OTP Bank Falls Most in 3 Months as Core Market Results Take Hit

  • Drop in Hungary, Bulgaria outweighs return to profit in Russia
  • Larger-than-forecast GDP slump in Hungary also weighs on stock

OTP Bank Nyrt.’s shares fell the most in three months as declining profitability in its key Hungarian and Bulgarian markets outweighed a return to positive results in Russia and Ukraine.

The stock slumped 2.7 percent to 6,960 forint by close in Budapest, the biggest daily decline since Feb. 8. Net income for Hungary’s largest lender surged 18-fold from a year earlier to 34.3 billion forint ($124 million) in the January-March period, as a Hungarian bank tax halved and Russian and Ukrainian operations improved. Income adjusted for one-off items fell in both Hungary and Bulgaria, the lender’s two largest markets.

OTP Bank is looking to boost income at its foreign European units as net interest revenue from its Hungarian operations falls amid record-low borrowing costs. While performance recovered in Russia and Ukraine after two leaner years and the group’s risk costs dropped 68 percent, that wasn’t enough to impress investors, according to Concorde Securities, Hungary’s largest brokerage.

"The market will see previously hated units in Russia and Ukraine as the new favorites even as their situation remains far from stable, despite the strong start to the year," said Hai Thanh Le Phuong, an analyst at Concorde in Budapest who has an equalweight recommendation for the shares. "We expect deterioration in revenues in Hungary and Bulgaria, and risk costs are unlikely to stay at such low levels."

Economic Contraction

Adjusted after-tax profit in Russia was 2.6 billion forint in the first three months, excluding a loss booked at a local online banking unit, compared with a 10.7 billion loss a year earlier. Ukrainian profits amounted to 900 million forint, up from a 10.2 billion forint loss in the first quarter of 2015. Profit from Bulgarian operations fell 22 percent and in Hungary by 2 percent.

A significant slowdown in Hungary’s economy also weighed on the lender’s shares, according to Concorde and the Budapest-based Equilor brokerage. Gross domestic product shrank 0.8 percent in January-March from the fourth quarter after a 0.6 percent gain in the previous three months, the first quarterly contraction in four years.

Government steps to lift mortgage lending and home construction may boost economic output in the second half of the year, OTP Chief Financial Officer Laszlo Bencsik told reporters in Budapest on Friday, reiterating an estimate for Hungarian economic growth of "above 2 percent" for the full year.

"There’s interference from the Hungarian GDP data, that, along with low interest rates, shows limited improvement in the bank’s operating environment," said Balint Kovacs, an analyst at the Equilor brokerage in Budapest.

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