but other markets having the most significant impact on the overall volumes were strong, too: in Hungary deposits grew by 3%, in Bulgaria by 6% in Russia by 5% and in the Ukraine by 7%.

As a result of further portfolio deterioration risk costs in 2Q reached HUF 50 billion (-13% q-o-q), whereas the six months risk costs amounted to HUF 107 billion (-23% y-o-y). The DPD90+ ratio kept growing and reached 15.4% by the end of June (+0.5%-point q-o-q), however the quarterly pace of deterioration moderated as expected by the management. FX-adjusted DPD90+ formation also showed a declining trend (2Q: HUF 55 billion). Despite the q-o-q lower risk costs, the DPD90+ coverage improved from 72.7% to 73.3%.

The consolidated IFRS capital adequacy ratio (“CAR”) reached 18.0% by June 2011. The Tier1 ratio (15.1%) grew by 2.1%-points in the past twelve months. Also, the second European stress test results published by EBA on 15 July 2011 underpinned the outstanding capital strength of OTP Group. Under the adverse scenario OTP’s Core Tier1 still would be at 13.6%, the third highest amongst the European banks.