The European Bank for Reconstruction and Development (EBRD) is providing a €200 million subordinated loan to OTP on market terms and will buy €20 million in OTP treasury shares, OTP Bank announced on Friday.
The draw-down period for the EBRD's subordinated loan to OTP Bank will be six months.
The capital enhancement from the EBRD will help OTP Bank to mitigate the impact of the recession and strengthen its market position in the currently challenging environment in Hungary and the central and eastern European region in which the bank operates, OTP said in the statement.
OTP Bank's lending portfolio has continued to deteriorate as central and eastern Europe's economic crisis deepens, OTP Bank chief financial officer László Urbán said in an interview with Reuters earlier this week.
OTP's lending portfolio will deteriorate throughout the year before reaching bottom in 2010, Urbán predicted.
“We earlier estimated risk costs of between HUF 40 billion and 50 billion per quarter and the second quarter will likely be within this range,” Urbán said.
“In Ukraine, the total NPL (non-performing loan) rate is not much higher than it was in the first quarter, at around 11%, while in Hungary after further deterioration it's around 5-6%,” Urbán said.
Urbán added that the bank's subsidiaries abroad may need a total of around $100 million to $200 million in fresh capital for the rest of the year. OTP Bank is not contemplating selling any of its foreign units.
First-quarter net income of OTP Bank's dropped 24% to HUF 41.8 billion from the same period a year earlier as provisions for possible loan and placement losses more than tripled.
OTP Bank said that the quality of the bank's loan portfolio deteriorated during the quarter as the proportion of loans more than 90 days past due increased to 5.7% from 3.6%. As a result, group provisions for possible loan and placement losses jumped 259% to HUF 46.0 billion, giving the bank a coverage ratio of 76.1%.
OTP Bank, with a regional presence in nine countries, is a systematically important player in both Hungary's banking sector as well as that in countries where OTP units are among the top ten largest banks, such as Ukraine, Bulgaria, Croatia and Montenegro.
EBRD Business Group Director Péter Reiniger said “With this new facility (...) the EBRD is demonstrating its support for the real economy. This transaction will further strengthen the capitalization of OTP Bank and will contribute to raising the overall level of confidence in the banking sector in Hungary and in the region.”
The EBRD investment in Hungary is part of a joint EBRD-World Bank Group-European Investment Bank pledge to provide over €24.5 billion in support for the banking sectors in the central and eastern European region and to fund lending to businesses hit by the global crisis.
The EBRD has committed more than €1.77 billion in new funds for the financial- institutions sector in countries of its operations so far in 2009.
Urbán said “The current deal is a sign of mutual interest: OTP can enhance its lending activity in Hungary and across the group, while EBRD demonstrated again its commitment to the region.”
OTP Bank is the largest universal bank in Hungary and the biggest independent bank in the region, with almost 12 million customers in nine countries.
The EBRD, which was already a shareholder in OTP Bank prior to the transaction, raised its stake in the bank to 2% with its purchase of €20 million in OTP treasury shares.
European Bank for Reconstruction and Development (EBRD) President Thomas Mirow suggested in an interview published in the daily newspaper Népszabadság in January that the EBRD planned to invest in Hungarian banks, particularly those that do not have a foreign parent bank, notably OTP. (MTI-ECONEWS)