After posting its first ever full-year loss in 2014, Hungary’s largest lender OTP Bank is eyeing a return to profit as negative one-off events subside and its domestic market environment becomes more conducive. That is opening up the way for acquisitions, the bank tells bne IntelliNews.
The war in Ukraine, economic sanctions against Russia, special taxes in Hungary and Slovakia, have weighed heavily on OTP’s business, alongside domestic regulation that forced banks to compensate borrowers for past lending practices and convert foreign currency mortgages at disadvantageous rates. The bank was pushed into a loss of HUF102bn (€327mn) in 2014.
However, most of those negative factors receded last year, and the bank likely managed to return to profit in 2015, suggest analysts. OTP is expected to close 2015 with net profit of HUF81bn, according to a survey of 20 analysts, published on the bank’s website. Full-year financials will be published on March 4.
The bank says it expects its Russian and Ukrainian units to return to profit after several years of losses, although the two eastern markets remain the main challenges, analysts note. “It’s questionable whether the Russian and Ukrainian operations will be profitable the whole year,” Stefan Maxian, director of research at Raiffeisen Centrobank in Hungary, tells bne IntelliNews. “In my estimation, both units will swing into the black towards the end of the year.”
Another positive should come at home this year. The Hungarian operating environment has vastly improved since the Fidesz government brokered a peace deal with the mostly foreign-owned banks early in 2015. Budapest has pledged to relieve pressure on the sector after years of punitive policies, and appears to be living up to its promise.
As part of the deal agreed with Austria’s Erste Bank Group and the European Bank for Reconstruction and Development (EBRD), the government has pushed through a bill to lower the country's high bank tax starting in 2016. Under the bill, banks with assets greater than HUF50bn (€160mn) will pay a 0.24% levy on assets, while smaller banks will face a bill of 0.15%. Since 2010, lenders had been paying 0.53%, the highest levy in Europe.
The peace deal comes as Budapest is trying to persuade banks to boost credit to support an economy that is set for a slowdown. Erratic policymaking has made the banks wary of new lending, leaving the central bank as the main driver of credit to the economy via its cheap-loan programme. Bank lending shrank from 75% of GDP in 2009 to just 53% in 2014.
Improving lending activity and a fall in loan-loss provisioning are the major questions for OTP, Jozsef Miro, an equity strategist at Erste, tells bne IntelliNews. “Both processes are on a positive trend, so the size is the only question,” he says. Erste estimates Hungarian corporate loan growth of around 1-2% this year, while the government’s newly launched home loan subsidy programme should result in another HUF100bn-200bn in new mortgage loans.
Along with lower tax payments, OTP’s provisions are forecast to decrease in 2016, reflecting the significant slowdown in bad loans, Miro notes. These two factors should result in higher profit.
On the hunt
Increased profitability means more funds for OTP to invest, should it decide to chase acquisition opportunities. The Hungarian bank appeared to have abandoned in recent years an earlier strategy to bulk up via M&A at home. That came on the back of the tough policies on the sector and a falling out with the ruling Fidesz party.
Instead, OTP has been following a strategy to buy up smaller lenders around the region instead of Hungary, and now has units in Bulgaria, Romania, Serbia and Croatia. That offers it a platform to “chase” deals in markets where it still considers its presence sub-optimal, says Sandor Pataki, an investor relations officer at OTP. “In Croatia and Romania we made smaller-scale purchases earlier and within our existing markets Romania looks attractive,” he tells bne IntelliNews. “We might consider further deals there in the case that pricing is acceptable and those assets represent a good fit to our business.”
Erste’s Miro insists that OTP also "definitely remains in the race,” at home in Hungary, though others are less sure.
Currently, the biggest acquisition target on the home market is state-owned MKB, for which the central bank has invited offers. “OTP looked at MKB... but current plans do not envisage such an acquisition,” Raiffeisen's Maxian says.
It also remains to be seen whether OTP will show any interest in Budapest Bank, which the government bought from GE Capital last year and has pledged to privatise. Meanwhile, there is speculation that OTP is in talks to buy the Hungarian retail mortgage portfolio of AXA Bank Europe, the Belgian banking arm of French insurance group AXA. A potential deal could boost OTP’s mortgage portfolio by a fifth.