Secondary Contact: Cihan Duran, Frankfurt (49) ;

Transcription

1 Primary Credit Analyst: Goeksenin Karagoez, FRM, Paris (33) ; Secondary Contact: Cihan Duran, Frankfurt (49) ; Research Contributor: Sabah M Ahmed, Mumbai; Sabah.Ahmed@spglobal.com Table Of Contents Major Rating Factors Outlook Rationale Related Criteria Related Research NOVEMBER 3,

2 SACP bbb- + Support 0 + Additional Factors 0 Anchor Business Position bb Strong +1 ALAC Support 0 Issuer Credit Rating Capital and Earnings Adequate 0 Risk Position Adequate 0 Funding Liquidity Above Average Strong +1 GRE Support 0 Group Support 0 Sovereign Support 0 BBB-/Stable/A-3 Major Rating Factors Strengths: Weaknesses: Dominant retail market position in Hungary, Bulgaria, and Croatia, with solid domestic retail deposit base. Sustainably high risk-adjusted margins. Highly granular funding base and strong liquidity cushion. Potential execution risks from the recent and ongoing acquisitions in the CEE. High legacy nonperforming loans (NPLs). NOVEMBER 3,

3 Outlook: Stable The outlook on our ratings on OTP Bank is stable. Reflecting the improved economic and industry risk environment in Hungary and stabilization of the risks in foreign operations, we expect continued gradual recovery of operational performance, supporting our forecast for OTP Bank to maintain a risk-adjusted capital (RAC) ratio of close to 8.5% during the next months. Upside scenario A positive rating action on OTP Bank over the next two years would hinge on us taking a similar rating action on Hungary, because we see it as unlikely that we would rate OTP above the ratings on its home country, on top of an improvement in the bank's stand-alone creditworthiness. We could revise upward the SACP if the RAC ratio improves sustainably above 10%, accompanied by a material improvement of asset quality metrics. The likelihood of a better assessment of other bank-specific factors that could trigger a change in the stand-alone credit profile (SACP) is limited. Downside scenario A negative rating action could stem from a similar rating action on the sovereign or a deterioration in the bank's stand-alone creditworthiness, driven by currently unforeseen, larger corporate transactions that hamper OTP Bank's financial or risk profiles. Rationale The ratings on OTP Bank reflect the bank's 'bb' anchor, the starting point for our ratings. It benefits from its dominant competitive position in Hungary and greater geographic diversity than its domestic and foreign peers. The bank's franchise proved fairly stable during an exceptionally difficult period in Hungary and the rest of its core markets in Central and Eastern Europe (CEE) and it did not suffer from any loss of confidence. The group's overall capitalization, earnings, and risk profile are neutral factors to our ratings. We expect our forecast risk-adjusted capital ratio (RAC) for OTP Bank to remain close to 9% during next 18 months. While the group's NPL ratio remained high at 12.2% on June 30, 2017, provisions cover 97.7% of NPLs. We expect both metrics to improve over 2018, with cost of risk below 50 basis points (bps). OTP Bank's funding metrics significantly improved during the past decade's deleveraging, including its stable funding ratio, which has stood well above the average of banks in Hungary. We expect OTP Bank's funding metrics to remain better than the average of domestic peers over the cycle. Therefore its funding and liquidity is a positive factor for the group's SACP. Anchor: 'bb', reflecting OTP's international franchise The starting point for our ratings on OTP Bank is its 'bb' anchor, which reflects our view of weighted economic risks in the countries where the bank operates and our industry risk assessment for Hungary. OTP Bank has significant operations outside of its home market of Hungary, including subsidiaries in Bulgaria, Ukraine, Russia, Croatia, Romania, Slovakia, Montenegro, and Serbia. We anticipate the share of the bank's total consolidated loans originated in Hungary will remain below 45% as the group is eyeing new acquisitions in the CEE. Regarding industry risk, we think the overall quality of banking regulation and supervision is now more in line with Hungary's peers. The country has implemented Basel III, the EU's Bank Recovery and Resolution Directive (BRRD), NOVEMBER 3,

4 and stricter measures on lending to households. We view the Hungarian authorities' move in 2015 to reduce the heavy tax burden on banks as a positive step toward a more market-friendly environment. The correction in the banking system has helped improve the system's loan-to-deposit ratio and bring it in line with peers'. We note that the system's overall reliance on external bank debt has decreased considerably, posing less risk than previously. Table 1 OTP Bank PLC Key Figures --Year-ended Dec (Mil. HUF) 2017* Adjusted assets 11,973,985 11,145,634 10,563,039 10,812,331 10,187,326 Customer loans (gross) 7,374,475 6,639,754 6,373,674 6,936,084 7,412,800 Adjusted common equity 1,324,324 1,205,418 1,031,650 1,064,845 1,315,611 Operating revenues 411, , , , ,080 Noninterest expenses 232, , , , ,347 Core earnings 133, ,250 63, ,648 64,108 *Data as of June 30. HUF--Hungarian forint. Business position: Largest bank in Hungary with more than 25% market share of domestic banking assets We assess OTP Bank's business position as strong. The bank's franchise proved fairly stable during an exceptionally difficult period in Hungary and the rest of its core markets and it did not suffer from any loss of confidence. We expect the group to preserve this strength. In the aftermath of the last global downturn, the group saw its loan book contracting about 13% through years owing to challenging credit conditions in countries of operation, but its operational revenues covered exceptionally high credit risk costs and a heavy banking levy in Hungary. At year-end 2016, the group's combined eight foreign subsidiaries accounted for about 59% of consolidated group loans (chart 1). NOVEMBER 3,

5 Chart 1 The group has total assets of Hungarian forint (HUF) 12,145 ( 39.3 billion) as of June 30, 2017, supported by a large regional network of 1,385 branches and a legacy as the state's savings bank. OTP Bank is predominantly a retail-focused institution, as demonstrated by its share of about 30% of the domestic mortgage loan market and household savings as of June 30, In our view, this business focus reinforces customer and revenue stability. OTP has also seen a turnaround in its Russian and Ukrainian subsidiaries, which weighed down earnings significantly in past years. Both subsidiaries returned to profit as of March 2016, and substantially reduced their associated risk costs. We believe the group has left the worst behind, notably in Russia, and should benefit from the ongoing economic recovery (see "Outlook On Russia Revised To Positive On Improving Growth Prospects," published March 17, 2017). In early 2017, the group acquired Splitska bank in Croatia from Société Générale and merged it with OTP Croatia. This boosted the market share of the bank to 11% from 4% making it the fourth-largest bank. We consider the overall impact to be positive for the group's business stability as it adds more diversification in a country with improving economic prospects (see "Republic Of Croatia Outlook Revised To Positive On Stronger Growth And Public Finances; 'BB/B' Ratings Affirmed," published on Sept. 22, 2017). The overall impact on the financials of the group post-acquisition was positive on June 30, In July 2017, OTP Bank Romania S.A. signed an acquisition agreement to purchase a 99.3% shareholding held in the NOVEMBER 3,

6 Romanian Banca Romaneasca S.A. by National Bank of Greece S.A. As a result of the acquisition, the Romanian market share of OTP Group will rise to approximately 4%, and it will become the eight-largest bank in the country. The financial closing of the transaction is expected by the beginning of However, the takeover depends on the receipt of approval from Romania's central bank, which was still outstanding as of the publication of this report. In August 2017, OTP banka Srbija a.d. Novi Sad, the Serbian subsidiary of OTP Bank signed an acquisition agreement on purchasing 100% shareholding held in the Serbian Vojvodjanska banka a.d. ("VOBAN") and NBG Leasing d.o.o. and certain other Serbian exposures held by the Group of the National Bank of Greece S.A. As a result the combined entity's market share will increase to 5.7%. OTP Bank's long-term strategy continues to be based on defending its leading retail position in its Hungarian home market and further developing its commercial bank expansion in CEE to leverage long-term growth opportunities in the region. In our view, the group has an overall stable management team with sufficient capacity and skillset and experience to govern this large, multinational group. We expect OTP's management to continue to meet targets and deliver on its stated long-term objectives, reaching both its profitability and ROE targets. Table 2 OTP Bank PLC Business Position --Year-ended Dec (%) 2017* Return on equity (7.38) 4.26 *Data as of June 30. Capital and earnings: Strengthening capital cushion, supported by higher loss coverage and decreasing credit costs We assess OTP Bank's capital and earnings as adequate. This reflects our expectation that the bank's pre-diversification risk-adjusted capital (RAC) ratio will improve to 8.5% over the forecast period, which also takes into account our anticipation of decreased economic risks for banks in Hungary. This is barring an unexpected major acquisition. OTP's RAC ratio increased to 8.0% on back of robust internal capital buildup by year-end Its consolidated Basel-III regulatory Tier-1 capital ratio stood at 14.1% as of June 30, 2017, (15.4% if the profit for the period included after accrued dividend), well above minimum regulatory requirements. For our forecast, we assume about 5% loan growth until 2019 (15% in 2017, owing to the consolidation of Splitska Banka in Croatia), a gradual decline in credit losses to below 50 bps, an ongoing margin squeeze, and a dividend payout ratio gradually increasing to 40%. Bottom-line earnings are also set to benefit from the reduction in corporate income tax in Hungary (to 9% from 19% effective Jan. 1, 2017) and the bank levy in Hungary. Our assessment also takes into account low reliance on Tier-II capital (16.5% on June 30, 2017), and the quality and strength of OTP Bank's core earnings, which benefit from a combination of still-strong margins, low share of market sensitive income, and good geographic diversity. In our view, these factors should continue to support its capitalization throughout the business cycle. Table 3 OTP Bank PLC Capital And Earnings --Year-ended Dec (%) 2017* Tier 1 capital ratio NOVEMBER 3,

7 Table 3 OTP Bank PLC Capital And Earnings (cont.) --Year-ended Dec (%) 2017* S&P Global Ratings RAC ratio before diversification N.M N.M S&P Global Ratings RAC ratio after diversification N.M N.M Adjusted common equity/total adjusted capital Net interest income/operating revenues Fee income/operating revenues Market-sensitive income/operating revenues Noninterest expenses/operating revenues Preprovision operating income/average assets Core earnings/average managed assets *Data as of June 30. RAC--Risk-adjusted capital. N.M.--Not meaningful. Table 4 OTP Bank PLC RACF [Risk-Adjusted Capital Framework] Data (Mil. HUF) Exposure* Basel III RWA Average Basel III RW (%) S&P Global Ratings RWA Average S&P Global Ratings RW (%) Credit risk Government and central banks 4,138, , ,291, Institutions and CCPs 604, , , Corporate 1,758,635 1,653, ,907, Retail 4,218,462 2,543, ,341, Of which mortgage 2,524,795 1,289, ,888, Securitization Other assets 858, , ,934, Total credit risk 11,578,214 5,300, ,872, Credit valuation adjustment Total credit valuation adjustment -- 15, Market risk Equity in the banking book 24,393 28, , Trading book market risk , , Total market risk , , Operational risk Total operational risk , ,669, (Mil. HUF) Basel III RWA S&P Global RWA % of S&P Global Ratings RWA Diversification adjustments RWA before diversification 6,730,463 14,405, Total Diversification/Concentration Adjustments -- 2,639, RWA after diversification 6,730,463 17,044, NOVEMBER 3,

8 Table 4 OTP Bank PLC RACF [Risk-Adjusted Capital Framework] Data (cont.) (Mil. HUF) Tier 1 capital Tier 1 ratio (%) Total adjusted capital S&P Global Ratings RAC ratio (%) Capital ratio Capital ratio before adjustments 1,060, ,147, Capital ratio after adjustments 1,060, ,147, *Exposure at default. Securitization exposure includes the securitization tranches deducted from capital in the regulatory framework. Other assets includes Deferred Tax Assets (DTAs) not deducted from adjusted common equity. Adjustments to Tier 1 ratio are additional regulatory requirements (e.g. transitional floor or Pillar 2 add-ons). RWA--Risk-weighted assets. RW--Risk weight. RAC--Risk-adjusted capital.huf--hungary forint. Sources: Company data as of Dec. 31, 2016, S&P Global Ratings. Risk position: Asset quality issues persist but show some positive trends We assess OTP Bank's risk position as adequate, reflecting our view that the bank is on par with other banks operating in regions with similar economic risk in terms of its track record of losses and asset quality. In our view, asset quality metrics have bottomed out, and we expect OTP Bank's management to succeed in its effort to reduce the NPL ratio below 8% before year-end 2019 from 12.2% on June 30, Coverage ratios remain high at 98% on a consolidated basis, while better conditions at operations in Ukraine and Russia may improve asset quality metrics. We monitor the evolution of the group's credit composition across different geographic regions as well as by lending type (unsecured, corporate, small and midsize enterprise, and retail), since this could alter its credit risk profile. Finally, OTP Bank generates the vast majority of its income from products of relatively low complexity, with stable interest income. It has no investment banking activities, no apparent exposure to pension risk, and a very small trading book, suggesting relatively low earnings risk. Market risk is limited, because OTP Bank has no exposure to structured investments and hedges most of its foreign currency and interest rate risk. The bank has separate limits for active treasury (only at headquarters and the Bulgarian subsidiary) and passive treasury (at all other subsidiaries). In our view, tight limitation of passive treasury ensures smooth management of positions from banking activities. OTP Bank provides its subsidiaries with fixed or floating internal loans to match the repricing characteristics of their loan books, thereby mitigating interest rate risk. It closes trading positions and adjusts the repricing structure of external debt to hedge interest rate risk at the group level. Investments in network banks are partly hedged against foreign exchange risk. Table 5 OTP Bank PLC Risk Position --Year-ended Dec (%) 2017* Growth in customer loans (8.1) (6.4) (1.8) Total diversification adjustment/s&p Global Ratings RWA before diversification N.M N.M. (1.4) Total managed assets/adjusted common equity (x) New loan loss provisions/average customer loans Net charge-offs/average customer loans N.M (4.5) (5.5) Gross nonperforming assets/customer loans + other real estate owned Loan loss reserves/gross nonperforming assets *Data as of June 30. RWA--Risk-weighted assets. N.M.--Not meaningful. NOVEMBER 3,

9 Funding and liquidity: Granular, largely retail funding base with no reliance on external debt and a high level of liquid assets We assess OTP Bank's funding as above average and liquidity as strong. OTP Bank's funding metrics significantly improved during the past decade's deleveraging, including its stable funding ratio of 142% as of June 30, 2017, which has stood well above the average of banks in Hungary. We expect OTP Bank's funding profile and metrics to remain better than the average of domestic peers and some regional peers over the cycle (see chart 2). Chart 2 OTP Bank relies less on foreign funding than its Hungarian peers thanks to a strong domestic retail franchise, which we regard as very stable and well diversified. Unlike many domestic peers owned by foreign parents, OTP does not have any reliance on ongoing funding support from abroad. The group does not have any wholesale debt maturing during the next four years. We also believe that OTP Bank's individual foreign subsidiaries expose similar funding profiles, as OTP Bank's consolidated ratio indicates. The only exception currently is OTP Romania, but we view the funding needs of this subsidiary as manageable for the group. The coverage of short-term wholesale funding needs by broad liquid assets was exceptionally high at 14.2x as of June 30, 2017, as the group has limited usage of wholesale debt. Our assessment also takes into account its strong level of liquid assets, mainly in the form of cash and government bonds equivalent to almost 40% of its total assets. Its NOVEMBER 3,

10 regulatory liquidity coverage ratio is exceptionally high at 266% on a consolidated basis. We expect the liquidity profile of OTP to remain strong for the time being until the credit growth in its core markets picks up on a sustainable basis. Table 6 OTP Bank PLC Funding And Liquidity --Year-ended Dec (%) 2017* Core deposits/funding base Customer loans (net)/customer deposits Long-term funding ratio Stable funding ratio Short-term wholesale funding/funding base Broad liquid assets/short-term wholesale funding (x) Net broad liquid assets/short-term customer deposits Short-term wholesale funding/total wholesale funding Narrow liquid assets/3-month wholesale funding (x) *Data as of June 30. Support: High systemic importance is neutral for the ratings In our view, OTP Bank has high systemic importance in Hungary. However, this does not result in any uplift to the long-term rating on the bank, since we consider that the prospect for government support is now uncertain in Hungary, following the implementation of the European Bank Recovery and Resolution Directive (BRRD). While the Hungarian government has historically demonstrated willingness to support the banking system in times of crisis, the new resolution framework now puts this support into question. We consider OTP Bank's ownership to be a neutral rating factor, because the bank is publicly traded with no strategic majority shareholder. Additional rating factors: None No additional factors affect the ratings on OTP Bank. OTP Mortgage Bank We equalize our ratings on OTP Mortgage Bank with those on OTP Bank because of its integral position in the group's strategy. Our view of its status is based on its full ownership and very close organizational and operational integration with its parent. OTP Bank operates OTP Mortgage Bank like a branch that specializes in refinancing residential mortgages originated by OTP Bank. OTP Mortgage Bank has a leading position in retail mortgage lending in Hungary, with 26% of all mortgage loans in the country (as of year-end 2015). OTP Bank is obliged to repurchase any nonperforming loans at face value when a loan is more than 90 days in arrears. We believe OTP Mortgage Bank's return on assets could remain very low, due to the high guarantee and administrative fees paid to the parent coupled with sizable funding costs, but its return is largely protected against credit risk. The capital allocated to OTP Mortgage Bank is only moderate, which raises no major concerns for us, because we believe that OTP Bank is highly likely to support its core subsidiary, if necessary, as was the case in NOVEMBER 3,

11 Related Criteria Criteria Financial Institutions General: Risk-Adjusted Capital Framework Methodology, July 20, 2017 General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017 General Criteria: Group Rating Methodology, Nov. 19, 2013 Criteria - Financial Institutions - Banks: Quantitative Metrics For Rating Banks Globally: Methodology And Assumptions, July 17, 2013 Criteria - Financial Institutions - Banks: Revised Market Risk Charges For Banks In Our Risk-Adjusted Capital Framework, June 22, 2012 Criteria - Financial Institutions - Banks: Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 Criteria - Financial Institutions - Banks: Banks: Rating Methodology And Assumptions, Nov. 9, 2011 General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 Related Research Two Hungarian Banks Upgraded, One Affirmed As Economic And Industry Risks Diminish, July 24, 2017 Banking Industry Country Risk Assessment: Hungary, Sept. 19, 2017 Outlook On Hungary Revised To Positive On Financial Sector Improvements; 'BBB-/A-3' Ratings Affirmed, Aug. 25, 2017 Outlook On Russia Revised To Positive On Improving Growth Prospects, March 17, 2017 Anchor Matrix Industry Risk Economic Risk a a a- bbb+ bbb+ bbb a a- a- bbb+ bbb bbb bbb a- a- bbb+ bbb+ bbb bbb- bbb- bb bbb+ bbb+ bbb+ bbb bbb bbb- bb+ bb bb - 5 bbb+ bbb bbb bbb bbb- bbb- bb+ bb bb- b+ 6 bbb bbb bbb- bbb- bbb- bb+ bb bb bb- b+ 7 - bbb- bbb- bb+ bb+ bb bb bb- b+ b bb+ bb bb bb bb- bb- b+ b bb bb- bb- b+ b+ b+ b b+ b+ b+ b b b- Ratings Detail (As Of November 3, 2017) OTP Bank PLC Counterparty Credit Rating BBB-/Stable/A-3 Senior Unsecured BBB- Short-Term Debt A-3 NOVEMBER 3,

12 Ratings Detail (As Of November 3, 2017) (cont.) Counterparty Credit Ratings History 24-Jul Jul May Jun Mar Nov-2012 Sovereign Rating Hungary Related Entities OTP Mortgage Bank Issuer Credit Rating BBB-/Stable/A-3 BB+/Stable/B BB/Positive/B BB/Stable/B BB/Negative/B BB/Stable/B BBB-/Positive/A-3 BBB-/Stable/A-3 *Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings credit ratings on the global scale are comparable across countries. S&P Global Ratings credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. Additional Contact: Financial Institutions Ratings Europe; FIG_Europe@spglobal.com NOVEMBER 3,

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