OTP Bank Sees Declining Risk Costs, Loan Expansion Uncertain

OTP Bank Nyrt., Hungary’s largest lender, expects risk costs to decline this year, while the loan expansion remains uncertain as operations in Russia are set to decline, Chief Financial Officer Laszlo Bencsik said.

OTP’s second-quarter adjusted net income rose 14 percent from a year earlier to 52.3 billion forint ($232 million), beating analyst expectations as tax payments dropped and revenue rose. Adjusted net profit forecast was for 43.1 billion in a Bloomberg poll of 5 analysts. Net income after the payment of an additional one-time levy on banks this year was 40.6 billion forint in the period versus 41.1 billion forint a year earlier, the bank said in a statement on Budapest bourse website today.

“All we can say for certain is that OTP’s lending performance will be better in the second half of the year, however we can’t say for sure if lending will grow this year,” Bencsik told reporters at a press conference in Budapest today. The bank expects the profitability of its Russian unit to be weaker than in previous years as lending will slow and bad loans will persist, Bencsik said.

OTP, which has subsidiaries in nine countries in central and eastern Europe, increasingly relies on them for profit generation as Europe’s highest bank levy and Hungary’s slow emergence from an economic slump erode domestic operations. OTP’s Russian and Ukrainian units “suffered a significant setback” in the second quarter, cutting foreign units’ contribution to group profit to 24 percent from 45 percent in the first quarter, the bank said.

Cast Shadow

OTP’s results are “pleasing only at first glance,” portfolio quality deterioration and the plunge in profitability at the Russian subsidiary “cast a shadow on” the numbers, analysts at KBC Securities, a unit of KBC Groep NV, said in an e-mailed note today.

“Taking into account risks stemming from the Hungarian foreign-currency mortgage plan, which is being laid out now, we see little reason for a sustainable rise in OTP’s share price,” KBC said.

OTP shares fell 0.8 percent to 4,460 forint by 12:39 p.m. in Budapest, heading for the lowest close since Aug 7. The benchmark BUX stock index declined 0.5 percent, falling for a fifth day.

The ratio of OTP’s non-performing loans rose to 20.8 percent by the end of June from 19.9 percent in the first quarter, boosted by rising bad loans in Russia and Ukraine, according to the statement. OTP’s second-quarter risk provisions amounted to 59.8 billion forint while the coverage of bad loans declined to 78.6 percent from 80.3 percent in the previous quarter.

Bad Loans

Bad loans are set to ease in all markets except Russia and risk costs will be lower this year than in 2012, Bencsik said.

OTP’s corporate tax payment dropped 34 percent from a year earlier, helping boost profit, the bank said. Net interest income rose an annual 2 percent in the period to 162.6 billion forint while income from fees and commissions jumped 13 percent to 42.8 billion forint.

Hungarian commercial lenders and the government are in talks to devise a plan helping foreign-currency mortgage borrowers whose installments soared after the forint weakened.

“We hope that negotiations will yield a solution that is acceptable to all parties,” Bencsik said.

The government in 2011 forced domestic banks to take losses on foreign-currency mortgages when it allowed borrowers to repay these loans in bulk at below-market rates.

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