Laszlo Bencsik, chief financial officer at OTP Bank Nyrt., Hungary’s largest lender, comments on lending outlook and bad loan trends, the expected performance of foreign subsidiaries and dividend payment plans. He spoke in an interview in Budapest yesterday.
On the outlook for lending:
“Loan growth is negative in Hungary on a market level, similarly to last year, and it’s likely this trend will continue next year. We don’t see any major structural changes which would turn the trend around. The market itself is shrinking while OTP’s market share from the new loan flow is increasing; but even so, we’re struggling to maintain portfolio volumes.
‘‘Demand constraints are clearly the primary reason behind weak lending. We see household consumption declining 1 percent this year and 0.5 percent in 2013. In the corporate segment, the biggest problem is investments as the capital expenditure to the gross domestic product ratio is extremely low in Hungary.
‘‘Considering OTP Bank loan volumes, adjusted for the impact of the early repayment of foreign-currency mortgages and supposing we do well in the last quarter of the year, they may be level with last year. We see subdued loan growth potential for OTP in Hungary in 2013 and it’s hard to foresee fundamental improvement in the environment. A realistic scenario is flat loan growth, the optimistic scenario is low single-digit growth, excluding all possible one-offs. For instance, municipality loans will for sure create some noise in the numbers. Assuming no one-offs, I think a flat loan volume could be an acceptable performance and a low single-digit growth would be a good and desired level of performance.
‘‘In all the nine countries in which we operate, I expect a marginally better economic, overall economic performance next year than this year. This ranges from zero growth next year to 3 percent to 4 percent in some countries. In our highest growth markets, like Russia, it can be up to or above 20 percent.’’
On foreign units:
‘‘In Russia, we continue to expect further strong growth in consumer lending, obviously the percentage-wise growth rate may be smaller in the coming years just because the base is bigger and bigger in nominal terms. I expect competition will intensify and there will be margin pressures, and to counterbalance that you have to be better in operations and in risk management.
‘‘Ukraine is certainly a challenging environment, but we rather see Ukraine as an opportunity. Higher risk means higher potential gain. We are in the process of shifting the focus of the bank from mortgage lending to consumer lending. We basically implemented our Russian business model in Ukraine and if we do well it might be a similar success story as Russia.
‘‘A revaluation of the hryvnia is expected, and if you ask me, the hryvnia is overvalued. Devaluation should happen, and the earlier it happens, the better, because all market participants are awaiting it. Obviously this would have an impact on the expected returns, especially in the non-performing mortgage portfolio. That’s one of the reasons why we built up substantial provisions in Ukraine. We have around 80% provisions to non-performing loans ratio -- not counting for any collateral value -- and virtually the entire NPL portfolio is secured.
‘‘If devaluation is in the 10 percent to 15 percent range, we don’t expect strong differences in the currently performing part of the portfolio. Fundamentally, our provisions for FX mortgages was very conservative and it’s going to be a decision how much -if at all -- we want to additionally provision.’’
On bad loans:
‘‘In terms of NPL formations, we are going to see slowly declining numbers on group level and even in Hungary. We have marginally improving economic environments in the countries where we operate therefore I believe we rightly expect to see marginal improvement in portfolio deterioration and lower risk costs.
‘‘The NPL ratio rose 20 bps to 19 percent at the end of third quarter on group level, which is the lowest rate of increase in the past 3 years.’’
On Hungarian municipality loans:
‘‘OTP’s municipal loans stood at 286 billion forint at the end of the third quarter and the provisioning is quite small given the good performance of the portfolio.
‘‘These are loan contracts, contractual obligations taken by the municipalities to pay back these debts. I expect serious discussions between banks, municipalities and the government, but that’s shareholders’, bondholders’ and depositors’ money that we’ve lent to municipalities, so the bank management is not in a position to just forgive loans or give material discounts that would probably amount to breach of our managerial duties.
‘‘Having said that, I expect intense negotiations with the municipalities and the government and I believe we’ll be able to find a solution which works for all parties. In my view the really challenging part of the portfolio is the foreign-currency denominated one, therefore I expect the most intense discussion around this part of the portfolio.’’
On dividend payment:
‘‘We intend to propose a higher level of dividend than what we paid last year. ’’