otp bank plc · the stable outlook on otp bank plc (otp) reflects the sound economic and industry...

OTP Bank PLC

Primary Credit Analyst:

Cihan Duran, Frankfurt (49) 69-33-999-242; [email protected]

Secondary Contact:

Felix Winnekens, Frankfurt (49) 69-33-999-245; [email protected]

Table Of Contents

Major Rating Factors

Outlook

Rationale

Related Criteria

Related Research

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 5, 2018 1

OTP Bank PLC

SACP bbb-

Anchor bb

Business

PositionStrong +1

Capital and

EarningsAdequate 0

Risk Position Adequate 0

FundingAbove

Average

+1

Liquidity Strong

+ Support 0

ALACSupport 0

GRE Support 0

GroupSupport 0

SovereignSupport 0

+AdditionalFactors 0

Issuer Credit Rating

BBB-/Stable/A-3

Resolution Counterparty Rating

BBB-/--/A-3

Major Rating Factors

Strengths: Weaknesses:

• Leading market position in Hungary and Bulgaria,

where it has solid business lines.

• Sound risk-adjusted margins and diversified loan

portfolio by geography and assets.

• Highly granular funding base and strong liquidity

cushion.

• Potential execution risks from the recent and

expected acquisitions in the Central and Eastern

Europe (CEE), Commonwealth of Independent

States (CIS), and Southeast Europe (SEE) regions.

• Elevated, but declining, nonperforming assets

(NPAs).

• Large holdings of home sovereign debt securities

that carry repricing risks.


Outlook: Stable

The stable outlook on OTP Bank PLC (OTP) reflects the sound economic and industry risk environment in

Hungary and stabilization of the risks in foreign operations. S&P Global Ratings expects the gradual recovery of

operational performance to continue, supporting its forecast that OTP will maintain a risk-adjusted capital (RAC)

ratio between 8.5%-9.0% during the next 18-24 months.

Downside scenario

A negative rating action could stem from a similar rating action on the sovereign or a deterioration in the bank's

stand-alone creditworthiness, driven by currently unforeseen, larger corporate transactions that could hamper

OTP's financial or risk profile.

Upside scenario

A positive rating action on OTP over the next two years would hinge on us taking a similar rating action on

Hungary, because we see it as unlikely that we would rate the bank above the ratings on its home country, on top

of an improvement in OTP's stand-alone credit profile (SACP). We could revise upward the SACP if the RAC ratio

improves sustainably above 10%, accompanied by a material improvement of asset quality metrics. The likelihood

of a better assessment of other bank-specific factors that could trigger a change in the SACP is limited.

Rationale

The ratings on OTP reflect the bank's 'bb' anchor, the starting point for our ratings. OTP benefits from its dominant

competitive position in Hungary and greater geographic diversity than its domestic and foreign peers. The bank's

franchise proved fairly stable during an exceptionally difficult period in Hungary and the rest of its core markets and it

did not suffer from any loss of confidence. The group's overall capitalization, earnings, and risk profile are neutral

factors to our ratings. We expect our forecast RAC ratio for OTP to move between 8.5%-9.0% during next 18-24

months. Although our own measure of the bank's nonperforming assets (NPA) ratio remained relatively high at 8.1%

on June 30, 2018, we note its significant decline from its 19.8% peak value in 2013. The coverage by provisions was at

a strong level of 110.3% of NPAs.

We expect asset quality metrics to improve, and we project that the cost of risk will normalize toward 100 basis points

by 2020. OTP's funding metrics significantly improved during the past decade as it reduced leverage. Its stable funding

ratio and liquidity ratios have stood well above the average for banks in Hungary. We expect OTP's funding metrics to

remain better than many rated banks over the cycle. Therefore the bank's funding and liquidity profile is a positive

factor for its stand-alone credit profile (SACP).

Based on these factors, the SACP for OTP is 'bbb-'. In our view, OTP has high systemic importance to Hungary.

However, we consider the prospect of extraordinary government support for the Hungarian banking sector is uncertain

and we do not include uplift for government support in our rating on OTP. Neither do we add uplift for additional

loss-absorbing capacity (ALAC) because we do not consider that OTP is likely to increase ALAC above our 5%

threshold of S&P Global Rating's risk-weighted assets over a two-year projection period. Therefore, the issuer credit


OTP Bank PLC

rating (ICR), at 'BBB-', is at the level of the SACP.

Anchor: 'bb', reflecting OTP's international business model

Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores

to determine a bank's anchor, the starting point in assigning an ICR. Our anchor for a commercial bank operating

mainly in Hungary is 'bb+', based on an economic risk score of '6' and an industry risk score of '6'. We view the

economic and industry risk trends as stable.

We take OTP's international exposure into account when analyzing its economic risks. OTP has significant operations

outside of its home market of Hungary, including subsidiaries in Bulgaria, Ukraine, Russia, Croatia, Romania, Slovakia,

Montenegro, and Serbia. Economic risks and through-the-cycle credit losses in most of these countries are higher than

in Hungary, in our view. Our view of the weighted economic risks in the countries where OTP operates and our

industry risk assessment for Hungary lead to a lower 'bb' starting point for our ratings on the bank. We anticipate the

share of the bank's total consolidated net loans originated in Hungary will move below 40% due to its planned

acquisitions in Bulgaria and Albania, and potential future acquisitions in its core regions.

Buoyed by strong domestic demand, Hungary's economy is growing strongly; estimated growth for 2018 is 4%.

Favorable domestic conditions--low unemployment, strong wage growth, and low interest rates--are fueling the

housing market. Real estate prices in Hungary have grown rapidly since 2015, increasing the risk of an emergence of

economic imbalances. However, we consider this trend is transitory--slowing economic growth and rising interest

rates might dampen demand. The surge in house prices has also largely not been credit driven, though we note the

recent pickup in mortgage lending.

Hungary's central bank, the MNB (Magyar Nemzeti Bank), has tightened rules on payment-to-income ratios to

incentivize more prudent mortgage lending. Overall, Hungary's banks benefit from a reduced bank levy, growing credit

demand, and the release of risk provisions that boost the sector's return on equity (ROE).

Table 1

OTP Bank PLC Key Figures

--Year-ended Dec. 31--

(Mil. HUF) 2018* 2017 2016 2015 2014

Adjusted assets 14,038,338 13,014,159 11,145,634 10,563,039 10,812,331

Customer loans (gross) 8,501,864 7,726,630 6,639,754 6,373,674 6,936,084

Adjusted common equity 1,490,528 1,360,905 1,147,365 1,031,650 1,064,845

Operating revenues 457,317 819,660 765,147 747,424 890,582

Noninterest expenses 274,124 483,713 442,148 436,133 478,499

Core earnings 154,571 249,288 199,250 63,171 130,648

*Data as of June 30. HUF--Hungarian forint.

Business position: Market leader in Hungary and Bulgaria, with solid diversity of business activitiesby geography and assets

We assess OTP's business position as strong. We anticipate that the bank's strong franchise, which weathered a

difficult period in Hungary and the rest of its core markets, should withstand future turbulences as well. OTP has a

diversified loan book by regions and segments. The broader mix of business activity and limited concentration risks


OTP Bank PLC

strengthens OTP's revenue predictability and business volume continuity, in our view. We expect the group to

preserve this strength. By September 2018, the foreign contribution to the group's consolidated income was about

52%, considering the eight foreign subsidiaries, as well as leasing companies and other entities of the group (see chart

1).

Chart 1

OTP had total assets of Hungarian forint (HUF) 14,363 billion (€44.6 billion) as of Sept. 30, 2018, supported by a large

regional network of 1,467 branches and a legacy as the state's savings bank since its establishment in 1949. Excluding

employed agents, the bank had 29,374 employees across the CEE, CIS, and SEE regions as of Sept. 30, 2018. OTP is

predominantly a retail-focused institution, as demonstrated by its share of about 30% of the Hungarian retail loan

market and 32% of household deposits. This business focus reinforces customer and revenue stability.

In the aftermath of the last global downturn, the group saw its loan book contracting about 13% over 2012-2015 owing

to difficult credit conditions in its countries of operation. That said, its operational revenues covered exceptionally high

credit risk costs and a heavy banking levy in Hungary. OTP has also seen a turnaround in its Russian and Ukrainian

subsidiaries, which weighed down earnings significantly in past years, thanks to stabilizing economic conditions. Both

subsidiaries returned to profit as of March 2016, and substantially reduced their associated risk costs. That said, we

note that recent renewed tensions between Russia and Ukraine could strain OTP's business conditions in these


OTP Bank PLC

countries and affect the financial profile via higher risk costs if there is a broader impact on the economies.

OTP is actively pursuing mergers and acquisitions (M&A). The bank has acquired six banks within the past five years,

using its dedicated M&A in-house expertise. For example, the group acquired Splitska bank in Croatia in early 2017

from Société Générale and merged it with OTP Croatia. In August 2017, OTP banka Srbija a.d. Novi Sad, the Serbian

subsidiary of OTP Bank, signed an acquisition agreement on purchasing a 100% shareholding in the Serbian

Vojvodjanska banka a.d. (VOBAN) and NBG Leasing d.o.o., as well as certain other Serbian exposures held by the

Group of the National Bank of Greece S.A. In early August 2018, OTP announced its intention to acquire Société

Générale's subsidiaries in Bulgaria and Albania. It planned to close these transactions by year-end 2018, subject to

regulatory approval (see "OTP Bank And Societe Generale Ratings Unaffected By SocGen's Sale Of Subsidiaries In

Bulgaria And Albania To OTP," Aug. 2, 2018). We expect OTP to target more transactions in the next years to

strengthen its market position in its core regions. Despite the positive track record, we note M&A-related execution

and integration risks that could decelerate OTP's growth strategy.

OTP's long-term strategy continues to be based on defending its leading retail position in Hungary and further

developing its commercial bank expansion in CEE, CIS, and SEE to exploit long-term growth opportunities in the

region. In our view, the group has a stable management team that has sufficient capacity and the skillset and

experience to govern this large, multinational group. We expect OTP's management to continue to meet targets and

deliver on its stated long-term objectives, reaching both its profitability and ROE targets.

Table 2

OTP Bank PLC Business Position


(%) 2018* 2017 2016 2015 2014

Loan market share in country of domicile 21.1 20.6 20.2 18.6 18.5

Deposit market share in country of domicile 25.9 26.1 26.5 25.7 26.0

Return on average common equity 18.5 18.4 15.3 5.1 (7.4)

*Data as of June 30.

Capital and earnings: Adequate capital cushions, limited by bank acquisitions

We assess OTP Bank's capital and earnings as adequate. Barring an unexpected major acquisition, we anticipate that

the bank's prediversification risk-adjusted capital (RAC) ratio will remain between 8.5%-9.0% over the next two years.

OTP's RAC ratio increased to 8.5% on the back of robust internal capital buildup by year-end 2017, which outpaced

the growth of risk-weighted assets. Its consolidated Basel III regulatory Common Equity Tier 1 (CET1) capital ratio

stood at 14.3% as of Sept. 30, 2018 (16.4% if interim profit included after accrued dividend), well above its minimum

regulatory requirement. OTP made use of the transitional rules considering the impact of International Financial

Reporting Standard 9 (IFRS 9), which caused its CET1 ratio to fall by 3bps in 2018. Over the five-year phase-in period,

the bank expects the total negative impact to be HUF50.4 billion (a fall of 60bps against the CET1 ratio on Dec. 31,

2017).

Our RAC forecast for the next 12-24 months is based on the following main assumptions for the group:

• Average annual gross loan growth of 10% until 2020 (16.4% in 2017, owing to the consolidation of Splitska Banka in


OTP Bank PLC

Croatia; we exclude the impact of the acquisitions of Société Générale's subsidiaries in Bulgaria and Albania) and

related increase of risk-weighted assets;

• Ongoing net interest margin squeeze toward 4.5% from 5.0% in 2017, by our own measures;

• Gradual increase in cost of risk toward 100bps;

• After-tax profits of roughly HUF300 billion; and

• Dividend payout ratio of 25%-30%; we note that dividend payments depend on further acquisitions, something that

is difficult to forecast.

Our assessment also takes into account low reliance on the Tier II capital that forms part of OTP's reported total

capital ratio (16.2% on Sept. 30, 2018), and the quality and strength of OTP's core earnings, which benefit from a

combination of still-strong margins, low share of market sensitive income, and good geographic diversity. After its dip

in 2014, the group has reported an ROE of over 10% after 2015 on the back of the positive economic development in

its core regions. The earnings buffer measures the capacity for a bank's earnings to cover its normalized credit losses;

OTP's was at 1.3% of its S&P Global Ratings' risk-weighted assets in 2017, an adequate value compared with rated

peers. These factors should continue to support OTP's capitalization throughout the business cycle, in our view.

Table 3

OTP Bank PLC Capital And Earnings


(%) 2018* 2017 2016 2015 2014

Tier 1 capital ratio§ 16.0 15.3 15.8 13.3 13.5

S&P Global Ratings’ RAC ratio before diversification N/A 8.5 8.0 N/A N/A

S&P Global Ratings’ RAC ratio after diversification N/A 7.5 6.7 N/A N/A

Adjusted common equity/total adjusted capital 100.0 100.0 100.0 100.0 100.0

Net interest income/operating revenues 63.8 67.6 67.9 73.6 71.4

Fee income/operating revenues 29.3 31.9 29.1 28.6 24.2

Market-sensitive income/operating revenues 4.0 3.4 5.5 4.4 2.3

Noninterest expenses/operating revenues 59.9 59.0 57.8 58.4 53.7

Preprovision operating income/average assets 2.7 2.7 2.9 2.9 3.9

Core earnings/average managed assets 2.3 2.0 1.8 0.6 1.2

*Data as of June 30. §Including interim profit less indicated dividend payment. N/A--Not applicable.

Table 4

OTP Bank PLC Risk-Adjusted Capital Framework Data

(Mil. HUF) Exposure*

Basel III

RWA

Average Basel

III RW (%)

S&P Global

Ratings RWA

Average S&P

Global Ratings RW

(%)

Credit risk

Government and central banks 4,523,512 430,331 10 2,185,508 48

Of which regional governments and local

authorities

78,697 21,633 27 64,161 82

Institutions and CCPs 491,915 199,171 40 311,214 63

Corporate 3,032,756 2,821,250 93 4,127,564 136


OTP Bank PLC

Table 4

OTP Bank PLC Risk-Adjusted Capital Framework Data (cont.)

Retail 4,637,531 2,797,647 60 4,904,246 106

Of which mortgage 2,273,539 1,065,572 47 1,518,264 67

Securitization§ 0 0 0 0 0

Other assets† 877,042 536,619 61 1,709,631 195

Total credit risk 13,641,453 6,785,017 50 13,238,162 97

Credit valuation adjustment

Total credit valuation adjustment -- 10,561 -- 0 --

Market risk

Equity in the banking book 49,645 126,632 255 386,407 778

Trading book market risk -- 512,497 -- 768,745 --

Total market risk -- 639,128 -- 1,155,152 --

Operational risk

Total operational risk -- 1,081,864 -- 1,536,863 --

(Mil. HUF) Basel III RWA S&P Global RWA % of S&P Global

RWA

Diversification adjustments

RWA before diversification 8,516,571 15,930,176 100

Total diversification/Concentration

adjustments

-- 2,116,179 13

RWA after diversification 8,516,571 18,046,355 113

(Mil. HUF)

Tier 1

capital Tier 1 ratio (%)

Total adjusted

capital

S&P Global Ratings

RAC ratio (%)

Capital ratio

Capital ratio before adjustments 1,282,524 15.3 1,360,905 8.5

Capital ratio after adjustments‡ 1,282,524 15.3 1,360,905 7.5

*Exposure at default. §Securitization exposure includes the securitzation tranches deducted from capital in the regulatory framework. †Other

assets includes Deferred Tax Assets (DTAs) not deducted from ACE. ‡Adjustments to Tier 1 ratio are additional regulatory requirements (e.g.,

transitional floor or Pillar 2 add-ons). RWA--Risk-weighted assets. RW--Risk weight. RAC--Risk-adjusted capital. HUF--Hungary Forint. Sources:

Company data as of Dec. 31, 2017, S&P Global Ratings.

Risk position: Asset quality issues persist, but trends are positive

We assess OTP's risk position as adequate, reflecting our view that the bank is on par with other banks operating in

regions with similar economic risk in terms of its track record of losses and asset quality (see chart 2).


OTP Bank PLC

Chart 2

We monitor the evolution of the group's credit composition across different geographic regions, as well as by lending

type, because this could alter its credit risk profile. Of the total gross customer loans as of Sept. 30, 2018, 35% were

corporate loans, 30% residential mortgage loans, 24% consumer loans, 7% SME loans, and 4% auto loans and leasing.

The mortgage loan book is adequately collateralized, in our view. It has an average loan-to-value ratio of roughly 60%

and the overall loan book does not show significant single-name concentrations.

We think that asset quality metrics have improved significantly, and we expect OTP will succeed in its effort to reduce

the NPA ratio (loans past due by at least 90 days) below 5% by year-end 2020, from 8.1% on June 30, 2018. At the

same date, OTP's subsidiaries in Ukraine and Montenegro had the highest NPA ratios within the group (21.6% and

25.8%, respectively).

We understand that the bank has a dedicated collection team to recover NPAs. The bank's intensive workout efforts

accounted for roughly 60% of the recent NPA reduction, while the rest came from portfolio sales and write-offs.

Considering the reclassification of NPAs under IFRS 9, OTP reported a stage 3 ratio of 9.8% and a stage 2 ratio of 6.6%

of total gross customer loans as of Sept. 30, 2018. We understand that stage 3 loans reflect restructured and loans that

are more than 90 days past due, while stage 2 loans reflect loans that are underperforming or among OTP's watchlist

cases. The bank's coverage ratio for NPAs remained strong at 110.3% on a consolidated basis, as of June 30, 2018.

This reduced the risks of unexpected losses in OTP's loan book.

Market risk is limited, because OTP has no exposure to structured investments and hedges most of its foreign currency

and interest rate risk. The bank provides its subsidiaries with fixed- or floating-rate internal loans to match the

repricing characteristics of their loan books, thereby mitigating interest rate risk. It closes trading positions and adjusts


OTP Bank PLC

the repricing structure of external debt to hedge interest rate risk at the group level. Investments in network banks are

partly hedged against foreign exchange risk.

Nearly all of OTP's income comes from products of relatively low complexity, with stable interest income. It has no

investment banking activities, no apparent exposure to pension risk, and a very small trading book, suggesting

relatively low earnings risk. That said, OTP had an elevated home sovereign bond exposure of roughly 21% of

consolidated exposure at default as of Dec. 31, 2017. Holdings of domestic government bonds benefit from lower risk

charges in the EU, such that repricing risks might not be adequately covered by capital if the sovereign suffers from

negative market sentiment.

Table 5

OTP Bank PLC Risk Position


(%) 2018* 2017 2016 2015 2014

Growth in customer loans 20.1 16.4 4.2 (8.1) (6.4)

Total diversification adjustment/S&P Global Ratings’ RWA before diversification N/A 13.3 18.3 N/A N/A

Total managed assets/adjusted common equity (x) 9.5 9.7 9.9 10.4 10.3

New loan loss provisions/average customer loans 0.2 0.5 1.2 3.3 4.2

Net charge-offs/average customer loans N.M. 1.1 0.6 1.3 (4.5)

Gross nonperforming assets/customer loans + other real estate owned 8.1 9.5 14.7 17.3 19.3

Loan loss reserves/gross nonperforming assets 110.3 100.2 97.0 91.8 84.3

*Data as of June 30. N/A--Not applicable. N.M.--Not meaningful.

Funding and liquidity: Granular, largely retail funding base, with no reliance on external debt and ahigh level of liquid assets

We assess OTP's funding as above average and liquidity as strong. OTP's funding metrics have significantly improved

during the past decade as a result of reduced leverage. Its stable funding ratio was 144% as of June 30, 2018, well

above the average for banks in Hungary. We expect OTP Bank's funding and liquidity metrics to remain better than

average for domestic peers and some rated regional peers over the cycle (see chart 3).


OTP Bank PLC

Chart 3

OTP relies less on foreign funding than its Hungarian peers thanks to a strong domestic retail franchise, which we

regard as loyal and well-diversified. Unlike many domestic peers owned by foreign parents, OTP does not rely on

ongoing funding support from abroad. We also consider that OTP's individual foreign subsidiaries have similar funding

profiles, as OTP's consolidated ratios indicate. The bank is in a position to issue mortgage covered bonds via OTP

Mortgage Bank. We understand that the mortgage funding adequacy ratio, introduced in October 2016, is adequately

fulfilled by the bank's own issuances of covered bonds during 2017 (HUF122 billion) and year-to-date 2018 (HUF146

billion).

The coverage of short-term wholesale funding needs by broad liquid assets was exceptionally high at 17.9x as of June

30, 2018, because the group makes limited use of wholesale debt given its high level of available deposits. The group's

net broad liquid assets-to-short-term customer deposit ratio was also at a sound level and reached 44% at the same

date. These metrics are stronger than those for most banks we rate, supporting our view that OTP would withstand

adverse market shocks without access to wholesale funding in the next 12 months.

Our assessment takes into account OTP's strong level of liquid assets, mainly in the form of cash and government

bonds, equivalent to almost 35% of its total assets. We consider that OTP's eight subsidiaries are well equipped with

liquidity buffers and could preserve a self-funded profile. Having said that, if OTP's subsidiaries were to experience a


OTP Bank PLC

liquidity shock, we would expect liquidity lines to be available and fungible among group members.

We expect the funding and liquidity profile of OTP will remain strong at least until credit growth in its core markets

picks up and sustainably outpaces the increase of customer deposits.

Table 6

OTP Bank PLC Funding And Liquidity


(%) 2018* 2017 2016 2015 2014

Core deposits/funding base 91.7 92.8 91.8 88.9 86.0

Customer loans (net)/customer deposits 71.2 68.3 66.7 67.1 75.7

Long-term funding ratio 98.0 98.3 97.5 95.4 94.1

Stable funding ratio 144.0 148.5 148.7 147.4 137.1

Short-term wholesale funding/funding base 2.3 2.0 2.9 5.1 6.6

Broad liquid assets/short-term wholesale funding (x) 17.9 22.0 15.6 8.7 6.4

Net broad liquid assets/short-term customer deposits 44.1 46.0 47.5 45.7 43.2

Short-term wholesale funding/total wholesale funding 27.7 27.2 35.0 46.2 47.5

Narrow liquid assets/3-month wholesale funding (x) 24.3 30.1 22.2 18.1 7.8

*Data as of June 30.

Support: High systemic importance is neutral for the ratings

In our view, OTP has high systemic importance in Hungary. However, this does not result in any uplift to the

long-term rating on the bank, since we consider the prospect for government support as uncertain in Hungary,

following the implementation of the European Bank Recovery and Resolution Directive (BRRD) in 2016. Although the

Hungarian government has historically demonstrated its willingness to support the banking system in times of crisis,

the current resolution framework puts this support into question.

We have not added uplift to OTP's SACP for additional-loss absorbing capacity (ALAC) because we do not foresee that

OTP is likely to increase ALAC above our 5% threshold over a two-year projection period. Our assessment reflects the

bank's marginal amount of bail-in-able debt and lack of plans to issue new subordinated or hybrid instruments. We

expect more disclosure on OTP's resolution plan, minimum requirement for own funds and eligible liabilities (MREL)

requirements, and types of instruments to act as bail-in capital by the beginning of 2019.

We understand that OTP is in discussions with the Hungarian central bank about the type of resolution in the unlikely

scenario of nonviability--that is, multiple point of entry at OTP's subsidiaries or single point of entry at OTP's

headquarters in Hungary. Generally, we view the Hungarian resolution regime as effective under our ALAC criteria

because, among other factors, we believe it contains a well-defined bail-in process.

Resolution counterparty rating: Capped by the sovereign foreign currency rating

We have assigned resolution counterparty ratings (RCRs) on OTP Bank PLC and its subsidiary, OTP Mortgage Bank,

and have aligned them to the foreign currency sovereign rating on Hungary. In a hypothetical sovereign stress

scenario, we doubt that OTP would have sufficient bail-in-able liabilities to absorb the impact on its capitalization. This

possible lack of resilience is amplified by two factors. First, the bank's substantial domestic sovereign securities and

loan exposure would lead to a severe erosion of equity under our standardized assumptions, likely pushing the bank


OTP Bank PLC

into a nonviability scenario. Second, the bank's limited historical use of capital instruments and other term debt means

that the resolution authority would need to rely heavily on a bail-in of other senior liabilities, notably corporate and

other uninsured deposits, to recapitalize the bank. Although these liabilities comprise a substantial portion of OTP's

balance sheet, we are cautious about the extent to which these deposits would be withdrawn in a stress situation, and

also about the financial stability and systemic risks that could result from bailing in these liabilities. If we were to raise

our sovereign rating on Hungary, we would likely raise our RCR on OTP by one notch.

An RCR is a forward-looking opinion of the relative default risk of certain senior liabilities that may be protected from

default through an effective bail-in resolution process for the issuing financial institutions. RCRs apply to issuers in

jurisdictions where we assess the resolution regime to be effective and we consider the issuer likely to be subject to a

resolution that entails a bail-in if it reaches nonviability.

Additional rating factors:OTP Mortgage Bank is a core bank of OTP Group

We equalize our ratings on OTP Mortgage Bank with those on OTP because of its integral position in the group's

strategy. Our view of its status is based on its full ownership and very close organizational and operational integration

with its parent. OTP Bank operates OTP Mortgage Bank like a branch that specializes in refinancing residential

mortgages originated by OTP Bank. We understand that OTP Mortgage Bank is key in fulfilling the group's mortgage

funding adequacy ratio (currently above the required 20% minimum) via issuances of mortgage covered bonds.

OTP Mortgage Bank has a leading position in retail mortgage lending in Hungary, with 30.1% of all mortgage loans in

the country (as of Sept. 30, 2018). OTP is obliged to repurchase any NPAs of OTP Mortgage Bank at face value when a

loan is more than 90 days in arrears. The capital allocated to OTP Mortgage Bank is only moderate, which raises no

major concerns for us, because we believe that OTP Bank is highly likely to support its core subsidiary, if necessary, as

was the case in 2014.

Related Criteria

• Criteria - Financial Institutions - General: Methodology For Assigning Financial Institution Resolution Counterparty

Ratings, April 19, 2018

• Criteria - Financial Institutions - General: Risk-Adjusted Capital Framework Methodology, July 20, 2017

• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017

• Criteria - Financial Institutions - Banks: Bank Rating Methodology And Assumptions: Additional Loss-Absorbing

Capacity, April 27, 2015

• General Criteria: Group Rating Methodology, Nov. 19, 2013

• General Criteria: Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And

Assumptions, Nov. 19, 2013

• Criteria - Financial Institutions - Banks: Quantitative Metrics For Rating Banks Globally: Methodology And

Assumptions, July 17, 2013

• Criteria - Financial Institutions - Banks: Banks: Rating Methodology And Assumptions, Nov. 9, 2011

• Criteria - Financial Institutions - Banks: Banking Industry Country Risk Assessment Methodology And Assumptions,


OTP Bank PLC

Nov. 9, 2011

• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009

Related Research

• Banking Industry Country Risk Assessment: Hungary, Nov. 1, 2018

• Hungary 'BBB-/A-3' Ratings Affirmed; Outlook Remains Positive, Aug. 17, 2018

• OTP Bank And Societe Generale Ratings Unaffected By SocGen's Sale Of Subsidiaries In Bulgaria And Albania To

OTP, Aug. 2, 2018

• Six Central And Eastern European Banks Assigned Resolution Counterparty Ratings, July 16, 2018

• Resolution Counterparty Ratings Jurisdiction Assessment For Hungary Completed, July 16, 2018

Anchor Matrix

Industry

Risk

Economic Risk

1 2 3 4 5 6 7 8 9 10

1 a a a- bbb+ bbb+ bbb - - - -

2 a a- a- bbb+ bbb bbb bbb- - - -

3 a- a- bbb+ bbb+ bbb bbb- bbb- bb+ - -

4 bbb+ bbb+ bbb+ bbb bbb bbb- bb+ bb bb -

5 bbb+ bbb bbb bbb bbb- bbb- bb+ bb bb- b+

6 bbb bbb bbb- bbb- bbb- bb+ bb bb bb- b+

7 - bbb- bbb- bb+ bb+ bb bb bb- b+ b+

8 - - bb+ bb bb bb bb- bb- b+ b

9 - - - bb bb- bb- b+ b+ b+ b

10 - - - - b+ b+ b+ b b b-

Ratings Detail (As Of December 5, 2018)

OTP Bank PLC

Issuer Credit Rating BBB-/Stable/A-3

Resolution Counterparty Rating BBB-/--/A-3

Senior Unsecured BBB-

Short-Term Debt A-3

Issuer Credit Ratings History

24-Jul-2017 BBB-/Stable/A-3

21-Jul-2016 BB+/Stable/B

18-May-2015 BB/Positive/B

20-Jun-2014 BB/Stable/B

Sovereign Rating

Hungary BBB-/Positive/A-3


OTP Bank PLC

Ratings Detail (As Of December 5, 2018) (cont.)

Related Entities

OTP Mortgage Bank

Issuer Credit Rating BBB-/Stable/A-3

Resolution Counterparty Rating BBB-/--/A-3

*Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings’ credit ratings on the global scale are comparable

across countries. S&P Global Ratings’ credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and

debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees.


OTP Bank PLC


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