UPDATE 1-Hungary's OTP faces 'lean times' as Russia weighs
* Russian profit will remain lower as bank retools business
* Profit in Hungary down on interest rate falls, new tax
* Bad debts top 20 pct, capital position remains strong (Adds outlook in Russia, CFO quote, detail)
By Marton Dunai
BUDAPEST, Aug 15 (Reuters) - Hungary-based OTP Bank , one of Eastern Europe's biggest lenders, saw quarterly profit knocked by bad Russian loans and said it was bracing for tougher times ahead as its expansion abroad stalls.
Provisioning against bad consumer debt in Russia -- where a fifth of the loans are behind payment -- and a special tax in its home market burdened second-quarter net profit, the bank said on Thursday.
"It seems like we'll have to prepare for some lean times in Russia after the very profitable 3-4 years we have had there," Deputy Chief Executive Laszlo Bencsik told reporters.
Other foreign units were also weak. Just 24 percent of the bank's earnings came from abroad in the quarter, down from 45 percent in the first, a sharp setback in the bank's long-term plan to earn 90 percent of its money outside of Hungary.
The only soundly profitable major foreign unit was its Bulgarian bank.
Bencsik said the OTP would stick to its plans to retool its Russian business even amid the adverse environment to focus more on general retail banking and small businesses but would not enter corporate financing.
UNCERTAINTY AT HOME
Hungary's government has been in talks with the country's banks about unwinding a massive stock of foreign currency loans that hundreds of thousands of Hungarians took out before the financial crisis.
Payments on the loans, denominated mostly in Swiss francs, soared as the forint weakened against the franc after 2008.
The uncertainty about the government's plans, which analysts have said could cost banks billions of euros, made it difficult to plan acquisitions, Bencsik said.
"This uncertainty and its potential effects on our capital position does not ease these kinds of decisions," Bencsik said. "Especially in Hungary, where the assessment of the value in any potential deal is also difficult."
The bank's core Hungarian business continued to suffer, with operating profit down 10 percent in the first half as interest margins narrowed amid record low rates, the loan book shrank and a shelter scheme on foreign currency loans also eroded profits.
Bencsik said the previously projected growth in loans was not evident yet.
The bank's consolidated second-quarter profit after tax slipped to 40.58 billion forints ($180 million) from 41.07 billion a year ago, while pre-tax profit rose steeply to 58.38 billion forints, from 46.08 billion a year ago.
The Hungarian government's financial sector taxes weighed heavily, with OTP paying 13.2 billion forints in a one-off tax.
OTP said bad debt provisioning in the home business remained subdued, at about half the level seen a year ago, but foreign provisions pushed the rate of non-performing loans rose to 20.8 percent by the end of June from 19.9 percent in March.
The bank said its capital position remained robust, however, with its capital adequacy ratio at 20.2 percent of assets, up from 19.7 percent in the first quarter and far above the regulatory minimum of 8 percent. ($1=225.55 Hungarian forints) (Editing by Greg Mahlich and Thomas Atkins)
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