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Hungary: OTP looks abroad amid troubles at home

Government moves squeeze domestic earnings; Foreign-derived profits rise to exceed 50%

Hungary’s OTP Bank is looking to profits from foreign subsidiaries, including potential acquisitions, according to a senior official, as domestic government policies eat into earnings in its home market.

A rare locally owned bank in Hungary, OTP accounted for around half of banking-sector profit last year, as other banks posted large losses. But Laszlo Bencsik, OTP’s head of finance and strategy, acknowledges that controversial bank levies and measures to force banks to allow early repayments on foreign-currency-denominated mortgages have adversely affected return on equity.

Bencsik says Hungary’s biggest bank is now looking to buy a new bank in Serbia, where it already owns one bank, and it could buy market share in Croatia and Romania. "The perception is that these markets [in emerging Europe] are riskier, yet margins were more sustainable," he says.

Strong growth at OTP (Russia) is already offsetting weaker demand in Hungary, says Bencsik. Interest income in Russia was up 47% year on year in the first quarter, compared with an 8% increase at overall group level. Overall, the proportion of foreign earnings at OTP is rising, jumping to 53% of pre-tax group profit in the first quarter, excluding one-offs.

In recent weeks there have been signs of better relations with Hungary’s multilateral lenders after more conciliatory moves by the government on extraordinary bank levies and a new central bank law, which had rankled the EU. Less welcome, says Bencsik, is the government’s continued determination to collect Ft283 billion ($1.2 billion) from a new financial transaction tax in 2013.

But in a research note in May, JPMorgan wrote that investors in OTP should avoid fixating on Hungarian macro risk, instead remembering the performance of foreign subsidiaries. JPMorgan expects the Russian and Bulgarian units to contribute 37% and 14% respectively of 2013 net income.

"While the IMF deal remains the key catalyst for Hungary, in our view, the market is ignoring [about 50% estimated 2013] profits coming from Russia [and] Bulgaria," JPMorgan wrote.