OTP Bank - Q4 Rather Neutral, Guidance Seems Neutral But It Is Actually Good

Summary

 

• Net income Q4 HUF 77.8 bln, adj. net income HUF 62.5 bln vs. market cons. of HUF 66.3 bln, adj net income exp. HUF 67.3 bln
• Lower adj. NP was due to higher risk cost, OPEX, positive one-off of swaps (+18.8 bln), neg. one-off on acquisitions (-4bln
• Volumes remained stellar, higher provisioning due to IFRS9, seasonality
• NPLs at 6.3%, coverage well above 100%
• Dividend remains the same (in line)
• Guidance first glance neutral BUT putting together is quite good (POS)

 

 

 

OTP -  Instant Earnings comment

Recommendation:  Buy (unch)

Target price (12M): 12,536 (unch)

 

• OTP reported net income came to HUF 77.8 bln in the fourth quarter and adjusted net profit was HUF 62.5 bln vs. consensus estimate of HUF 67.3 bln and our forecast of HUF 64.6 bln. FY net result amounted to HUF 318 bln and adjusted HUF 325 bln, in accordance with the EUR 1 bln target set by the Chairman in autumn.
• The main positive one-off was related to the booking of MIRS (interest swap) gains to the tune of HUF 18.8 bln which was offset by acquisition negatives (HUF 4 bln)
• Net interest income rose 1.7% q-o-q and came better than expected thanks to still strong volumes and higher margins in Romania, Russia and Ukraine.
• Net interest margin remained more or less flat at 429 bps q-o-q, and down by 8 bps y-o-y, which is all in all better than what the mgmt. guided at the start of last year.
• Net F&C was down both q-o-q and y-o-y, explained by lower fees from the Asset mgmt. segment and from retail bond sales.
• OPEX and risk cost was the main negative surprise vs. market expectations, the former increased 15.1% q-o-q and 13.2% y-o-y, driven by PEREX and bonuses in the Hungarian segment in Q4. Risk cost increased significantly q-o-q, as a result of seasonality and IFRS9 impact (mainly in Russia, Bulgaria, Ukraine and Slovakia).
• Despite the negatives in risk cost, asset quality and provisioning remains comfortable with NPLs at almost record low of 6.3% and coverage at 118.4%.
• Volumes: Loan growth was sound again driven by basically all units, but y-o-y development was excellent in Hungary (+18%, retail mortgage +6%), Russia (30%), Ukraine (30%) and Serbia (31%) while Bulgaria also posted a growth of +11%.
• Capital adequacy: CET1 ratio increased to 16.5% (from 16.3%) including interim profits and dividend. The Bank proposes the same amount of dividend as in 2017, implying a DPS of HUF 219.

Guidance

• ROE above 15% on CET1 ratio of 12.5%
• Romanian banking tax could dampen results but the amount is yet to be known (not that material in our view, at most HUF 7.5 bln after tax based on our calculation)
• Organic loan book growth of 10%
• NIM to slightly decline to 4.25% but below (2018 Q2 level, -5bps from FY 2018)
• Asset quality to remain benign, cost of risk to be similar to 2018
• OPEX to grow by 4%, driven by wage growth, digitalization, IT CAPEX
• The mgmt. guidance does not incorporate any acquisition impact.

 

Opinion: Q4 results were rather neutral for us, with costs causing a somewhat negative surprise. Nevertheless the guidance at first sight seems to be neutral as well, but putting together the numbers, without acquisition (which will definitely come this year), if the environment remains supportive (aka risk cost remains flat), it is very likely that the Bank would repeat this stellar result and with acquisitions, the final figure could be beyond 2018. As a result, we consider the earnings release as positive.

 

 

 

Hai Thanh Le Phuong, CFA
Head of Research

CONCORDE SECURITIES LTD.

Hillside
55-61 Alkotás street, H-1123 Budapest.
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MEMBER OF THE CONCORDE GROUP

 

 

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