OTP Bank - Spectacular Q3 Results

 

Summary

 

• Better than expected results, cons. HUF 104.8 bln, Concorde HUF 118.5 bln, actual HUF 131.6 bln
• net profit also better, HUF 110.5 bln vs. cons HUF 102.4 bln and Concorde HUF 108.5 bln
• Higher results on one-off HUF 21.4 related to acquisitions, strong NII, Net F&C and lower costs
• NIM remains subdued, but volumes compensate
• Loan growth stellar across countries, Hungary strong on baby loans
• Mgmt changed few points in guidance, but nothing that was not anticipated before
• Spectacular results, strong fundamentals, but recent rally could fade off

 

 

 

OTP - Instant Earnings Comment

Recommendation: Accumulate (unch.)

Target price (12-month): 14,330 (unch.)

 

• OTP reported remarkable profit (HUF 131.6 bln), beyond consensus estimate of HUF 104.8 bln and our estimate of HUF 118.5 bln. Better results came from higher revenues and lower OPEX while one-off impact of acquisitions contributed HUF 21.4 bln to Q3 results. Also, the Bank benefitted from the weaker HUF in Q3.
• Net interest income increased 3.7% q-o-q and 15.0% y-o-y on strong volumes and acquisitions (adjusting for that it would have been 2%). Basically all NII growth came from volume impact as NIM is still eroding, in line with market trends.
• NIM was down significantly from 4.2% in the previous quarter to 4.0%, partially due to the integration of new banks (i.e. Serbia). Without the dilution effect of acquisitions (all of them including Bulgarian ExpressBank), NIM would have been 4.17% compared to 4.3% last year as a result of hedging and lower reinvestment yields. In the third quarter, NIM in Hungary declined significantly by 24 bps, but half of it was attributed to one-offs. Still, lower repo income and the above mentioned reinvestment yield took its toll.
• Net fees improved again nicely, up 9% q-o-q (+26% y-o-y on acquisitions as well), thanks to seasonality and particularly strong Hungary.
• Expenses were rather stable in the quarter, up by 0.7% q-o-q and 11.8% y-o-y, thanks to strict cost control in Croatia, Serbia while at Core, OPEX was also declining on a quarterly basis (-1.3%). Cost-to-income declined thanks to 49.8%.
• Asset quality remained benign with Stage 3 loans declining to 6.9% from 7.7%, coverage at stable 65.9% (NPL ratio 5.0%, coverage at 122.7%). Risk cost at the same time went up due to seasonality as well, now standing at 25bps in the quarter and first 9M at 21bps, in line with mgmt. expectation.
• Volumes: Loan growth was again strong across the board, most prominently in Ukraine, Romania, Hungary, Croatia and Bulgaria. In Hungary, the new baby loan scheme (available since summer) contributed a lot to the dynamics, impacting Q3 stock by HUF 124 bln. Loan-to-deposit ratio remained low despite some improvement q-o-q to 75.5%. Deposits in Hungary further increased 8.6% q-o-q which is quite surprising given the strong demand of the Hungarian retail bond (MAP+).
• Capital adequacy: CET1 ratio was at 14.3%, down from 15.9% a quarter ago, but this is basically due to acquisition effect of Serbia, Moldavia and Montenegro. Adjusted for that, CET1 would have been at 16.2%. The closing of the Slovenian transaction is expected in the next quarter which will have a negative impact of 86 bps on capital adequacy. All in all, OTP’s capital depletion was completed thus it seems that the Group will refrain from major acquisitions for a while.

 

MGMT expectation:

• Romanian bank tax will be less than the guided HUF 2.0 bln before (HUF 700 mln)
• Loan growth will be over 10% in 2019 (anticipated by the market)
• Cost inflation will be around 6% (mgmt. already said in Q2 that 4% is challenging)
• NIM adjusted for acquisitions to come to 417 bps in Q4 as it was in this quarter (this is somewhat worse than expected)

 

 

Opinion: OTP again posted spectacular results, mgmt. expectations changed but nothing that market did not expect. We believe the Bank’s fundamentals remain strong and today’s earnings release is clearly positive. In addition, we have to incorporate the Slovenian transaction to our model as well as the better than expected 9m results. Nevertheless after the recent rally in the share price could fade off gradually, so some profit taking could be expected in our view.

 

 

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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