January 9, 2013 / 6:57 PM / 5 years ago

TEXT-Fitch affirms OTP Hungary, and Russian subsidiary

Jan 9 - Fitch Ratings has affirmed OTP Bank Plc's (OTPH) Support Rating at
'3' and its Russian subsidiary OJSC OTP Bank's (OTPR) Long-term Issuer Default
Ratings (IDRs) at 'BB' and National Rating at 'AA-(rus)' and revised the
Outlooks to Stable from Negative. Simultaneously, the agency has upgraded OTPR's
Viability Rating to 'bb-' from 'b+'. A full list of rating actions is at the end
of this comment.

RATING ACTION RATIONALE: OTPH's SUPPORT RATING
The affirmation of OTPH's Support Rating reflects Fitch's opinion that the
Hungarian government would likely have a high propensity to support OTPH if
needed, in light of its systemic importance in the banking sector. However,
Fitch believes that OTPH is unlikely to require such support in the short to
medium term given the bank's generally sound and stable credit profile. At
end-Q312, OTPH was the largest bank in Hungary and accounted for about 25% of
sector assets and almost 30% of retail deposits.

RATING ACTION RATIONALE AND DRIVERS: OTPR's IDRS, NATIONAL RATING, SUPPORT
RATING
OTPR's Long- and Short-term IDRs and Support Rating are driven by potential
support from OTPH. Fitch believes that the parent would have a high propensity
to support OTPR in light of the ownership, quite high level of integration, and
the Russian subsidiary's important contribution to the group's results (34% of
group's 9M12 net income).

The revision of the Outlook to Stable reflects the stabilisation of OTPH's asset
quality metrics and of the macroeconomic environment in Hungary. The Outlook
revision also takes into account Fitch's recent revision of the Hungarian
sovereign's Outlook to Stable, driven by progress in reducing the budget deficit
and stabilising government debt along with improved fiscal and external
financing conditions (see ' Fitch Affirms Hungary at 'BB+', Revises Outlook to
Stable ' dated 20 December 2012 at www.fitchratings.com).

RATING ACTION RATIONALE AND DRIVERS: OTPR's VIABILITY RATING
The upgrade reflects OTPR's solid profitability, strong capital and liquidity
positions, moderate refinancing risk and sizeable pre-impairment results, which
provide a considerable buffer to absorb loan losses. At the same time, the
rating is weighed by high credit risks inherent in OTPR's unsecured consumer
lending in the highly cyclical Russian economy, very rapid recent loan growth,
increasing loss rates and intensifying competition in the sector.

Profitability has remained solid (annualised ROAE of 27.6% in 9M12) thanks to
strong operating efficiency and adequately priced credit risks. However,
intensifying competition is likely to weigh on the net interest margin both
through more expensive retail funding and tighter loan yields. In addition, the
bank may be forced to seek other distribution channels from the traditional POS
network to sustain growth, which may put pressure on costs.

In common with other Russian consumer banks targeting the lower mass market
clientele, OTPR is exposed to high credit risk, although so far this has been
well compensated by high loan rates. There was a moderate deterioration of asset
quality in 9M12, reflected in an increase in the ratio of originated
non-performing loans (NPLs, more than 90 days overdue) to performing loans to
9.2% (annualised) from 7.9% in 2011, although this is significantly below the
Fitch-estimated break-even rate of about 18%.

Capitalisation is a rating strength with a Fitch core capital ratio of 20.2% at
end-Q312 and regulatory capital ratio of 16.7% at the same date. The latter
allows provisions to be increased to 25% from 16% of the loan book before
breaching regulatory requirements.

Liquidity is linked to the stability of the retail deposit base (44% of total
liabilities at end-Q312), which is price-sensitive and potentially flighty.
Withdrawal risk is mitigated by substantial coverage of deposits by liquid
assets (32% at end-November 2012) and the loan book's strong liquidity. Loan
repayments of about RUB8.3bn per month (equal to 7.4% of end-Q312 total
liabilities) provide an additional safety buffer. Refinancing requirements have
been deferred, but are rather concentrated, with RUB13.5bn (12% of end-9M12
liabilities) potentially coming due in H114.

RATING SENSITIVITES: OTPH's SUPPORT RATING
OTPH's Support Rating could be upgraded or downgraded if there was a multiple
notch upgrade or downgrade of the Hungarian sovereign rating. However, Fitch
currently views this as unlikely.

RATING SENSITIVITES: OTPR's IDRS, NATIONAL RATING, SUPPORT RATING
OTPR's ratings could be upgraded or downgraded if OTPH's credit profile improved
or deteriorated. The ratings could also come under pressure if Fitch reassesses
the parent's propensity to provide support, although this appears unlikely at
present.

RATING SENSITIVITES: OTPR's VIABILITY RATING
OTPR's Viability Rating could come under pressure if credit losses increase
significantly due to portfolio seasoning and/or worsening of macro environment.
An upgrade is unlikely at present, given the challenges of the almost saturated
POS market and the expected increase in competition as state-owned banks roll
out their mass-market lending.

The rating actions are as follows:
OTPR
Long-term foreign currency IDR: affirmed at 'BB'; Outlook revised to Stable from
Negative
Short-term foreign currency IDR: affirmed at 'B'
Long-term local currency IDR: affirmed at 'BB'; Outlook revised to Stable from
Negative
National Long-term rating: affirmed at 'AA-(rus)'; Outlook revised to Stable
from Negative
Viability Rating: upgraded to 'bb-' from 'b+'
Support Rating: affirmed at '3'
Senior unsecured debt long-term rating affirmed at 'BB'
Senior unsecured debt National rating affirmed at 'AA-(rus)'

OTPH
Support Rating: affirmed at '3'


Additional information is available at www.fitchratings.com. OTP Bank Plc's
ratings were unsolicited and have been provided by Fitch as a service to
investors. OJSC OTP Bank's were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.

Applicable criteria, 'Global Financial Institutions Rating Criteria' dated 15
August 2012, are available at www.fitchratings.com.

Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria

Our Standards:The Thomson Reuters Trust Principles.
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