Rating action

Scope Ratings GmbH (Scope) has today assigned a first-time issuer rating of BBB+ to OTP Bank Nyrt (OTP). Scope has also assigned first-time ratings to the following debt categories:

• Preferred senior unsecured debt rating at BBB+
   
• Non-preferred senior unsecured debt rating at BBB
   
• Tier 2 debt at BB+

The Outlook for all ratings is Stable.

Rating rationale

The ratings of OTP are based on the group’s resilient business model, which rests on a dominant market position in Hungary and a high degree of geographical diversification. Less than half of the group’s total assets are domestic. Outside of Hungary, the group operates in 10 Central and Eastern European (CEE) countries, notably Bulgaria and Croatia. Soon, it may expand to Asia, starting from Uzbekistan, where it recently signed a non-binding memorandum of agreement for the potential acquisition of state-owned Ipoteka Bank, the country’s fifth largest bank.

The high geographical diversification allows the group to not only counterbalance the volatility of its Hungarian operations but also exploit higher margins and growth in less developed banking sectors. At the same time, its presence in more volatile operating environments such as Russia and Ukraine exposes the group to localised risks. However, given the relatively small size of these operations within the group, the risks are rather limited from a credit perspective.

The ratings also consider OTP’s appetite for acquisitions in the CEE area. Scope acknowledges the strong execution record and the boost these acquisitions provide to OTP’s growth. Nevertheless, Scope also notes the challenges that accompany acquisitions, especially if in high numbers.

Under Scope’s bank rating methodology, the ‘long-term sustainability’ assessment (ESG factor) captures how relevant environmental, social and governance (ESG) factors and preparedness for digital transition (D) may impact an issuer’s creditworthiness. As part of the first-time implementation of this methodology, Scope has assigned a ‘developing’ to OTP, acknowledging the group’s efforts to accelerate its digitalisation and become the reference for competitors in the CEE region but also noting that the group only launched an ESG programme in 2020. We consider that there is still room to improve management of emerging ESG-D challenges and that progress made so far does yet not provide a rating uplift.

The ratings benefit from OTP’s excellent profitability. In the past five years, the group’s return on equity averaged around 17%, backed by the sound economic growth of the CEE countries. Such returns are uncommon among large European banks. In 2020, the performance of the group took a hit due to the slowdown in revenue growth and the increase in provisions. In 2021, results have been rebounding and management expects the bank to reach a return on equity of 18%-20% for the year.

Although OTP’s non-performing loan ratio is higher than international peers’, Scope considers it manageable in view of the high coverage. So far, the Covid crisis has had a minimal impact on the group’s credit portfolio. The group’s headline asset quality metrics have improved in the past quarters, mainly thanks to strong loan growth. Scope does not foresee a material deterioration of these metrics in 2022.

High capital buffers and a solid funding profile are additional strengths that back OTP’s ratings. Despite dividend pay-outs and acquisitions, the group’s capital ratios have steadily increased over the years thanks to its earnings power. The positive results obtained in the EBA 2021 stress test further demonstrate the group’s solidity.

OTP is funded primarily through deposits thanks to its strong positioning in retail markets, especially in Hungary and Bulgaria. The group’s subsidiaries are funded in the respective local currency, minimising currency mismatches between assets and liabilities.

One or more key drivers for the credit rating action are considered ESG factors.

Rating-change drivers

The Outlook is Stable, reflecting Scope’s view that OTP’s credit profile will remain unchanged in the next 12 to 18 months.

Positive rating-change drivers:

• Significant improvements in managing emerging ESG-D challenges relative to peers

Negative rating-change drivers:

• A significant deterioration in the group’s asset quality or profitability that could arise form an economic downturn in CEE
   
• A material decline in capital ratios, which now are comfortably above requirements

Overview of rating construct

Operating environment: moderately supportive

Business model: resilient

Initial mapping refinement: low

Initial mapping: bbb-/bbb

Long-term sustainability (ESG-D): developing

Adjusted anchor: bbb-

Earnings capacity and risk exposures: supportive

Financial viability management: comfortable

Additional rating factors: neutral factor

Standalone assessment: bbb+

External support: not applicable

Issuer rating: BBB+

Stress testing & cash flow analysis
No stress testing was performed. No cash flow analysis was performed.

Methodology
The methodologies used for these Credit Ratings and Outlooks (Bank Rating Methodology, 26 January 2021; Bank Capital Instruments Rating Methodology, 30 April 2021), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope’s internal source.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Alessandro Boratti, Analyst
Person responsible for approval of the Credit Ratings: Dierk Brandenburg, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 15 November 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.