The austerity measures introduced by the Hungarian government are expected to have a negative impact on OTP, with the key issues being 1) an increase in the corporate tax rate to 20% (from September 2006), 2) a continuation of the special banking tax in 2007 and beyond, 3) the impact of higher personal taxes and social contributions on wage inflation, 4) slower overall economic growth.
On the special banking tax, the scope is to be widened to include insurance companies, in order to increase the level of revenues from HUF 30 bn in 2005 and an expected HUF 36bn in 2006 to as much as HUF 50bn in 2007. Its possibly that further changes to the collection of the tax, currently an additional 8% of pre-tax income or 6% of net interest income with a tax shield, to arrive at the revenue target. The duration of the bank tax, originally promised to last 2 years, is unknown at this stage but we are including it in our financial model through 2009, when larger scale tax reform is planned.
On the back of the above-mentioned issues, we are cutting our earnings estimates on by some 1.7% to HUF 186.1bn (+17.6% y/y) for 2006, by 12.5% to HUF 193.5bn (+4.0% y/y) for 2007, and by 13.7% to HUF 206.8bn (+6.9% y/y) for 2008. The impact on our fair value estimate for OTP Bank has been a reduction by 8.6% to HUF 8,853.3 per share.
Whilst the details of the austerity programme are negative for OTP Bank and consensus earnings estimates for the company are now expected to be cut substantially, the announcement by the govenment has been anticipated by the market. The share price of the company has been hammered in recent weeks - the stock is down 28% from its high point in May. With OTP Bank trading at a 2006F P/E of just 8.7x and 2007F P/E of 8.4x, the stock is simply too cheap. We reiterate our Buy rating on the stock.