Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

Behind the acquisitions, consolidation, and FX fluctuations, the trends at <a href="https://www.smartkarma.com/entities/otp-bank-nyrt" target="_blank" data-smartkarma-citation="entities:28806:1" rel="noopener">OTP Bank Nyrt (OTP HB)</a> continue to erode. For this most popular of GEM components, the direction of travel is far from clear. Similar to Sberbank, Credicorp, or even an Indonesian lender such as <a href="https://www.smartkarma.com/entities/bank-tabungan-pensiunan-nasi" target="_blank" data-smartkarma-citation="entities:27088:1" rel="noopener">Bank Tabungan Pensiunan Nasi (BTPS IJ)</a> , the temptation is to invest in a high profitability franchise in an attractive EM. The problem is that investors pay through the nose: valuation risk is high especially in these stressed and volatile times. The folly is to pay a premium for an eroding franchise in terms of fundamental momentum.Trading at a FV of 16%, when the regional median stands at 9% and many lenders command &lt;5%, OTP is priced to deliver strong results. And recent data at Q120 reveal a loss at Q120 even before the full onset of COVID-19 though an impact was visible across burgeoning "stage 2" exposures. The loss was rooted in, among items, the debt moratorium in Hungary and the banking tax in Hungary and in Slovakia which equated to a hit of HUF36.9bn. In the quarter, Loan Loss Provisions (despite flat NPLs) and OPEX climbed firmly wiping out "Core Income" progression.Profitability is relatively elevated but markedly less so than in the past on a LTM basis. (Similar to Sberbank which commands a higher valuation). We may have seen peak OTP ROE and ROA. This will be related to the market share-driven credit growth and the effects of consolidation and FX fluctuations. Elevated Loan growth, compounded by corporate activity and FX effects plus market share focus are very often a signal of a subpar investment. Margin and Spread are narrowing too as cost of funds jumps. There is slippage in Capitalisation given the expansion of the consolidated loan book. Liquidity is weakening as robust consumer (subsidised "baby Loans" in Hungary, mortgages in Moldova, Croatia and Romania) and corporate (Hungary, Croatia, Slovenia, Moldova) credit supply  outpaces deposit expansion. Provisioning is reduced as a % of Loans despite much higher credit costs. Despite Q120, LTM Efficiency (CIR and "Core Jaws") and Asset Quality (bolstered by the denominator) show improvement however.A PH Score™ of 4.3 is subpar, supported by the valuation variable.<div class="content-highlight">The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. </div>

Behind the acquisitions, consolidation, and FX fluctuations, the trends at OTP Bank Nyrt (OTP HB) continue to erode. For this most popular of GEM components, the direction of travel is far from clear. Similar to Sberbank, Credicorp, or even an Indonesian lender such as Bank Tabungan Pensiunan Nasi (BTPS IJ) , the temptation is to invest in a high profitability franchise in an attractive EM. The problem is that investors pay through the nose: valuation risk is high especially in these stressed and volatile times. The folly is to pay a premium for an eroding franchise in terms of fundamental momentum.Trading at a FV of 16%, when the regional median stands at 9% and many lenders command &lt;5%, OTP is priced to deliver strong results. And recent data at Q120 reveal a loss at Q120 even before the full onset of COVID-19 though an impact was visible across burgeoning "stage 2" exposures. The loss was rooted in, among items, the debt moratorium in Hungary and the banking tax in Hungary and in Slovakia which equated to a hit of HUF36.9bn. In the quarter, Loan Loss Provisions (despite flat NPLs) and OPEX climbed firmly wiping out "Core Income" progression.Profitability is relatively elevated but markedly less so than in the past on a LTM basis. (Similar to Sberbank which commands a higher valuation). We may have seen peak OTP ROE and ROA. This will be related to the market share-driven credit growth and the effects of consolidation and FX fluctuations. Elevated Loan growth, compounded by corporate activity and FX effects plus market share focus are very often a signal of a subpar investment. Margin and Spread are narrowing too as cost of funds jumps. There is slippage in Capitalisation given the expansion of the consolidated loan book. Liquidity is weakening as robust consumer (subsidised "baby Loans" in Hungary, mortgages in Moldova, Croatia and Romania) and corporate (Hungary, Croatia, Slovenia, Moldova) credit supply  outpaces deposit expansion. Provisioning is reduced as a % of Loans despite much higher credit costs. Despite Q120, LTM Efficiency (CIR and "Core Jaws") and Asset Quality (bolstered by the denominator) show improvement however.A PH Score™ of 4.3 is subpar, supported by the valuation variable.The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. 

OTP Bank Nyrt

OTP: A GEM Favourite Reports a Loss