At its press conference yesterday, OTP Bank announced a reduction in its earnings guidance for 2007 by 4.7% from HUF 222bn to HUF 211.6bn. The reduction was attributable to four factors i) a HUF 3bn lower forecast contribution from Russia, ii) HUF 3bn higher financing costs, iii) HUF 2bn attributable to the stronger forint, and iv) HUF 2bn attributable to lower Hungarian economic growth. Overall, OTP now expects a contribution from its new group members of HUF 57.8bn before funding costs, including HUF 29bn from acquisitions announced last year (ie. Ukraine, Russia, Serbia, Montenegro) expected to provide 23.9% of after-tax profit (before funding costs).
The bank maintained its long-term guidance for a pre-tax profit of EUR 2bn in 2010, which is planned to be accomplished without acquisitions. However, the management also stated that an acquisition, if necessary, could be purchased to meet the target.
Our view: Despite the relatively weak quality of the results yesterday and the downgrade in near-term guidance, the stock was surprisingly up 2.0%. One factor mitigating the negative news was that consensus earnings estimates for 2007 were already below management guidance at HUF 211.5bn, suggesting that brokerage forecasts will not require downward revision. Our forecast of HUF 208.0bn is slightly below the consensus and will be reviewed in the coming days.
Investors appear to be focused on the medium-term outlook and the growth prospects of newly acquired subsidiaries, particularly in Ukraine and Russia. The bank’s strategy to expand rapidly in these countries, to capture market share particularly in the retail segment, is being well received.
We reiterate our Buy rating on OTP Bank, which is the cheapest bank in the region, trading on a 2007F P/E of 11.6x versus an average for the CEE banks of 17.8x. It is the only major bank in the region trading at a discount to the FTSE Eurofirst 300 banks index on a 2007F P/E of 12.0x.