Hungarian OTP Bank warns of possible exit from Russia

In the bank's statements, the wording about the sale of the Russian business "at an acceptable price" appeared.Three months ago, OTP did not prescribe such an opportunity

The Hungarian OTP Bank, which controls the Russian OTP Bank from the top 50, announced the possible sale of a subsidiary - this wording appeared in the financial statements of the credit institution under IFRS for the first half of the year.

"OTP's management is guided by the 'going concern' principle, however, in RUSSIA, management is considering all possible options that will not significantly reduce the shareholder value [of the asset] and may have positive effects for shareholders, including the possible sale of the Russian enterprise at an acceptable price," the report says. . In the first quarter, the bank only mentioned the commitment of OTP management to continue doing business in Russia and Ukraine.

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In May, REUTERS reported that OTP Bank was under pressure to sell business in Russia - due to the Ukrainian bill to raise taxes on enterprises with Russian subsidiaries, the Ukrainian division of OTP could face increased workload. However, the HEAD of the supervisory board of the Ukrainian OTP Bank, Andras Kucharsky, said that even if the bill is approved, it will not in itself lead to the group leaving Russia.

On August 5, President Vladimir Putin signed a decree that seriously limits the ability to sell subsidiaries of foreign credit organizations. Such transactions are now impossible without the special permission of the President. Since March, they required permission from a specialized commission in the government, but back in mid-July, Deputy Finance Minister Alexei Moiseev warned that the Finance Ministry no longer intends to approve sales in the banking market.

Following the start of the Russian military operation in Ukraine, many global banks announced plans to wind down business in Russia or sell their subsidiaries. This was done by the French Societe Generale, which transferred control of Rosbank to Vladimir Potanin's Interros, as well as the Czech PPF Group, which sold a 49.5% stake in Home Credit Bank to a group of private investors led by financier Ivan Tyryshkin.

Societe Generale and Interros completed the sale of Rosbank Finance

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As follows from the reporting of OTP Bank, in the second quarter, he faced an increase in group risk on Russian and Ukrainian assets. The share of these two subsidiaries reached 8% of the group's consolidated assets against 6% as of March 31. The volume of intra-group financing in relation to the Ukrainian structure increased by 9.2%, to 83 billion forints (€207.2 million), and in relation to the Russian one - by 54.5%, to 85 billion forints (€212.2 million). In an unexpected, "highly negative" deconsolidation scenario, that is, the loss of an asset in Russia and its write-off, the pressure on the group's Tier 1 capital will be 128 basis points, the report says. At the end of the first quarter, the effect on capital adequacy from business losses in Russia was estimated at 30 basis points. This revision is largely due to the strengthening of the ruble against the Hungarian forint, according to the report.

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What are the results of the Russian business of OTP Bank

According to the results of six months, the Russian OTP Bank received a loss of 14.8 billion forints (5 billion rubles, according to reports) against a profit of 17.4 billion forints (2.8 billion rubles for the same period in 2021). Nevertheless, in the second quarter, the subsidiary turned out to be profitable (12.5 billion forints, or 1.9 billion rubles), while in the first quarter it recorded losses.

The financial performance of the subsidiary bank was strongly affected by the dynamics of the ruble exchange rate - over the quarter, the Hungarian forint weakened against the Russian currency by 46%, the report says.

OTP Bank's net interest income in April-June amounted to HUF 25.1 billion, which is 22% higher than in the first quarter. Net fee and commission income increased by 42% to HUF 7.2 billion, while reserve expenses decreased by almost three times - from HUF 32.8 billion in the first quarter to HUF 11.4 billion in the second. In ruble terms, the dynamics of the main items of the income statement was negative - net interest income fell by 17% compared to the first quarter, and net commission - by 3%. In addition, the bank showed a decrease in net interest margin - from 10.9% to 9.6% qoq.

As noted in the report, after the start of the Russian military operation in Ukraine, OTP Bank temporarily suspended lending in all client segments, but then returned to issuing cash loans and POS loans in small volumes. The bank no longer provides new loans to corporate borrowers, and prolongs existing loans only in exceptional cases in order to maintain the quality of the portfolio. The reduction in loan issuance was the reason for the fall in net interest and commission income in the second quarter in rubles, the report says.

The loan portfolio of the Russian OTP, taking into account exchange rate differences in April-June, decreased by 9%, to 1.2 trillion forints. This was mainly due to corporate loans (-43%), in which OTP Bank does not specialize in Russia. The retail loan portfolio dipped by only 6% to HUF 812.5 billion. The issuance of loans to the population fell by more than a quarter compared to the first quarter. The foreign exchange-adjusted deposit base increased by 3% in the quarter, although retail deposits decreased by 1% to HUF 456.1 billion.

The quality of the loan portfolio of the Russian subsidiary of OTP Bank deteriorated: the share of loans overdue by more than 90 days in April-June increased by 2.5 percentage points, to 15%, while the volume of such loans jumped by 93%, to 158.8 billion forints.