OTP Mortgage Bank. Investor presentation April 2011

Transcription

1 OTP Mortgage Bank Investor presentation April 211 Gergely Tardos Head of Research, OTP Bank Sándor Pataki Director, IR&DCM, OTP Bank Csaba Nagy Deputy CEO, OTP Mortgage Bank

2 Contents Hungary An Economic Overview OTP Group Introduction OTP Mortgage Bank Operating Environment OTP Mortgage Bank Portfolio & Risks 2

3 Hungary An Economic Overview Current macroeconomic processes Fiscal outlook and government financing OTP Group Introduction OTP Mortgage Bank Operating Environment OTP Mortgage Bank Portfolio & Risks 3

4 Recession is likely to be over in the OTP universe. In 211 positive GDP-growth is expected in every country GDP growth (y-o-y and q-o-q growth rates, %, recently published quarterly statistics on real GDP growth) Growth Expectations for 211 (annual growth rate, %, Focus Economics) n.a 4 Source: Eurostat, Focus Economics, IMF, Consensus Economics * Third quarter data ** IMF *** Consensus Economics

5 High redistribution, high tax burden and weak labor market incentives had adverse effects on growth and employment in recent years Hungary Czech R. Poland Slovakia Budget expenditures (as % of GDP, 29) Public debt (as % of GDP, 2-21) GDP growth (22=1) Operating expenditures Wage bill Price subsidies Social expenditures Interest, paid Subsidies Investments Other expenditures 5.5% 7.7% 11,3% 3.1% 16.3% 8,7% 4.6% 1.7% 1,4% 1.% 3,% 3,9% 3,6% 3,7% Hungary +6.6pp 43.9% 5.9% 4.5% 14.1% CZ, PL, SLK avg. Undesired incentives on labour supply Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Average tax wedge* (%, 2-21e) Employment** (%, 1Q 26 1Q 21) e Q Q1 3 Q1 4 Q1 7 Q1 5 Q1 6 Q1 8 Q1 7 Q1 3.5pp/year 8 Q1 9 Q1 9 Q Q1 1 Q1 avg Source: Eurostat, OECD, OTP Research; * Average Tax wedge on average income: Total tax and social contribution paid by the employee and the employer imposed on the average income as % of the total labor costs (gross wage + social contribution paid by the employer) ** Employment: Total potential labor force between ages 15 and 64, LFS definition

6 In March 211 the government s structural reform plan was announced targeting higher growth by smaller redistribution, moderating deficit and decreasing public debt Structural reforms Major goals Lowering state redistribution to 4% of GDP from the current 48% by 214 Reducing public debt to 65-7% of GDP by 214 Gradually cutting budget deficit to 1.9% of GDP by 214 Increasing employment rate and improving labour market incentives Boosting potential economic growth to 4-6% p.a. Effect on balance (in HUF billion) TOTAL Expenditure side: Employment reform: Transformation of sick leave payment system - Capping per-capita social benefits - Reducing the time jobseekers receive allowance - Channeling EU funds into labour market programmes and vocational training Pension reform: Shifting to inflation-indexed pension system - Re-examination of all early retirements that involve disability pensions - Abolishing early retirement Public transportation reform: Creating the National Transportation Holdig (railways, bus companies ) - Abolishing parallel traffic; cost-effectiveness - Debt consolidation Tertiary education reform: Training to meet market demands - Reducing the number of students on fully subsidized scholarship - Increasing the weight of Engineering, IT and Sciences in education Pharmaceutical subsidies: Using international reference prices - More frequent fixing of the launch of generic drugs State and local government financing: Improved economies of scale - Changing the scope of activities (education, social services, health care) Revenue-side measures: Special tax on financial sector: +9 E-motorway tolls: Postponing corporate income tax cut: Source: Ministry of National Economy

7 According to OTP s forecast the planned measures will secure the market-based financing of the State through meeting deficit and debt targets Government OTP Research Consolidated government deficit as % of GDP (ESA-95) Forecast Government debt as % of GDP (ESA-95) Forecast Consolidated government expenditures (ESA-95) Forecast Gross FX-bond issuance (billion EUR) Forecast 7 Source: Central Statistical Office, NBH, Ministry for National Economy, OTP Research *: Taking pension assets transfer into account in 211 (one-off), the surplus may reach +2.2% **: Figure for 211 does not include the debt assumption from Hungarian Railways and from BKV (a total of 1.3% of GDP) and purchase of PPP assets (.7% of GDP) as they are one-off items

8 Hungary An Economic Overview OTP Group Introduction OTP Group members Financial performance Capital and liquidity position OTP Mortgage Bank Operating Environment OTP Mortgage Bank Portfolio & Risks 8

9 OTP Group is offering universal banking services to more than 12 million customers in 9 countries across the CEE Region Major Group Members in Europe Total Assets Gross Loans OTP Bank Russia Serbia Slovakia Croatia Romania 4% 1% 4% 5% Russia 2% 7% Montenegro Corporate loans 31% Car-financing 5% 4% Mortgage loans OTP banka Hrvatska CKB Montenegro OTP Banka Slovensko OTP Bank JSC Ukraine OTP banka Srbija Serbia OTP Bank Romania DSK Bank Bulgaria Ukraine 7% 57% Hungary Bulgaria 12% Total Assets: EUR 35. billion* 6% SME loans 18% Consumer loans Total Loans: EUR 26.7 billion* Number of Branches Headcount Serbia Serbia Montenegro Montenegro Slovakia Slovakia Other 55 Croatia 76 Hungary Croatia 2% 2% 33 Romania % 4% 4% 3% Romania 16 19% 32% Hungary Russia 155 Russia % Bulgaria Ukraine 17% Ukraine Bulgaria Total number of branches: 1,486 Total headcount: 25,9** Customer Deposits Corporate SME deposit 8% 25% 19% 49% Retail sight deposit Retail term deposit Total Deposits: EUR 2.8 billion* 9 * Assuming EURHUF rate at (31 December 21) ** Excluding selling agents employed at OTP Russia

10 After many years of high growth and high profitability before the crisis, OTP has demonstrated strong financial resilience during the period of turbulence; as a result S&P has recently upgraded the Bank Strong and resilient profitability steadily improving PAT until 8; average ROE twice as high as the industrial average and almost matching it during the crisis Consolidated Net Profits (HUF bn) CAGR 24% ROE* % average Banking tax Goodwill write-off Comm. Bank average** Outstanding capital strength consolidated CAR at 17.5%; Tier1 at 14%; Bank-only HAR CAR at 18.1%; all major indicators are better than for regional peers without any external capital enhancement; 2nd best results on the CEBS stress test Tangible equity/tangible assets rates in international comparison*** 11.% 7.1% 5.% 4.3% 4.2% 4.1% OTP Group s capital adequacy ratios in regional comparison*** 17.5% Tier2 Tier1 3.5% 14.% 13.6% 3.9% 13.6% 3.4% 13.% 3.3% 9.7% 1.2% 9.7% OTP Raiffeisen KBC Erste Intesa Uni- OTP Raiffeisen Erste Unicredit SP credit 4Q1 3Q1 4Q1 4Q1 2Q1 3Q1 4Q1 3Q1 4Q1 3Q1 Strong liquidity position gross operating liquidity exceeds EUR 5. billion equivalent 2.5 times as high as all outstanding external FX obligations until 215 Total liquidity breakdown (31 January 211, equivalent in EUR million) 5,18 Total 2,852 Primary**** 2,166 Repoable bonds (mortg. & muni) Group level FX maturities (consolidated, EUR mn) 1,5 1, 5 1, Covered Bond Bilateral Loan Bond * Calculated from the Group s adjusted net profit, without one-off items (result of the strategic open position, goodwill impairment, consolidated dividends, sale of OTP Garancia and special banking tax.). ** Average between 2Q ***Source: Bloomberg, OTP **** government bonds + liquid asset surplus within 1 month

11 21 OTP Group s 21 adjusted-after tax profit reached HUF 162 billion underpinning a 7% y-o-y growth, whereas non-adjusted after-tax profit declined by 22% due to the banking tax and goodwill write-offs After tax profit (consolidated, adjusted * ) (in HUF billion) % +7% % Bank tax Goodwill writedown After tax profit, accounting Financial highlights of OTP Group (consolidated, IFRS) Operating profit (adj.) in HUF billion Total income margin (adj. ** ) 8.22% 7.93% 8.9% Net interest margin (adj. ** ) 5.79% 6.17% 6.16% Operating cost / avg. assets 4.8% 3.65% 3.62% ROE, adjusted * (%) Risk cost rate (adj. ** ) 1.69% 3.57% 3.77% Bank tax 2.4 Goodwill writedown 1.2 ROE calculated 9.4 from accounting profit DPD9+ ratio (%) 4.5% 9.8% 13.7% Change of DPD9+ ratio (y-o-y, %-point).9% 5.3% 3.9% DPD9+ coverage (%) 85.8% 73.6% 74.4% Change of DPD9+ coverage (y-o-y, %-pont).8% -12.2%.8% Loan volume change (y-o-y) 15% -3% -,3% 11 * After-tax profit without one-off items ** Without one-off items (Upper Tier2 buyback, FX-swap revaluation, revaluation of FX provisions at OTP Core, FX-result offsetting the revaluation of FX-provisions at OTP Core and FX-gain related to FX-hedging of the provisions of some FX-loans of OJSC Ukraine).

12 Capital adequacy ratios of both OTP Group (consolidated) and OTP Bank (unconsolidated) are above regulatory minimum and remained outstandingly high even in international comparison Capital Adequacy Ratio OTP Group consolidated (IFRS) Tier2 Tier1 17.2% 17.5% 15.4% +.3%p 13.4% +1.8%p +2.%p 13.7% 14.% 11.3% 8.3% Capital Adequacy Ratio OTP Bank unconsolidated (HAS) Tier2 Tier1 18.1% 16.2% +1.9%p 12.% 11.% +4.2%p +1.1%p 15.4% 13.1% 9.% 7.% OTP Group s capital adequacy ratio in international comparison 17.5% 16.5% Tier2 3.5% 13.6% 13.6% 13.% 12.5% 3.9% 3.4% 3.9% 3.3% 3.6% Amount of capital received from the state (in EUR billion) 7. Tier1 14.% 1.2% 9.7% 9.7% 8.9% 12.6% OTP Erste Raiffeisen Unicredit Intesa SP KBC OTP Erste Raiffeisen KBC 4Q 1 4Q 1 3Q 1 3Q 1 3Q 1 4Q 1 12 Source: Bloomberg, OTP

13 Retail and corporate loan flows are on an increasing trend, but still at moderate levels compared to pre-crisis Net Retail Loan Flows (as a % of GDP) 1 Total Y-o-Y loan volume changes in OTP Group in 21, FX-adjusted % 1% 24% -7% 1% -1% 1% -3% -2% -15% F 212F Net Corporate Loan Flows (as a % of GDP) Consumer Mortgage Corporate * Carfinancing 1% 1% 61% -11% % -33% 5% 2% -11% % -2% 3% -7% 4% 5% 1% 6% 3% -11% -4% 3% -26% -5% 1% -3% % -9% -6% -17% -13% -8% -2% -23% Cons. Core OBRu OBU DSK OBR OBH OBS OBSr CKB 1 Y-o-Y loan volume changes in OTP Group in 29, FX-adjusted 5 Total -3% % -1% -12% -1% -9% % -15% -6% -29% Consumer 2% 6% 1% -1% -27% -2% 15% -27% -24% Mortgage -3% -3% -12% -12% 4% -1% -1% % -3% -11% F 212F Corporate * -4% 3% -9% -9% -7% -14% 3% -22% -2% -35% Hungary Russia Ukraine Bulgaria Romania Carfinancing -2% -27% -26% -15% 13 * including SME, LME and municipality loans as well

14 whereas saving rates remained at close to pre-crisis levels Net Retail Deposit Flows (as a % of GDP) 1 5 Total Retail Y-o-Y deposit volume changes in OTP Group in 21, FX-adjusted 3% 1% 18% 4% 3% 13% 7% -2% 14% -7% 2% -1% 22% 5% 3% -11% 9% 4% 22% 8% Corporate * ** 3% 5% 11% 3% -1% 46% -4% -1% 5% -13% F 212F Net Corporate Deposit Flows (as a % of GDP) 1 Cons. Core OBRu OBU DSK OBR OBH OBS OBSr CKB Y-o-Y deposit volume changes in OTP Group in 29, FX-adjusted 5 Total 7% 7% 39% % 8% 34% 5% -6% -5% -21% Retail 6% 1% 46% 31% 9% 53% 7% 3% -3% -4% F 212F Corporate * 11% 19% 29% -2% 4% 15% -9% -17% -7% -35% Hungary Russia Ukraine Bulgaria Romania 14 * including SME, LME and municipality deposits as well ** Adjusted by the end-21 deposit withdrawals of the Funds managed by OTP Asset Management (Hungary). In 4Q 21, the maturing term deposits of the Funds were allocated into government papers, however in January 211 most of the withdrawn money was deposited again to OTP Core.

15 Portfolio quality deterioration decelerated in 21, however risk costs remained high as a result of the increase in the provision coverage level - as opposed to 29, when coverage shrank by 12%-points Risk cost (HUF billion) Risk cost rate (%).8% 1.7% 3.6% 3.8% DPD9+ ratio (%) 3.6%** 4.5% 9.8% 13.7% DPD9+ coverage (%) 85.%** 85.8% 73.6% 74.4% the consolidated DPD9+ ratio.9%p 5.3%p Y-o-y change (in %-points) in 3.9%p the consolidated DPD9+ coverage ratio.8%p.8%p FX-adjusted quarterly change of consolidated DPD9+ loan volumes (in HUF billion) % % 82-5% -13% +124% 77-26% +4% Q 2Q 3Q 4Q 1Q 2Q 3Q Share of rescheduled loans within the consolidated retail portfolio* (%, without SME exposures) Share of DPD -9 rescheduled loans Share of DPD9+ rescheduled loans Change in DPD9+ loan volume Sold or written-down DPD9+ loan volume Outstanding exposure to Technosila Q %p 28** ** Q 2Q 3Q 4Q 1Q 2Q 3Q Q 15 * From 4Q 21 DPD9+ loan volumes of OTP Flat Lease Ltd. are included in the consolidated statistics. Impact of the change is limited, statistics of the base periods are unadjusted, thus both y-o-y and q-o-q changes in risk indicators are affected by this effect. ** Indicator of 1Q 28 is displayed because of a methodological change in the calculation of NPLs.

16 No significant peaks in maturity profile of senior debts; refinancing of mortgage bonds solved as a result of the liquidity enhancing measures of the NBH (repo-eligible instruments); minimal maturing sub-debt until 215 Liability structure of OTP Group, 21 (in EUR billion) Breakdown of OTP Group liabilities Maturity profile of OTP Group 4 until 215 (in EUR million) Senior notes and bilateral loans FX denominated 16 Other liabilities 2.3 Customer deposits 2.9 Retail bonds 1. Other interbank liabilities 1.9 Bilateral loans.6 Senior notes.5 Mortgage bonds (cons.) 1.6 Other issued bonds.6 Lower Tier2.7 Upper Tier2.3 Hybrid Tier 1.4 Shareholders equity w/o Hybrid Tier1 Total Liabilities and Shareholders equity Net operating liquidity buffer Operating liquidity % 15% 16% The current liquidity is enough to prepay all the outstanding FX-denominated external obligations of OTP Group. 1, 1 Retail bonds: low refinancing risk, retail customers consider these as alternatives for term deposits 2 Other interbank liabilities: short term interbank liabilities for liquidity management purposes 3 Net operating liquidity buffer = Operating liquidity Maturing debt over 1 month within 1 year (excl. mortgage bonds) 4 Only external obligations of the Group Subordinated debt 1, Mortgage bonds (consolidated) 1, EUR HUF Issued mortgage bonds are repo-eligible at NBH, furthermore the Group is able to issue ECB-eligible mortgage bonds in EUR, thus refinancing risk of both HUF and EUR mortgage bonds is minimal Lower Tier

17 Despite strong profitability, capital and liquidity position, rating map of countries and subsidiaries in OTP Universe suggest the strong sovereign ceiling effect (rating outlook) + positive - negative stable Moody's Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 LATEST RATING NEWS Hungarian sovereign and OTP Bank rating OTP Moody's OTP S&P Sov Moody's Sov S&P S&P Moody's has affirmed OTP Bank's standalone BFSR at D+, at the same time it lowered the bank's local currency LT and ST deposit ratings to Baa3 from Baa2. Moody's also lowered OTP's FX senior debt rating to Baa3, its subordinated debt rating to Ba1 and its junior subordinated debt rating to Ba2 (hyb) by notch each. The bank's FX deposit ratings were affirmed at Baa3. The ratings carry negative outlook -- except the BFSR which has a stable outlook. Moody's has affirmed OTP Mortgage Bank's standalone BFSR at D+ and its FX deposit ratings at Baa3. Moody's lowered the local-currency deposit ratings of OTP Mortgage Bank to Baa3 from Baa2. The outlook on the ratings is negative, except the BFSR which has stable outlook. (5 April 211) Moody's Investors Service has revised the outlook on Montenegro's Ba3 government bond ratings to stable from negative and has affirmed the rating at its current level. (3 March 211) S&P raised its long- and short-term counterparty credit ratings on OTP Bank and OTP Mortgage Bank to 'BBB-/A-3' from 'BB+/B'. Both outlooks are negative. (24 March 211) S&P affirmed its 'BBB-/A-3' long- and short-term foreign and local currency sovereign credit ratings on Hungary. The outlook on the ratings remains negative. (24 March 211) S&P raised its long-term local and foreign currency sovereign credit ratings on Serbia to 'BB' from 'BB-'. The outlook is stable. (16 March 211) Fitch downgraded OTP Bank's Support Rating to '3' from '2 and affirmed the Long-term Issuer Default Rating (IDR) of OJSC OTP Bank at 'BB' with a Negative Outlook. (3 December 21) Fitch downgraded Hungary's Long-term foreign currency Issuer Default Rating (IDR) to 'BBB- from 'BBB' and its Long-term local currency IDR to 'BBB' from 'BBB+'. The Outlooks on the Long-term IDRs remained negative. (23 December 21) S&P lowered its long-term sovereign credit rating on the Republic of Croatia to 'BBB-' from 'BBB'. The outlook is negative. (21 December 21) A+ A A- BBB+ BBB BBB- HU(-), CR(-) BBB- AA- BBB- BB+ BB OTP Bank (Hungary) OTP Mortgage Bank (HU) OTP Banka Slovensko (SK) DSK Bank (Bulgaria) OAO OTP Bank (Russia) OTP Bank JSC (Ukraine) Aaa AAA AAA Aa1 AA+ AA+ Aa2 AA AA Aa3 AA- AA- A1 SK() A+ SK() A+ SK() A2 A A A3 A- A- Baa1 RU() BBB+ BBB+ Baa2 BBB RU(), BG() BBB RU(+) Baa3 Moody s Standard & Poor s Fitch BG(+), CR(), RO(), HU(-) Moody s S&P Fitch Baa3 (-) Baa3 (-) Baa3 (-) Baa3 (-) Ba1 (-) B3 () BBB- (-) BBB- (-) HU(-), BG(-), CR(-) Ba1 BB+ RO() BB+ RO() MN(-), Ba2 BB SRB() BB BB (-) Ba3 MN() BB- BB- SRB() B1 B+ UA() B+ B2 UA() B B UA() B3 B- B- Caa1 CCC+ CCC+ 17 * Last updated: 5/4/211 Country ratings: long term foreign currency government bond ratings, Bank ratings: long term foreign currency deposit ratings Abbreviations: BG - Bulgaria, CR - Croatia, HU Hungary, MN - Montenegro, RO - Romania, RU - Russia, SRB - Serbia, SK - Slovakia, UA Ukraine

18 Hungary An Economic Overview OTP Group Introduction OTP Mortgage Bank Operating Environment Legal framework Housing and mortgage market in Hungary OTP Mortgage Bank Portfolio & Risks 18

19 Legal Framework in Hungary: An Overview Act on Mortgage Banks and the Mortgage Bond based on German legislation General Specialised credit institution principle Limited business activity loan origination is restricted to mortgage loans, no deposits, etc. Derivatives for hedging and risk management purposes only Supervision Cover pool supervisor should be approved by Hungarian Financial Supervisory Authority; in practice Hungarian mortgage banks hire one of the big four audit companies as auditor and an other as coverage supervisor Special supervision through supervisory authority special annual on-site audit Regular public reporting requirements obligation to publish key data on collateralisation Cross-border lending max. 15% of total portfolio, geographical scope is limited to EEA countries LTV cap for individual loans 7%, LTV is based on mortgage lending value LTV cap on portfolio level 7% Lending limits LTV limit for calculating collateralisation residential properties: 7%, commercial and agricultural properties: 6% Defined methods for property valuation special regulation applies to the real estate appraisals of mortgage banks with respect to valuation, mortgage lending value calculation methods, professional experience and education Limit on FX lending since 14 August 21 no mortgage right can be registered in the real estate register with the purpose of securing FX denominated loans 19

20 Legal Framework in Hungary: Insolvency Procedure Collateralisation requirements both on nominal value and NPV basis, stress testing Cover pool Substitute collateral allowed maximum 2% of coverage No mandatory OC Hungarian mortgage bonds Pari passu rank of mortgage bonds Issuance under Prospectus Directive ECB eligibility if issued either via Euroclear or Clearstream Priority status of investors is assured Specific legal framework for bankruptcy of the issuer superseding general insolvency law Segregation of cover pool assets from general insolvency estate ring fencing Insolvency procedure Bankruptcy remoteness No acceleration of mortgage bonds in case of insolvency of the issuer Emergency plan in case of crisis of the issuer Special supervision cover pool administrator is nominated, cover pool supervisor remains responsible Investors have preferential right to non-cover pool assets ordinary collateral in excess of the LTV-limit as well as any liquid assets held but not recognized as substitute collateral will be used to satisfy bondholders claims 2

21 Comparison of the Hungarian and the German Covered Bond Legislation Key provisions Hungary Germany Specialised Credit Institution Principle Yes No, but special licence required Supervision Hungarian FSA BaFin Coverage Supervisor Yes Yes Matching Requirements NPV coverage is maintained under either dynamic or static stress-scenarios. Nominal volume and payable interest of the outstanding bonds must always be covered by the nominal volume and interest income from cover assets NPV coverage is maintained under either dynamic or static stress-scenarios. Nominal volume and payable interest of the outstanding bonds must always be covered by the nominal volume and interest income from cover assets Asset Segregartion Cover register, dedicated receiver to manage Covered Bonds after insolvency Cover register, dedicated receiver to manage Covered Bonds after insolvency Mandatory O/C No 2% on a PV basis Fulfills UCITS/CRD Yes Yes ECB Eligibility Yes Yes 21

22 Legal Framework in Hungary: Developments in March 29 Government programme to soften the households payment burden under the economic recession June 29 Subsidy system of housing loans drastically cut January 21 Reduction of duty on the acquisition of real estate aiming to boost property market January 21 Code of Conduct of banks with the purpose of strengthening confidence between retail borrowers and creditors March 21 New regulation of LTV limits (HUF 75%, EUR 6%, other FX 45%) August 21 No mortgage right can be registered in the real estate register with the purpose of securing new FX loans August 21 Moratorium on evictions (since March 211 only housing loans are subject to the moratorium), to be in effect until July April / May 211 New mortgage relief programme For a grace period of 3 years, borrowers will be allowed to pay scheduled CHF instalment at a fixed CHFHUF rate (fixed below market rate), with unpaid amount accumulating at a special account, the special account to be guaranteed by the Government. Banks purchase EURCHF hedge in the market, setting an indirect CHFHUF level via market EURHUF. Main aim of the programme is to allow sharing the burden of CHFHUF between CHF strength (hedged in the market) and HUF weakness (managed via grace period). 22

23 Housing market: drop in demand followed by declining construction activity, with trend expected to change in 211 Construction activity The housing stock consists of 4.3 million properties. The number of properties grew by.3 million since 2, with the average number of residents per property dropping from 2.5 to 2.3. Average housing standards in Hungary are still low by Western European standards, even after significant developments in the last decade. There is substantial need for renovation and improvement. For traditional reasons, Hungary has one of the highest home ownership ratios at 92% within the European Union. The average home ownership ratio in the EU is approximately 65%. High home ownership ratio induces stronger payment discipline. The decline of construction activity started in 29. The number of issued building permits fell by 37% annually, while the number of occupancy permits also dropped. Recent data forecast that activity in the sector will stabilise at the current level, significant growth can only be expected after 212. The secondary market also shows signs of fall in demand. The number of market transactions dropped by 4% in 29, and further 1% in 21. On the positive side, the trend seems to change and the number of transactions is expected to grow in % 9% 8% 7% 6% 5% 4% 3% 2% 1% % Building permits Occupancy permits Home ownership ratios H I PL GB EU27 A F DK NL S CZ D 23 Source: Central Statistical Office

24 Real estate prices: fall due to temporary excess of supply, no bubble-effect In Hungary, the period of rapidly growing house prices was relatively short and did take place earlier compared to other Central and Eastern European countries House price index (2=1) Prices did increase sharply between 1998 and 23 with the introduction of state subsidies. With the onset of the economic crisis, declining economic activity, cut of state subsidies and stricter mortgage lending criteria led to a steep fall of demand in the housing market. Construction activity followed this trend with a delay, as ongoing housing projects were finished. As a result of excess supply over demand, real estate prices fell 6.3% in 29 and 5.7% in 21. With the slowing down of the construction activity, the market is getting balanced. Prices are expected to change moderately in 211. Changes are following the trend of Western European countries unlike other Central and Eastern European markets (most notably the Baltic states). Price trends suggest that fall can be attributed to a temporary excess of supply. There is no sign of house prices being artificially inflated by speculation. In international comparison, house prices are extremely low in Hungary, even compared to other CEE countries. (EUR 7-2 / m 2 in Budapest.) Nominal price index Annual change in house prices Real price index FRA ESP GER UK HUN 24 Source: Central Statistical Office, FHB, RICS European Housing Review

25 Households' monthly debt servicing burden / GDP HUF billion Mortgage market in Hungary: shrinking FX loan portfolio, low level of indebtedness in international comparison Development of mortgage loans in Hungary Home ownership was stimulated through the government interest subsidy regime, which was first introduced in 21 and was amended time to time % 9% 8% 7% Due to the fierce competition among commercial banks, FX denominated (mainly CHF) loan products were offered to customers from % 5% 4% 3% 2% Lending to households is continuously declining, however the foreign currency portfolio is shrinking quite slowly. 1 1% % Banks tightened their lending conditions in 21 in accordance with regulatory changes. HUF FX Ratio of FX loans (rhs) The aggregate demand for loans remains rather subdued, but there has been shift in the demand toward forint denominated loans. 6,5% 6,% Households' debt-to-gdp ratio in CEE LV EE Despite continuous net repayment the outstanding amount of mortgage loans increased during 21 due to depreciation of forint. The debt to GDP ratio is relatively low in Hungary (31%) compared to the region and the EU. Households aggregate debt burden has increased mostly due to the appreciation of Swiss franc. Average PTI increased to 32% from 19% during the crisis. 5,5% HU BG 5,% RO 4,5% PL 4,% LT CZ 3,5% 3,% SK 15% 2% 25% 3% 35% 4% 45% 5% 55% Household loan / GDP 25 Source: National Bank of Hungary

26 25Q1 Q2 Q3 Q4 26Q1 Q2 Q3 Q4 27Q1 Q2 Q3 Q4 28Q1 Q2 Q3 Q4 29Q1 Q2 Q3 Q4 21Q1 Q2 Q3 % 28Q2 Q3 Q4 29Q1 Q2 Q3 Q4 21Q1 Q2 Q3 % Asset quality analysis: worsening portfolio, still moderate risk levels The depreciation of the forint against the Swiss franc and the persistently high unemployment severely reduced households debt servicing capacity DPD 9+ ratio for certain retail product types By the end of September 21, delinquency ratio has increased to 1.5 per cent. 5 The smallest delinquency ratios was recorded for housing loans, especially for HUF denominated loans, this is partly due to the fact that a large portion of them are state subsidized and their interest rates haven t changed notably since the beginning of the crisis. The DPD 9+ ratio was 3.8% for HUF denominated and 5.9% for FX denominated housing loans. For home equity loans it was 4.5% and 8.6% (September 21) In September 21, the average LTV of the total household loan portfolio was over 7% Housing loans - HUF Housing loans - FX Mortgage loans - HUF Mortgage loans - FX Unsecured loans - FX Unsecured loans - HUF Total outstanding LTV ratios of housing loans The depreciating exchange rate put pressure on LTV levels. Average LTV - total housing loans Average LTV - HUF housing loans Average LTV - FX housing loans 26 Source: National Bank of Hungary

27 % 27Q1 Q2 Q3 Q4 28Q1 Q2 Q3 Q4 29Q1 Q2 Q3 Q4 21Q1 Q2 Q3 % Credit risk: efficient provisioning, more than sufficient coverage for loan-losses The loan-loss provisioning for household loan portfolio increased over the crisis. 3,5 3, 2,5 Cost of provisioning to total outstanding amount The rapid appreciation of the Swiss franc had a detrimental impact on banks loan losses from two aspects: due to surging monthly instalments it deteriorated households debt servicing capacity and thus increased PD 2, 1,5 1,,5, it raised LTV and consequently the LGD In addition, falling residential property prices also increased the value of expected loss due to the declining collateral value. Beside NPL and provisioning the loan-loss coverage ratio for nonperforming loans is also an important indicator measuring credit risk, which was 26% for household loans in September 21. The LTV of non-performing loans was 14% on average, which means 4% loss would be suffered on the portfolio. As the current coverage ratio is 26%, it would be more than sufficient to cover these losses Cost of provisioning to total outstanding amount - 12-month moving average Jun 9 Loan-loss coverage for non-performing loans Jul Aug Sep Oct Nov Dec Jan 1 Feb Mar Apr May Jun Coverage ratio of mortgage loans LTV of non-performing mortgage loan minus 1 per cent Jul Aug Sep 27 Source: National Bank of Hungary

28 Hungary An Economic Overview OTP Group Introduction OTP Mortgage Bank Operating Environment OTP Mortgage Bank Portfolio & Risks Financials Portfolio Lending process 28

29 OTP Mortgage Bank: the leading mortgage lender in Hungary Started operations in 22 Company profile Fully owned subsidiary of OTP Bank The 7th largest bank in Hungary by total assets First Hungarian bank to issue securities in the Euro market (24); first Hungarian issuer to sell Jumbo series (28) Specialised credit institution with limited sphere of activities Offering mortgage credit only Operation No deposit collection, corporate lending, investment activity, etc. In addition to general banking regulation, special regulatory requirements Auditor: Deloitte; Coverage Supervisor: KPMG OTP Mortgage Bank is the mortgage funding vehicle of OTP Bank Business model OTP Bank provides services on various fields: accounting, IT, customer services Fully benefiting from the synergies arising from being a member of OTP Group OTP Mortgage Bank maintains its ability to operate on its own Cover pool is separated from senior risk Cover pool Portfolio of 1% Hungarian, first lien, residential mortgage loans Mortgage bond rating: Baa1 (Moody s) 29

30 OTP Mortgage Bank Balance sheet Cash, placements with other banks Government securities Loans, net of allowance for loan losses 1,126 1,455 1,443 1,562 from this: loan losses Other assets TOTAL ASSETS 1,239 1,612 1,981 1,68 Mortgage bonds 973 1,324 1,6 1,361 Related party and other bank financing Subordinated loans Other liabilities TOTAL LIABILITIES 1,192 1,546 1,889 1,61 Share capital Retained earnings and reserves TOTAL EQUITY Audited year-end IFRS data in HUF billion. Asset side is dominated by mortgage loans and government bonds (registered in the cover pool as substitute collateral). No other securities, real estate or other investments. Loan portfolio CAGR was 11.5% in 27-21, partially due to HUF depreciation against CHF. Prior to 21 non-performing loans were sold at book value to OTP Bank, no loan losses at OTP Mortgage Bank. Pre-financing at end of 29 raised volume of mortgage bonds and government securities (substitute collateral). Liability side is made up of mortgage bonds and interbank loans. 29 was an outstanding year, dividend paid was EUR 89 million. 3

31 OTP Mortgage Bank Financial highlights Total interest income Total interest expense Provision for possible loan losses Net interest income after provision Total non-interest income Total non-interest expense Income taxes Net income ROE * 11.2% 2.6% 47.2% 12.7% ROA *.4%.7% 1.4%.5% Net interest margin * 3.3% 2.% 2.8% 2.7% Capital adequacy ratio * 9.6% 9.1% 9.9% 9.4% Tier 1 capital adequacy ratio * 9.6% 9.1% 9.5% 8.9% Audited year-end IFRS data in HUF billion, unless indicated. Shrinking net interest income due to decreasing volume of loans receiving state subsidy, growing funding costs and provisioning. Prior to 21 non-performing loans were sold at book value to OTP Bank and no provisions were created at OTP Mortgage Bank. Extraordinary income in 21: HUF 14.5 billion received from OTP Bank as compensation for terminating asset-side guarantee. Financial institutions special tax paid in 21: HUF 8.3 bn. Bulk of non-interest expenses is fee and commission paid to OTP Bank. Stable capital position above prescribed regulatory level. 31 * Hungarian accounting standards.

32 28 Q1 Q2 Q3 Q4 29 Q1 Q2 Q3 Q4 21 Q1 Q2 Q3 Q4 EUR million 28 Q1 Q2 Q3 Q4 29 Q1 Q2 Q3 Q4 21 Q1 Q2 Q3 Q4 EUR billion OTP Mortgage Bank has a well-diversified portfolio containing residential loans only 6 Development of total loan portfolio Total loan portfolio EUR 5.6 bn 5 Ratio of loans registered into cover pool 97% 4 3 Ratio of FX denominated loans in portfolio 56% 2 Number of loans 31,514 1 Average loan size EUR 18 k Average maturity 15.5 years HUF CHF JPY EUR Average seasoning 4.3 years Geographical distribution 1% Hungarian residential properties Weighted average LTV 67.2% Lending value of real estate behind loan portfolio EUR 1.8 bn Ratio of DPD 9+ loans 2.7% Currently offered products HUF denominated loans Net changes in FX loan portfolio (adjusted for exchange rate) (as at 31 December 21) CHF JPY EUR 32

33 Portfolio breakdown (as at 31 December 21) Size Portfolio average HUF 5. million Maturity Portfolio average 15.5 years 5% 8% 32% 17% under HUF 5 million 5-1 million 1-15 million 38% 15-2 mm over 2 million 21% 33% 3% 2% 13% 28% Under 5 years 5-1 years 1-15 years 15-2 years 2-25 years Over 25 years Denomination LTV Portfolio average 67.2% 44% 1% 2% 44% HUF EUR CHF JPY 42% 11% 1% 14% 1% 13% Under 3% 3-4% 41-5% 51-6% 61-7% Over 7% 33

34 -.5 years.5-1 years years years years years years years years years years years years years years years years years over 9 years HUF billion HUF billion Portfolio breakdown (as at 31 December 21) Purpose Geographical distribution 1% Hungarian residential properties 9% 26% 13% 52% Purchase Building Renovation, improvement Home equity loans 15% 18% 12% 22% 33% Budapest and Central Northeast Northwest Southeast Southwest Seasoning Seasoning Origination year Origination year 34

35 EUR billion EUR billion OC and ALM matching requirements Over-collateralization (based on nominal value) OC test The aggregate outstanding amount of the cover pool must be at least equal to the outstanding amount of covered bonds % JPY EUR CHF HUF NPV test The net present value of the cover pool must be at least equal to the NPV of the outstanding covered bond total coverage Over-collateralization (based on NPV calculation) covered bond total 9 Interest coverage test Interest generated by the covered pool must be sufficient to cover interest payments under covered bonds % JPY EUR CHF 2 1 HUF total coverage covered bond total 35

36 HUF billion 27 Q4 28 Q1 28 Q2 28 Q3 28 Q4 29 Q1 29 Q2 29 Q3 29 Q4 21 Q1 21 Q2 21 Q3 21 Q4 Asset quality analysis: low level of NPLs compared to the Hungarian banking sector Before April 21 there was no provisioning at OTP Mortgage Bank, non-performing loans were sold to OTP Bank at (total) book value. With the transformation of OTP Bank s guarantee, since April 21, provisions and losses concerning non-performing loans are booked in OTP Mortgage Bank s Financials, according to its internal regulation. 7% 6% 5% 4% 3% 2% 1% Ratio of DPD9+ loans in OTP Mortgage Bank's loan portfolio Ratio of DPD9+ loans in the total loan portfolio has worsened and % reached record level, but this level is still low (2.7%) compared even to the best performing housing loans in Hungary. OTP Mortgage Bank s portfolio outperforms the Hungarian banking sector because the bank has started FX lending later than others with stricter limits and regulations applied to mortgage banks OTP MB avergage Housing HUF (Hungary) Housing FX (Hungary) DPD9+ loans Another reason for the good performance is the high ratio of additional insurances connected to mortgage loans. An amount of 1 billion HUF was insured with payment protection insurance and 38 billion HUF was insured with mortgage insurance JPY EUR CHF HUF

37 HUF billion HUF billion Conservative provisioning policy covering losses The Bank pursues conservative and prudent provisioning policy. The bank rates its on-off receivables and accounting for impairments monthly according to IFRS 9 standards. With the transformation of OTP Bank s guarantee, since April 21, provisions and losses concerning non-performing loans are booked in OTP Mortgage Bank s Financials. On the basis of the first data of the foreclosure processes, provisions provide sufficient cover for the losses in respect of both HUF and FX denominated loans. OTP Mortgage Bank s provisioning is very conservative: the current coverage ratio is 45% (vs. average of 26% in Hungary). The cost of credit was 1.8% for 21 in OTP Mortgage Bank. The average LGD is 19% for the last 5 years. As a result, the ratio of active restructured loans was 4% related to the total loan portfolio at the end of Provisions and losses at OTP Mortgage Bank (cumulated) Provisions Losses Development of restructured loans EUR JPY CHF HUF 37

38 EUR billion EUR billion Funding structure Maturity profile of covered bonds OTP Mortgage Bank has a strategic function of a mortgage funding vehicle of OTP Bank. 2,5 Liabilities contain mainly covered bonds, owned by international and domestic institutional investors, complemented by Hungarian retail covered bonds. EUR denominated mortgage bonds issued by OTP Mortgage Bank are ECB eligible. 2, 1,5 1, HUF EUR OTP Mortgage Bank has an EMTN programme since 24, which has been updated time to time.,5 Main issuances: December 24: EUR 2 million, 1y maturity, July 26: EUR 75 million, 5y maturity March 28: EUR 1 billion, 2y maturity December 29: EUR 1,5 billion, 2y maturity 6 5,58 ALM structure,23 March 21: EUR 3 million Maturities in 211: EUR 75 million in July and EUR 1.35 billion in December The outstanding amount of mortgage bonds is EUR 4.6 billion. 5% is denominated both in HUF and EUR. Natural hedging: with the purpose of hedging FX risk OTP Mortgage Bank swaps EUR funding to CHF and JPY (CCIRS) ,46 2,28,13,2 2,44 2,34 JPY CHF EUR HUF Total loan portfolio Mortgage Bonds+CCIRS 38

39 Underwriting process Scoring Carried out in branches Based on socio-demo data provided by the client, applicants account history PD Budget calculation Clients CF is primary source Based on verified income, Cost of living data from Central Statistical Office and internal database PTI Conditions of the loan Amount of the loan Value of collateral Property appraisal Acceptable ratio of collateral value reflects liquidity and collateral value Based on Tax authority data, internal database LTV 39

40 Lending process: risk-aware solutions from the first steps, developed monitoring and reporting Origination Underwriting Loan servicing Monitoring Provisioning Basic principles: no lending towards clients with adverse credit history or whose behaviour will likely be against the bank s interest; 4 eye principle; decision making is simplified and has a robust IT support; historical performance of loan portfolio is part of the incentive system. Recent developments, restrictions of the process (29-211): decreased LTV limits; more rigorous collateral appraisal is introduced; new elements of the loan amount calculation include higher reserves for exchange rate movements and minimum wage requirement. Distribution channels: branches are involved in the whole process, serve as the primary channel for distribution; agents are also involved, but with limited role: they are responsible for data collection and product introduction only. Aim: to provide early warning signals of potential problems for making the work-out and the client protection more efficient. Monitoring: involves mathematical-statistical calculations using internal and external database; supported by robust IT solutions; automated, regular, in-depth reporting system. Reports: effectiveness of origination/underwriting: ratio of rejection, reasons of rejection; vintage report of newly originated loans (3,6 months); delinquency report 3-6-9DPD; effectiveness of soft collection; development of risk cost - basis of provisioning. Reports are evaluated on a quarterly basis by the directors and managers of risk and business units. 4

41 Centralised and strongly regulated arrears management Client protection programme Soft collection Hard collection Client Protection Programme: comprehensive and integrated programme implemented gradually in 3 phases; ultimate aim: helping customers with payment problems and consequently increasing the stability of the bank; starting July 29; pro-active assistance to customers with payment problems; tools: prolongation, decrease / suspension of monthly instalments, refinancing; programme offered to clients with chance for recovery; results: portfolio quality improvement, 4% of the total loan portfolio is part of the programme. Soft collection: Collection Score Card (probability of termination) determines the severity of applied methods; standard methods: SMS, call center, letters; personal handling: utilization of the local, personal connections in the branches. Arrears management is centralized and strongly regulated, starts from the first arrear and ends with the cancellations 9-12 days. Hard collection (OTP Faktoring): terminated loans are sold to OTP Faktoring on book value (value after provisioning), receivables are segmented; legal action is handled by OTP Faktoring, late soft collection is managed by OTP Bank (the process is similar to soft collection) with the aim to avoid foreclosure; OTP Faktoring applies same provisioning methods with the modification resulting in 1% provisioning after 5 years. 41

42 Changing the business model in 21: irrevocable payment undertaking of OTP Bank in respect of mortgage bonds issued by OTP Mortgage Bank Business model until 21 Q1 Business model since 21 Q1 OTP Mortgage Bank DPD 9+ loans OTP Bank OTP Faktoring HUF denominated DPD 9+ loans OTP Mortgage Bank Provisioning Loans at book value FX denominated DPD 9+ loans No provisioning Loans at total outstanding amount Provisioning Obligation to buy back NPLs OTP Bank OTP Faktoring Until April 21 OTP Bank provided asset side guarantee: committed an undertaking to repurchase non-performing loans at book value. In April irrevocable payment undertaking of OTP Bank in respect of the outstanding and future debt securities issued by OTP Mortgage Bank (liability side guarantee) replaced the asset side guarantee. The transformation was initiated in order to provide additional security to mortgage bond investors. The model was worked out and finalized with the consent of the HFSA and Moody s. OTP Mortgage Bank directly sells non-performing loans to OTP Faktoring and writes off losses. Since April provisions and losses concerning non-performing loans are booked in OTP Mortgage Bank s financials, according its internal regulation. 42

43 Contact OTP Bank OTP Mortgage Bank 151 Budapest, Nádor utca 16., Hungary 151 Budapest, Nádor utca 21., Hungary Sándor Pataki Director, IR&DCM Csaba Nagy Deputy CEO Tel: Tel: Fax: Fax: investor.relations@otpbank.hu nagy.csaba@otpjzb.hu Gergely Tardos Head of Research Tel: Fax: TardosG@otpbank.hu 43

44 Disclaimer This material has been prepared by OTP Mortgage Bank (the Company ) and has not been independently verified. This material has been prepared for the information of the parties to whom it is delivered and is being delivered to you solely in your capacity as a relevant person (as defined below). This document and its contents are confidential and may not be retransmitted, distributed, published, reproduced (in whole or in part) by any medium or in any form, or disclosed or made available by recipients to any other person. This material has been prepared solely for informational purposes and does not constitute or form part of, and should not be construed as, an offer to sell, or as an invitation or inducement to make, or a solicitation of, any offer to purchase or subscribe for any securities. No part of this material, nor the fact of its distribution, should form the basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever. Any offer of securities would only be made pursuant to a formal prospectus which contains, among other things, a description of certain risks relating to the relevant securities, certain disclosure relating to the Company and a description of the relevant securities. The information contained herein is preliminary, limited in nature and subject to verification, completion and amendment. No representation or warranty, either express or implied, is given or made by any person in relation to the fairness, accuracy, completeness or reliability of the information or any opinions contained herein and no reliance whatsoever should be placed on such information or opinions. This material should not be regarded by recipients as a substitute for the exercise of their own judgement and assessment. Any opinions expressed in this material are subject to change without notice and neither the Company nor any other person is under any obligation to update or keep current the information contained herein. This material is not intended to be a prospectus in connection with an offer of securities and any investment decision with respect to any securities should be made solely upon the basis of the information contained in the formal prospectus relating to such securities. Neither the Company, nor its advisors nor any of their respective affiliates, agents, directors, partners and employees shall have any responsibility or liability whatsoever (for negligence or otherwise) for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection with this document. This presentation contains certain tables and other statistical information and analyses (the Statistical Information ) which have been prepared in reliance upon information furnished by OTP Bank, OTP Mortgage Bank, National Bank of Hungary, Central Statistical Office, Ministry of National Economy, Hungarian Debt Management Agency, Bloomberg, Eurostat, Focus Economics, IMF, Consensus Economics, OECD, RICS and FHB. Numerous assumptions were used in preparing the Statistical Information, which may or may not be reflected herein. As such, no assurance can be given as to the Statistical Information s accuracy, appropriateness or completeness in any particular context; nor as to whether the Statistical Information and/or the assumptions upon which they are based reflect present market conditions or future market performance. The Statistical Information should not be construed as either projections or predictions or as legal, tax, financial or accounting advice. Any weighted average lives, yields and principal payment periods shown in the Statistical Information are based on, amongst other assumptions, the assumption that the relevant debt is not prepaid, and changes in any such assumptions may materially affect such weighted average lives, yields and principal payment periods. None of the Company, its advisors or any other person makes any representation or warranty as to the actual rate or timing of payments on the underlying asset or the payments or yields on the securities. These materials may contain statements about future events and expectations that are forward-looking statements. Any statement in these materials that is not a statement of historical fact is a forward-looking statement that is based on various assumptions and involves unknown risks and other factors which may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding the future performance. Any investors or prospective investors are required to make their own independent investigation and appraisal of the business, financial condition and prospects of the Company and the nature of any relevant securities and no reliance may be placed upon the information herein for such purposes. Recipients should consult with their own legal, regulatory, tax, business, investment, financial and accounting advisers to the extent that they deem it necessary, and make their own investment, hedging and trading decisions based upon their own investigation and judgement and advice from such advisers as they deem necessary and not upon any view expressed in this material. This material is being distributed only to, and is directed only at persons who have professional experience in matters relating to investments falling within the definition of investment professionals as defined in the Financial Services and Markets Act 2 (Financial Promotion) Order 25 (as amended or replaced) and other persons to whom it may otherwise be lawfully communicated and in all cases are capable of being categorised as a Professional Client or Eligible Counterparty for the purposes of the FSA conduct of business rules (all such persons being referred to as relevant persons ). It must not be acted on or relied on by persons who are not relevant persons. Nothing in this document constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. This document and the information contained herein, are not for release, publication or distribution, in whole or in part, directly or indirectly, to persons in the United States (within the meaning of Regulation S under the US Securities Act of 1933, as amended (the "Securities Act") or to entities in Canada, Australia or Japan or any other jurisdiction which prohibits the same except in compliance with applicable securities laws. You may not retain a copy of this material. By reviewing this material you acknowledge and agree to be bound by the foregoing. 211 OTP Mortgage Bank 44