OTP Group: Summary of the first quarter 2023 results

OTP Group's 1Q 2023 earnings showed a peculiar duality: against the customary strong performance at OTP Core during the last couple of years the Hungarian operation posted moderate results, at the same time the profit contribution of the subsidiary banks operating abroad - even without the acquisition impact - improved. In Hungary, despite the high underlying interest rate environment the net interest margin ('NIM') hasn't improved as a result of the balance sheet composition, whereas most of the Group members benefited from the increasing EUR rates through improving net interest income ('NII') and NIM. The consolidated portfolio quality demonstrated a stable picture, the unemployment rate was contained as a result of the tight labor market, whereas in Hungary the rate caps in place prevented delinquency rates from increasing.

Consolidated earnings: HUF 195 billion 1Q 2023 profit after tax, quarterly improving NIM, cost efficiency and credit quality, without the acquisition impact of NOVA KBM 1% increase in performing loan volumes quarterly (FX-adjusted), stable liquidity position.

On 6 February the financial closure of the purchase of the Slovenian Nova KBM (NOVA KBM) was completed, the consolidated 1Q figures already incorporated from February the bank's balance sheet and P&L data. The deal marks the biggest ever acquisition in OTP Group's history. The Bank managed to acquire NOVA KBM below book value.

The purchase of Ipoteka Bank, Uzbekistan is expected to happen by the end of May/early June 2023, thus the newly acquired entity may add 6 months earnings to the consolidated P&L.

OTP Group posted HUF 194.8 billion profit after tax in 1Q 2023. The significant, quarterly 69% improvement to a great extent was due to the positive balance of adjustment items. (1Q 2022: -HUF 122 billion, 4Q 2022: -HUF 38.2 billion, 1Q 2023: +7.6 billion, respectively), the moderate volume of total risk cost, as well as the consolidation of NOVA KBM, Slovenia. in 1Q 2023 adjustment items improved the consolidated profit after tax by HUF 7.6 billion, underpinning a meaningful difference both quarterly and yearly.

The major items were as follows:

-HUF 88 billion special taxes on financial institutions (after tax) which incorporates both the banking tax (-HUF 25.2 billion) and the windfall tax (-HUF 62.9 billion). As a result of the modification of the decree on the windfall tax on 24 April 2023, OTP Bank's annual extra burden will decline to HUF 41 billion (HUF 37.4 billion after tax), the HUF 25.5 billion (after tax) difference will be booked in 2Q within the consolidated adjustment items; +HUF 85 billion effect of acquisitions. The badwill impact of the NOVA KBM acquisition comprised HUF 103 billion, whereas other acquisition-related expenses including the ones at NOVA KBM comprised -HUF 15 billion in total (after tax), of which the so called initial risk cost represented -HUF 10 billion; +HUF 10.4 billion recovery on the winding up of Sberbank Hungary, as National Bank of Hungary (NBH) and the Hungarian Deposit Insurance Fund professionally managed the issue. In 2022 a similar negative amount was booked at OTP Bank.

The quarterly profit after tax, as well as the balance sheet items were distorted by the currency moves: the average rate of the Hungarian Forint yearly depreciated against all currencies but UAH, the most significant setback (-30.8%) was suffered against RUB. However, in 1Q the HUF was one of the best performing Emerging Markets currencies, and q/q strengthened against all currencies, especially against the steadily weakening RUB (+22.9%) hit by sanctions, moderating energy prices and deteriorating budgetary positions.

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 was RUB 3.9 billion (+29% quarterly, but -5% in HUF terms); the performing loan portfolio marginally increased quarterly, within that the corporate exposures decreased by 36% (FX-adjusted). The weight of Russian assets in the consolidated total assets comprised 3.1% by the end of 1Q 2023, while net loans represented 2.7%, respectively. Under an unexpected and extremely negative scenario of deconsolidating the Russian entity and writing down the outstanding gross intragroup exposure as well, the effect for the consolidated CET1 ratio would be -69 bps.

In Ukraine the lending activity suffered a major setback since the outbreak of the war, the performing loan volumes decreased by 10% quarterly, however the deposit book grew by 2%, on an FX-adjusted basis. The weight of the Ukrainian assets within the Group comprised 2.9%, while net loans represented 1.8% within the consolidated loan book. The volume of gross intragroup funding towards Ukraine represented HUF 80 billion equivalent. In 1Q 2023 the Ukrainian operation posted HUF 12.6 billion profit after tax, managed to achieve positive earnings in each consecutive quarter since 2Q 2022. The provision coverage of the gross Ukrainian loan book increased to 24.5% from almost 22% by the end of 2022. Under an unexpected and extremely negative scenario of deconsolidating the Ukrainian entity and writing down the outstanding gross intragroup funding as well, the effect for the consolidated CET1 ratio would be -5 bps.

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.

In 1Q 2023 the consolidated adjusted profit after tax was HUF 187.1 billion, of which the 2 months contribution from NOVA KBM comprised HUF 13.5 billion. The 1Q adjusted ROE reached 23% (+5.1 pps quarterly, +10.9 pps yearly).

The bottom line consolidated profit to a smaller extent was shaped by the higher operating results (w/o NOVA KBM it declined by HUF 6 billion quarterly), but more so by the moderate and declining risk cost volume (4Q 2022: -HUF 42 billion, 1Q 2023: -HUF 9 billion).

Total income increased moderately (+1% quarterly), but without NOVA KBM there was a decline; within that the NII improved by 5%, however, the net fee and commission income declined by 6% quarterly, as a result of the success fee booked at OTP Fund Management in 4Q, the decreasing overall business activity, seasonality and calendar effect. The 2 months NII contribution of NOVA KBM comprised HUF 17.2 billion, whereas the fees and commission contribution was HUF 4.7 billion, respectively. Other net non-interest income dropped by 7% quarterly.

The amount of consolidated total risk cost remined modest, HUF 9 billion only. Within those provisions for impairment on loan losses comprised HUF 6 billion, 97% of which was related to the Russian and Ukrainian credit costs. As a result, the credit risk cost ratio was 0.12% (1Q 2022: 1.42%, 4Q 2022: 0.66%).

As for the individual performances, the Bulgarian operation posted a decent quarterly increase (+6%), OTP Core, OBH (Croatia) and OBRu (Russia) demonstrated a moderate quarterly growth, while the Romanian and Serbian portfolio melted down by 2% quarterly. In case of OTP Core and DSK the corporate volumes were elevated by the refinancing of the Slovenian leasing entity that was carved out of the NOVA KBM deal. In 1Q it was the Ukrainian subsidiary that suffered the most significant loan volume drop (-10% quarterly and -37% yearly, FX-adjusted). As for the major segments, without NOVA KBM impact the performing corporate exposures advanced by 2% quarterly, other categories either grew marginally or stagnated.

The FX-adjusted deposits grew by 13% quarterly and their volumes exceeded HUF 27,300 billion. Out of the consolidated total deposit base NOVA KBM comprised HUF 3,106 billion, i.e., without the acquisition impact Group-level volumes stagnated quarterly.

Apart from OBH (Croatia) (Croatia) where deposit volumes declined (-8% quarterly FX-adjusted, driven by pricing steps and one-off factors) other Group members didn't experience major deposit withdrawals in 1Q. In case of OTP Core there was a quarterly1% decline in deposits (FX-adjusted) including the volume of retail targeted bonds; the outstanding volume of those bonds increased to HUF 99 billion by the end of 1Q 2023, i.e. the retail bond + deposit volumes overall remained stable quarterly. Besides, the market share of OTP Bank demonstrates a steadily improving trend in the retail segment. The consolidated net loan/(deposit + retail bonds) ratio declined to 72% (-2 pps quarterly).

In February 2023 OTP Bank issued USD 650 million MREL-eligible Tier2 bonds. For the rest of the year the Bank is planning to issue further two, maximum three MREL-eligible Senior Preferred bonds.

The credit profile of the consolidated loan book kept further improving in 1Q 2023, the major indicators shaped favorably. The Stage 3 ratio under IFRS 9 comprised 4.7% of the gross loan exposure by the end of 1Q 2023, underpinning a quarterly0.2 pp improvement. Without the impact of consolidating NOVA KBM the ratio would have increased slightly quarterly, from 4.9% to 5.0%. The reason for the latter was that effective from 2023 the presentation of accrued interest on Stage 3 loans changed in the adjusted balance sheet, resulting in a technical increase elevated-o-q in both the volume of Stage 3 loans and provisions (for details see: Supplementary Data).

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