Strong bottom line on positive one-offs, low provisioning and foreign subsidiaries

OTP posted HUF 194.8 bln net profit figure vs. our forecast of HUF 184.8 bln and
market expectation of HUF 167.9 bln. The better result vs. our estimate came from
lower provisions. As we anticipated, weaker HU operations were offset by NKBM
earnings contribution and foreign subsidiaries but even with the exclusion of the acquisition, earnings were strong on a Group level.
Key positives
 OTP reported better results vs. the market on stronger revenues (NII and other) and
substantially lower risk cost. NIM improved thanks to euro rates i.e. HR, Slovenia,
Montenegro and Bulgaria. Bank tax change could result in a HUF 25.5 better figure
vs. previously anticipated. Ipoteka Bank could also have a further EUR 200 mln positive impact after Nova KBM too, boosting the profit level by another HUF 74.4 bln for
2023.
Key negatives
 The Hungarian operation remained weak in the quarter operationally, despite q-o-q
improvement. NIM is expected to be below Q4 level now for the whole year (<1.9%)
at the Hungarian segment. Loan disbursement here was also very weak in mortgages.
Capital ratio declined partially due to the NKBM acquisition but also due to regulatory
changes too thus CET1 ratio declined to 14.4% in Q1.
 OTP reported HUF 194.8 bln net profit, above market on stronger revenues and
lower risk cost. The quarter was shaped by couple of one-offs including the bank
and windfall tax in HU (HUF 88 bln), offset by effect of acquisitions (HUF 85 bln),
Sberbank wind up positive impact (HUF 10 bln) and upfront payment of regulatory
charges i.e. in DSK (HUF 11 bln). 

Net interest income came in strong, up by 5% q-o-q (stagnating without NKBM
but Q1 is usually seasonally weaker), as all segments except for RU, Ukraine and
Moldova reported NII growth thanks to stable or improving margins, particularly in
BG, HR, Slovenia and Montenegro – basically euro rate countries. Note that
weaker RU and Ukr were also attributed to the stronger HUF exchange rate vs.
Q4, both grew in local currency terms. NIM remained stable but at low levels in
HU (1.9%), despite the gradual repricing of variable loans as interest expenditures
hiked due to issued bonds and repricing of corporate deposits.
 Net F&C declined by 6% q-o-q (-10% without Slovenian acquisition) on lack of
success fee at Asset Mgmt, seasonality and lower FX conversion fees at Croatia.
 Costs were up by 32% y-o-y and down 1% q-o-q (-5% ex-NKBM). Yearly dynamics are shaped by 4% higher headcount and wage inflation. Cost-to-income improved q-o-q to 49.3%, despite one-off regulatory charges.
 Volumes: FX-adjusted loan book expanded by 20% y-o-y, performing loans increased 11% q-o-q, ex-NKBM 1% q-o-q. Bulgaria, HU, HR and RU were growing
while Ukraine, RO and Serbia were weak. In HU, mortgages and overall nonsubsidized loans were also rather weak reflecting the extremely high interest
rates. Deposits without the acquisition impact stagnated with only HR experiencing a major decline of 8% q-o-q majorly as a result of a large corporate ticket. Due
to the higher liquidity at NKBM, net loan-to-deposit ratio declined further to 73%.
 Provisioning&Asset quality: Risk cost was very low both y-o-y and q-o-q. The latter can be explained to some extent by seasonality but overall asset quality remained benign end 97% of the risk cost was attributed to RU&Ukr. Stage 3 ratio
declined to 4.7% from 4.9% a quarter ago with coverage of 61.8% despite higher
ratio in RU, HU and Ukraine.
 CET1 ratio was at 14.4%, a substantially lower level as a result of RWA inflation of
acquisition but regulatory changes also had a negative impact. The Bank still sees
2-3 MREL issuances and since NKBM is not part of OTP’s Resolution Group, it
could need an EUR 400 mln MREL issuance separately too.
 Guidance 2023 – The mgmt. modified its guidance:
- NIM at Core now is expected to be below Q4 level due to a slower rate cut
pace of HU o/n rate than previously anticipated (-)
- This however can be offset at least partially thanks to eur rate development (+)
- HU banking tax is expected to be HUF 25.5 bln lower after tax (+)
- Ipoteka Bank will have a positive impact of EUR 200 mln (+)
- Adjusted ROE guidance unchanged (0)
 Outlook&Opinion: OTP’s Q1 was above market expectations thanks to better NII
and lower provisioning. The ROE guidance on the adjusted level is unchanged
(though again this is quite a high level of 18.8%) but we should note that the bottom line could be better than anticipated due to the higher positive one-offs.
Overall, we maintain our current TP of HUF 14,000 and expect a positive market
opening today. At the same time, the share rallied since the awakening of the US
banking crisis thus we would not be surprised if profit takers would emerge in the
short-term despite strong earnings.