Hungary's OTP - On The Prowl

By bne IntelliNews May 3, 2010

Thomas Escritt in Budapest -

Hungary's OTP Group is scouting again for acquisitions in Central and Eastern Europe and won't pay any dividends this year to preserve its acquisition war chest, the regional bank's chairman said on April 30.

Speaking at the bank's annual general meeting, Sandor Csanyi said OTP is considering acquisitions in neighbouring countries where the banking market looked ripe for further consolidation and is also open to acquisitions in its home market. He said the bank might make acquisitions to add to its existing operations in Serbia, Slovakia or Romania. The Hungarian press has frequently mentioned Romania's Carpatica, a minor player in Romania's crowded retail banking market, as a potential target. "We won't pay dividends because there are still signs of crisis," he said in reference to the turmoil surrounding Greece, adding: "Where [our subsidiaries]' operating scale is too small, we would like to make further acquisitions. For this we need sufficient capital reserves."

One senior manager sounds a note of caution. "We are coming out of the crisis, but we're still only going to buy banks at realistic prices, and after taking a careful look at portfolio qualities." The bank was more interested in buying an ongoing business and client base than in extended branch networks, the manager says.

OTP, which controls one-third of its domestic market by some measures, saw a previous decade-long buying spree brought to an abrupt halt by the onset of the financial crisis two years ago. After a series of acquisitions that began with the 2001 purchase of a bank in Slovakia, a deal with PKO BP, the partially state-owned Polish bank, had to be shelved amid the uncertainty that saw Hungary turn to multilateral lenders for a €20bn bailout in the autumn of 2008.

Csanyi said OTP had navigated the worst of the crisis successfully, insisting that its regional strategy had paid off. He had recently turned down an offer for the bank's Ukrainian subsidiary, he said, after having tried unsuccessfully to sell it in December 2008. "Yesterday, the banker [to whom I offered it] called me back, asking to buy it. I said no."

Bad loans

Profits were down from the previous year, while a decline in credit portfolio quality was counterbalanced by an improvement in the bank's capital adequacy ratio. The bank reported a post-tax profit of HUF150.2bn, down from HUF241.1bn in 2008, and a fall in portfolio qualities was counterbalanced by an improvement in its Tier I capital adequacy, which stood at 13.8%, up from 11.3% last year. Acknowledging that tighter credit conditions demanded a different approach, he said the bank would place a much greater emphasis on building up its deposit base.

Across the group, portfolio qualities have declined sharply. Non-performing loan ratios have almost doubled compared with 2008, with the proportion of loans more than 90 days overdue standing at 7.4%, up from 4.3% in 2008. Hungary's banks suffered heavily last year as borrowers struggled to pay back euro-denominated loans when the forint started falling sharply. But analysts doubt that further falls to the forint would have the same dramatic impact. "The borrowers who couldn't cope when the forint fell sharply last year have already defaulted," says Attila Gyurcsik, an analyst at Concorde Securities, a Budapest brokerage, who said the beneficial impact of a lower forint on unemployment would counterbalance the effect on portfolio qualities of a lower exchange rate.

Shareholders rejected a management proposal to cap voting rights at 10%. In a written justification of its proposal, management had argued: "In the current financial/economic environment, at the current share prices, the shareholding structure may easily undergo considerable rearrangement." But one minority shareholder questions this justification, saying: "It's not clear who OTP is meant to be protecting itself from with this measure."

Csanyi launched a stinging attack on the European Bank for Reconstruction and Development (EBRD), which owns some 2% of the bank and which opposed the voting rights cap. The EBRD made available a credit line at the height of the crisis, but Csanyi said the credit line's conditions were so poor that the bank had never had any intention of drawing on it. Despite this, he said, investors would have been nervous if OTP had rejected the EBRD's offer. In exchange for the credit line, the EBRD demanded OTP sell it €20m in share capital, which had later appreciated substantially in value, which he argued caused OTP a loss of "several hundred million" forints. "Next time they come offering help like this, we'll slam the door shut," he said.

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