OTP Q3: A V-shape so farx

OTP’s reported net income came to HUF 113.6 bln, ahead of cons. estimates by 21.0% and our estimate of HUF 102.0 bln by 11.4%. Beyond expected results were attributed to better revenues (basically all income lines) and significantly lower provisioning costs.

 Net interest income slightly increased by 0.65% q-o-q on the back of decent volumes across OTP’s market except for Russia (-12% q-o-q, FX-adjusted -1%). Net interest margin continued its erosion, down by 7 bps to 3.56% in the quarter on the back of FX-movement in Ukraine (-33bps q-o-q) and Russia (-15 bps q-o-q) while NIM in HU, BG, CR and Serbia improved.
 Net F&C experienced a sharp recovery up 11.5% driven by HU (+15.1% q-o-q), CR (+22.6% q-o-q), RU (+14.5% on a quarterly basis).
 Costs were up by 1.2% q-o-q, y-o-y +15.6% in the first 9M, adjusted for acquisitions, OPEX increased by 3.4%. The increase on a quarterly level was a result of higher de-preciation as PEREX remained flattish.
 Volumes: Lending was strong in Q3 particularly in SMEs (7.0% q-o-q) thanks to FGS Go while mortgages and consumers increased 4.2% and 2.9% q-o-q, respectively. Depos-its were up by 3.65% q-o-q on strong inflow across all markets (except RU).
 Provisioning: OTP made only HUF 5.1 bln provisioning, down by 86.9% q-o-q and 56.1% y-o-y. There were couple of risk cost releases (HUF 9.3 bln in HU, but also some in Slovenia, Ukr, RU and HU Merkantil). The large release in HU was related to Faktoring recoveries. RU and Ukr risk cost reversal were attributed to IFRS9 model recalibration after conservative provisioning in the previous quarters. Releases were compensatedwith higher risk cost in CR and BG. Cost of risk in the quarter amounted to 15bps and in the first 9M to 114bps vs. 125bps guided in H1.
 Asset quality: NPL ratio, as well as Stage 3 ratio was moderate, even falling further (Stage 3 to 5.6% vs. 5.9% and NPL to 4.1% from 4.4%). Movements between stages continued with Stage 2 increasing to 11.0% from 8.6% a quarter ago, driven by HU, BG and CR. Coverage of NPLs increased to 139.9% while Stage 3 coverage was more or less stable at 64.7%.
 CET1 ratio saw a sharp improvement to 14.6% due to profit inclusion while the Bank accrued HUF 105.5 bln for dividend. Note that this is not an indication for the actual payment but the mgmt. remains committed to compensate shareholders for 2019 divi-dend. OTP will tap to bond market in the next 14 months with senior preferred bonds to boost its MREL ratio. Capital adequacy should increase further in our view due to the sale of the Slovakian subsidiary in Q4.
 Forward looking notes:

 Mgmt still refrains from having a detailed guidance but outlook changes to the positive side.
 Risk cost is now expected to top 125 bps vs. around 125 bps
 Adjusted ROE should be well beyond 10% vs. beyond 10% (9M ROE 13.2%)
 Volumes to grow more than 7% vs. 7% in H1 (9M +11.6%)

 Opinion: OTP’s Q3 results were remarkable, the V-shape started in Q2 continued. Q4 could be weaker by seasonally higher risk cost, negative one-offs due to HU and Serbi-an moratoria (though we should see significantly lower charges relative to Q1). Never-theless OTP is expected to post a strong annual result despite the pandemic and we maintain our positive stance on the stock.