OTP Gains Most in Six Months on Overweight Call: Budapest Mover

OTP Bank Nyrt., Hungary’s largest lender, advanced the most in more than six months after Morgan Stanley raised its recommendation to overweight from equal weight.

Morgan Stanley increased its price target for the stock by 26 percent to 5,400 forint, Magdalena Stoklosa and Samuel Goodacre, London-based analysts at the bank, wrote in a research report yesterday. The shares rose 4.2 percent to 4,671 forint at the close in Budapest, the biggest jump since Aug. 6. The benchmark BUX stock index fell 0.4 percent.

Narrowing credit risk in Hungary and Bulgaria is helping to support OTP’s return on equity, the Morgan Stanley analysts wrote. The cost of insuring against default on Hungary’s debt with credit-default swaps has fallen to 296 basis points from a record 753 in January 2012. OTP’s shares rose 29 percent last year following a 36 percent plunge in 2011.

“After last year’s share price performance, which was so sensitive to narrowing Hungarian sovereign risk, we now see return on equity expansion over the next three years,” the Morgan Stanley analysts wrote.

OTP will see “low single-digit” growth in lending in 2013 as bad loan provisions decline and economies in central and eastern Europe “marginally” improve, Chief Financial Officer Laszlo Bencsik said in an interview on Nov. 15 when the bank posted a 21 percent jump in third-quarter net income. OTP is due to publish fourth-quarter results next month.

“Our analysis points to the flow of new non-performing loans stabilizing, even declining” in the retail market, the Morgan Stanley analysts said. “Despite near-term pressure, we expect OTP’s operating margin to expand in 2014-15.”

The CDS contracts for Bulgaria, where OTP operates its DSK subsidiary, fell to 105 basis points from 445 in November 2011 and as high as 714 in 2009.

OTP may turn into “one of the most interesting stories” in banks in Europe, the Middle East and Africa, the analysts said.

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