OTP to Retain Stability in Worst Russia-Ukraine ScenarioEdith Balazs and Zoltan Simon
OTP Bank Nyrt. would withstand the shock of a widening conflict between Russia and Ukraine, including a worst-case scenario in which Hungary’s largest lender were to lose its investments in the two sparring nations, Chairman Sandor Csanyi said.
“Should we lose all our investments in Russia and Ukraine, our core Tier1 capital ratio would still remain above 12 percent,” Csanyi, who is also chief executive officer, said in an interview in Budapest yesterday. “Even this unthinkable scenario would be unable to rattle our stability.”
Ukraine edged closer to open hostilities with Russia as Kiev resumed operations to oust militants from eastern cities and Russia signaled it was prepared to retaliate. Csanyi said provisioning at OTP, which has operations in nine countries in central and eastern Europe, is rising in both Ukraine and Russia and OTP’s Ukraine profitability is at risk.
OTP’s share price dropped as much as 1.3 percent after Csanyi’s comments. The stock traded at 4,291 forint at 2:28 p.m. in Budapest, 0.9 percent lower than yesterday’s closing price. OTP shares have gained 4.7 percent this year compared with a 4 percent drop in the benchmark BUX stock index.
OTP’s fourth-quarter adjusted net income plunged to 1.4 billion forint ($6.3 million) from 26.1 billion forint a year earlier due to provisioning and one-time costs. The lender set aside 91.6 billion forint of risk provisions in the period, the highest-ever amount, representing a 26 billion-forint jump from the previous quarter.
“Based on the current situation, it will be difficult for our Ukrainian bank to produce a profit, barring a positive resolution to the crisis,” Csanyi said, adding that OTP was ready to write down all its Ukrainian unit’s remaining goodwill if needed this year.
Russian operations will “hopefully remain profitable” in 2014 even if there are some quarterly losses amid risk costs that have “practically doubled,” Csanyi said. “However, we can already see signs of improvement,” he said.
OTP’s Russia provisions would gradually decline this year, Csanyi said in March.
Domestic operations are set to profit from an expected decline in provisioning and estimated growth in corporate lending of above 10 percent, according to Csanyi.
“I wouldn’t be surprised if the government was considering further measures that unilaterally affect banks,” Csanyi said. “However, their scale will not be comparable to that of the early repayment.”
Prime Minister Viktor Orban, who was re-elected on April 6 for another four-year term, forced banks to swallow $1.7 billion in losses on the early repayment of foreign-currency mortgages at below-market exchange rates in 2011. He pledged to phase out all such loans, with the government awaiting local and European Union courts to clarify legal issues before proposing an action plan.
Expanding an existing program that allows borrowers to temporarily repay their loans at fixed exchange rates would be beneficial to all parties involved, Csanyi said.
The EU Court of Justice is scheduled to issue a ruling on whether Hungarian courts can force banks to replace unfair contract terms for customers holding about $15 billion of foreign-currency loans on April 30.
Lawmakers can retroactively amend the terms of some foreign-currency mortgage contracts under “extraordinary conditions,” the Constitutional Court said on March 17, after the Supreme Court rejected a blanket invalidation of such contracts in December.
OTP competes with mostly foreign-owned banks including Erste Group Bank AG, UniCredit SpA, KBC Groep NV, Intesa SanPaolo SpA and Raiffeisen Bank International AG.
Orban saddled Hungarian lenders with Europe’s highest bank tax and introduced a financial transaction tax in a bid to push the budget deficit below the EU limit of 3 percent of economic output.
The tax burden discourages banks from investing in Hungary and may push foreign parents toward further deleveraging, Csanyi said.
Banking industry consolidation will take longer than previously expected, he said.
“The four or five banks that have been rumored to leave the market will probably do so in the medium term,” he said.
OTP is in talks both at home and abroad on potential acquisitions, Csanyi said, adding that no negotiation in Hungary is at a final stage.