OTP Group Second Quarter Results Exceed Expectations

OTP Group achieved a better-than-expected consolidated adjusted profit after tax of HUF 162.128 billion in the second quarter, which was 83% higher than in the previous quarter and 26% higher than a year earlier.

The analyst consensus for a quarterly consolidated adjusted profit after tax was HUF 136.541 billion, which implied a year-on-year increase of 6% and a quarter-on-quarter increase of 54%.

According to the International Financial Reporting Standards (IFRS) report published on the Budapest Stock Exchange's website at dawn on Thursday, OTP Group achieved a profit after tax of HUF 250.752 billion in January-June 2022, up 2% year-on-year.

The executive summary of the report points out that in Q1 2022, the Hungarian GDP expanded by 8.2% y-o-y. According to the Inflation Report published on June 28, the National Bank of Hungary (MNB) forecasted an annual growth rate of 4.5-5.5% for 2022 with inflation hovering between 11.0%-12.6%. However, on July 26 at its rate setting meeting the central bank flagged that inflation risks are tilted to the upside. The engine of growth in 2022 is likely to be driven by household consumption and the high level of fixed capital formation to GDP.

The new government formed in May announced series of measures aimed at containing the 2022 budget deficit to GDP below 4.9%. The measures included windfall taxes on certain sectors and affected both the revenue and expenditure sides of the budget. Furthermore, the effect of the payment moratorium and the rate cap on variable rate mortgages was extended until 31 December 2022.

In order to contain inflation the central bank tightened monetary conditions: in 2Q the base rate was hiked by 335 bps and as a result of further hikes on July 12 (+200 bps) and July 26 (+100 bps) the base rate stood at 10.75% at the end of July; this level is identical with the one-week central bank deposit rate. Alongside those rate hikes all benchmark yields moved upward with the 10 year point hovering around 8.2% and the 3 months BUBOR around 12% on August 1 (1Q 2022 closing level: 6.48%, 2Q: 8.40%).

In a regional comparison, the local currency weakened substantially, at the beginning of July the EUR/HUF sank to around 418, however on the back of government and central bank measures there was a positive correction and on the last trading day in July it came back to around 400. Apart from the Ukraine, all other economies across the Group demonstrated decent GDP figures with Q1 growth hovering between 4.4%-9.8%. However, depending on the weight of commodity and energy import, all countries faced increasing inflation, though central banks were far less stringent than in Hungary (except for Moldova). In July, the European Union voted in favour of accepting Croatia’s joining to the Eurozone by January 1, 2023; in July Moody’s upgraded the sovereign rating to ’Baa2’ and Fitch to ’BBB+’, respectively.

As a result of the lasting war between Russia and Ukraine, local economies are expected to contract by around 30% and 8%, respectively. The underlying inflation in both countries exceeds 10% and induced rate hikes: at end of July the Ukrainian base rate stood at 25%, whereas in Russia it dropped to 8% after reaching its maximum of 25% in February. Local currencies also demonstrated diverging trends: the UAH remained mainly flat against USD during the course of 2Q (29.25), but on 21 July the central bank devalued it by 25% to 36.6. On the contrary, in Russia partly due to currency control, but also to massive revenues from energy export, the USD/RUB rate dropped to below 60, down from its peak at 135 in early March.

Consolidated earnings: close to HUF 251 billion 1H adjusted profit after tax (Q2: HUF 162 billion), q-o-q improving NIM, significant decrease in risk costs, stable portfolio quality, ytd 8% increase in performing loan volumes (FX adjusted, without the Russian and Ukrainian volumes) Apart from some major negative one-offs (windfall tax in Hungary, goodwill impairment in Russia) the H1 profit after tax was shaped mainly by risk cost developments and increasing core banking revenues supported by the still dynamic business activity. OTP Group posted HUF 42.7 billion profit after tax in H1 (Q2: HUF 76 billion).

Both the quarterly and semi-annual earnings and balance sheet dynamics were distorted by cross currency moves in a more pronounced manner than in the previous previous periods: in Q2 the HUF weakened against all Group member countries’ currencies q-o-q and y-o-y, within that the RUB demonstrated the most glaring moves (the Q2 closing rate of HUF weakened by around 80% q-o-q and y-o-y, but the almost 50% q-o-q depreciation of the average rate was also exceptional).

Out of the already announced acquisitions, the purchase of Alpha Bank Albania was completed on July 18, whereas the closure of the NKBM transaction in Slovenia is expected to happen in September subject to obtaining all regulatory approvals.