OTP Bank turns Q1 profit as risk costs fall, Ukraine weighs

Fri May 16, 2014 1:34am EDT

* Moderates risk costs, avoids expected goodwill writedown

* Ukrainian business suffers amid crisis, sees more erosion

* Core Hungarian business, other banks solid

* NPL rises steeply as one big client falters in Hungary

By Marton Dunai

BUDAPEST, May 16 (Reuters) - Moderating risk costs and no new goodwill writedowns allowed Hungarian lender OTP Bank to turn a modest profit in the first quarter even as it paid a hefty bank tax in Hungary and faced a hostile market situation in Ukraine and Russia.

In its earnings statement published on Friday, OTP showed a profit of 5.86 billion forints ($26.34 million), compared with analyst expectations of a 5.7 billion forint loss in a poll by business website portfolio.hu.

Even as the bank was not forced to write down any goodwill as some analysts had expected, that was still the third-worst result in the past five years for the bank, which was profitable in nearly every quarter even in the economic crisis after 2008.

Ex-communist central Europe's largest independent lender, OTP operates in many countries in the region and the Ukrainian and Russian operations have been profitable businesses in the past, but the ongoing conflict and delinquency among borrowers sapped those markets.

At the end of the first quarter, OTP's management reckoned with a fairly swift resolution in the Ukrainian crisis - a scenario that it considered less and less probable now, the bank said in its quarterly report.

"In case the situation further escalates and the anticipated consolidation gets out of reach, that would negatively affect the medium-term expectations and performance of OTP Bank Ukraine, consequently it will have a material impact on the value of the company," OTP said.

The bank expects a fragile environment in Ukraine for the rest of the year and its subsidiary there is likely to post a loss of about 10 billion to 20 billion forints this year, it said.

In Russia, OTP said it would also post a loss this year as risk costs improved more slowly than it had expected with more clients falling behind on payments in the bank's flagship consumer loan portfolio than before.

Overall, OTP's risk provisions reached 68.9 billion forints in the first quarter after a 91.6 billion forint charge in the fourth quarter.

In its markets other than Russia and Ukraine, OTP reported solid numbers. Without a special bank tax that is due in the first quarter, the core Hungarian business posted a 33.9 billion forint profit, up 55 percent from a year before.

The Bulgarian unit posted a net profit of 11.3 billion forints, up 25 percent from the same period last year, and all other subsidiaries were also profitable, the bank said.

NON-PERFORMING LOANS

The rate of non-performing loans jumped to 21.2 percent of the loan book from 19.8 percent at the end of 2013, breaking a pattern of slow improvement in recent quarters, which the bank put down mostly to one large borrower falling behind in repayment in Hungary.

The bank's loan book shrank by 2 percent both on an annual and a quarterly basis as only consumer loans expanded, while other types of lending contracted or stagnated in the first quarter.

Deposits were stable as they grew in Hungary and Bulgaria but Ukrainian and Russian clients took out 8 percent and 10 percent of their deposits respectively in the first quarter.

Consolidated pre-tax profit was 38.98 billion forints, up sharply from 14.4 billion forints in the fourth quarter of the previous year.

The bank's interest income was 162.5 billion forints in the quarter, down 2 percent from a year earlier, while it made 42 billion forints from fees, a 17 percent annual rise.

The bank said its capital position remained robust, with its solvency margin at 20.2 percent of assets, up from 19.9 percent in the fourth quarter and far above the regulatory minimum of 8 percent. ($1 = 222.4438 Hungarian Forints)

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