Loan Expansion And Eurozone Convergence Will Support Stronger Long Term Bank Fundamentals

Catalysts

About OTP Bank Nyrt

OTP Bank Nyrt is a leading universal banking group in Central and Eastern Europe with a strong presence in retail and corporate lending, deposits and related financial services.

What are the underlying business or industry changes driving this perspective?

• Acceleration in performing loan volumes, driven by double digit growth in Hungarian mortgages, recovering corporate lending and expanding consumer portfolios in markets such as Uzbekistan and Ukraine, is set to sustain mid teens balance sheet growth and underpin recurring revenue expansion and net interest income growth.
• Robust retail deposit franchises in Hungary and Bulgaria, each with around 40 percent market share and highly profitable balances, should support low cost funding as incomes and consumption recover, helping to stabilize or modestly lift net interest margins and protect group earnings.
• Structural macro improvement across OTP’s core footprint, including a forecast rebound in Hungarian GDP to around 3 percent and resilient growth in other CEE and Central Asian markets, is likely to translate into stronger credit demand with only moderate risk cost pressure, supporting operating profit growth and healthy return on equity.
• Regulatory and monetary convergence in Bulgaria with Eurozone entry, including a sharp reduction in mandatory reserve requirements and interest recognition on reserves, is expected to free up balance sheet capacity and generate incremental interest income, lifting group level revenue and net margins.
• Ongoing optimization of capital and funding, including improved external credit ratings, diversified wholesale issuance and an active share buyback program, should enhance per share earnings growth and provide flexibility for disciplined inorganic expansion without materially diluting capital ratios or returns.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming OTP Bank Nyrt's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 39.1% today to 37.2% in 3 years time.
• Analysts expect earnings to reach HUF 1200.8 billion (and earnings per share of HUF 4587.26) by about December 2028, up from HUF 1092.9 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as HUF1487.8 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 10.7x on those 2028 earnings, up from 8.4x today. This future PE is greater than the current PE for the GB Banks industry at 10.4x.
• Analysts expect the number of shares outstanding to decline by 1.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.76%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Continued or further increases in sector specific taxes, transaction levies and supervisory fees in Hungary and other core markets could structurally raise the group tax burden above current levels, capping the translation of strong operating profit growth into bottom line earnings and compressing net margins over time.
• Persistently high or rising risk costs in higher risk markets such as Russia, Uzbekistan and Ukraine, particularly as consumer lending accelerates, could reverse recent credit quality stability, drive up the credit risk cost rate and erode the benefit of double digit loan growth on group earnings.
• Very rapid expansion in subsidized Hungarian mortgages and consumer loans across several countries, supported by election driven income measures and fixed low rate products, may encourage excess household leverage, leaving OTP exposed to a future normalization in macro conditions or subsidy regimes that would pressure revenue growth and net interest margins.
• Competitive and regulatory pressures in select markets, including pricing distortions in Slovenia and forced APR reductions in Serbia, could trigger a broader race to the bottom on loan pricing, undermining risk based pricing discipline and gradually weakening group level revenue yield and profitability.
• Execution and integration risks tied to further geographic expansion in high growth but less mature markets in Central Asia, along with reliance on favorable rating agency views to support diversified wholesale funding, could backfire in a downturn, raising funding costs and impairing capital generation, which would weigh on earnings resilience.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of HUF34571.31 for OTP Bank Nyrt based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HUF39700.0, and the most bearish reporting a price target of just HUF26500.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be HUF3225.7 billion, earnings will come to HUF1200.8 billion, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 13.8%.
  
• Given the current share price of HUF34320.0, the analyst price target of HUF34571.31 is 0.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.