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OTP's profit growth halts on increased competition - extended

OTP Bank Nyrt, the Hungarian lender that's spent almost $3 billion expanding in eastern Europe, said profit growth ground to a halt in the Q4 as increasing competition led to less profitable loans.

Net income of OTP Bank Nyrt was Ft 40.9 billion ($210 million), or Ft 156 a share, level with earnings a year earlier, the Budapest-based bank said in a statement today. Profit advanced 31% in the Q3 to a record. „Though the earnings were in line with expectations, their quality was poor,” said Mark Macrae, an analyst from KBC Securities in Warsaw. OTP was forced to set aside more money to cover potential bad loans, Macrae said. The bank, a monopoly during communist years, is turning to markets outside Hungary as competition toughens at home from banks including UniCredit SpA, Erste Bank AG and Raiffeisen International Bank AG. To win Hungarian clients, banks pay higher interest on deposits and reduce borrowing costs. The earnings compare with the Ft 40.5 billion median estimate of eight analysts surveyed by Bloomberg News. Shares in OTP rose 1.3% to Ft 8,661 as of 12:37 p.m. in Budapest. They've gained 16% the past 12 months.

OTP expects net income this year of Ft 212 billion, László Urbán, the bank's CFO, said at a press conference in Budapest today. That's down from an August prediction of Ft 222 billion. Analysts on average expect Ft 211 billion, according to data compiled by Bloomberg. The company lowered its profit target partly because it wants to expand its branch network in Russia, which will shave Ft 3 billion from net income this year, Urbán said in an interview. In July, OTP bought Moscow-based Investsberbank for $477 million. „It's a tradeoff between expanding branches and maximizing profitability,” he said. OTP wants to open 40 new branches in Russia, focusing on cities with populations of 500,000 or more. It aims to open 80 new branches a year beginning in 2008, Urbán said. OTP expects its profit from Russia to reach as much as Ft 10 billion this year, nearly double the amount from 2006. Profit from its Bulgarian unit is expected to grow 24% to Ft 26 billion, with the Ukrainian operations earning Ft 15 billion, a 15% increase, said László Bencsik, an OTP managing director, after the press conference. Romania is the only country that remains unprofitable, Urbán said. OTP plans to open 70 branches in its eastern neighbor this year and reach profitability by 2008, he said.

The lender has spent almost $3 billion the past five years buying banks to reduce its dependence on the domestic market. OTP earlier said it will halt acquisitions in 2007. Still, it may buy smaller lenders this year in countries where it is already present, OTP Chairman Sándor Csányi told the Világgazdaság newspaper in December. That's aimed to help OTP build a network and improve efficiency faster in certain markets. As part of the plan, OTP in December bought 83% of Kulska banka a.d. Novi Sad in Serbia and plans to merge the lender with two other units it has in that country. Further expansion may slow after deputy CEO Zoltán Spéder quit last month, some analysts say. Spéder has spent 16 years at the Hungarian lender, helping Csányi buy 10 banks in four years. He was replaced by Urbán, a former director at Hungary's central bank.

The company's net interest margin shrank to 4.93% from 6.03% a year earlier. OTP had 22.4% of Hungarian deposits on December 31, down from 25.6% a year earlier, because of a decline in household forint deposits. Its share of the lending market fell to 12.3% from 12.6% as a drop in consumer loans erased a gain in borrowing by municipalities. The bank, which targeted Ft 185 billion net income in 2006, said annual profit rose 18% to Ft 187.5 billion. Its net interest income, the difference between the money paid on deposits and that collected on loans, rose 29% to Ft 103 billion in the quarter. Income from fees and commissions declined 6.4% to Ft 52.7 billion. Of the 18 analysts covering OTP who are tracked by Bloomberg, 10 recommend buying the company's stock. (Bloomberg)