OTP Bank PLC Primary Credit Analyst: Lukas Freund, Frankfurt + 49-69-3399-9139; [email protected] Secondary Contact: Anna Lozmann, Frankfurt + 49 693 399 9166; [email protected] Support Analyst: Harshleen Sawhney, GURGAON HARYANA + 91 91(0) 124 672; [email protected] Table Of Contents Major Rating Factors Outlook Rationale Related Criteria Related Research S&P GLOBAL RATINGS360 APRIL 29, 2021 1 © S&P Global Ratings. All rights reserved. No reprint or dissemination without S&P Global Ratings' permission. See Terms of Use/Disclaimer on the last page. OTP Bank PLC Additional SACP bbb Support 0 0 + + Factors Anchor bb+ Issuer Credit Rating ALAC 0 Business Support Strong Position +1 BBB/Stable/A-2 Capital and GRE Support Adequate 0 Earnings 0 Risk Position Adequate 0 Group Resolution Counterparty Rating Support 0 Above Funding Average BBB/--/A-2 +1 Sovereign Liquidity Strong Support 0 Major Rating Factors Strengths: Weaknesses: • Leading market position in Hungary and strong • Potential execution risks from acquisitions. franchise in a number of Central, Eastern, and • Risks related to rapid organic growth. Southeastern European countries (CESEE) as well as • Large holdings of home-sovereign debt securities the Commonwealth of Independent States (CIS). carrying repricing risks. • Sound risk-adjusted margins and diversified loan portfolio and earnings by geography and assets. • Substantial digitalization efforts with noteworthy digital franchise. S&P GLOBAL RATINGS360 APRIL 29, 2021 2 © S&P Global Ratings. All rights reserved. No reprint or dissemination without S&P Global Ratings' permission. See Terms of Use/Disclaimer on the last page. OTP Bank PLC Outlook: Stable The stable outlook on OTP Bank reflects our view that the bank will continue its growth path and withstand macroeconomic pressure during the economic slowdown, given its good earnings generation and prudent risk management. Based on its track record, we expect that the group will also ensure sufficient capitalization in case of further acquisitions and increasing credit losses. 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 following decreasing capital or deteriorating asset quality. This could be spurred by currently unforeseen large acquisitions, particularly in higher risk countries or segments, or negative surprises from recent acquisitions or strong organic growth. Upside scenario A positive rating action over the next two years would hinge on us taking a similar rating action on Hungary, because it is unlikely that we would rate OTP above the sovereign. Should this happen, an improving economic environment in OTP's main countries of operations could trigger a positive action. We could also upgrade OTP (following a sovereign upgrade) if our main measure of capitalization--the risk-adjusted capital (RAC) ratio--improves sustainably above 10%. An upgrade would hinge on our view that the overall creditworthiness of the group would be on par with 'BBB+' rated peers. Rationale OTP benefits from its dominant competitive position in Hungary and greater geographic diversity than most of its domestic and foreign peers. Ambitious acquisitions and an organic growth strategy have brought additional revenues and market power, but high execution risks remain. Net income in 2020 was affected by significantly higher credit costs, mitigated by strong operating revenues. We believe that the higher credit losses reflect OTP's conservative provisioning policy, which provides a cushion against an expected increase in nonperforming loans in 2021, once several loan moratoriums have expired. OTP completed the integration of several of its acquisitions in 2020, with that of its Serbian business to be concluded in second-quarter 2021. Given its track record of previous acquisitions, we believe that the bank has the capacity for prudent execution. However, with its focus on additional acquisitions in 2021 we note the high operational risks that go along with rapid inorganic growth. We expect the bank to maintain its strong competitive position in Hungary and its geographic diversification. OTP's advanced digital capacities and strong digital franchise compared to domestic peers should also help it to maintain a competitive edge. We see further downside risks to OTP's 2021 prospects, such as the adverse impact on capital of any large-scale acquisition and recent tightening of lockdown measures in Hungary. With its increased inoculation rate, Hungary may be able to achieve widespread immunization before year-end. We use these assumptions about vaccine timing in S&P GLOBAL RATINGS360 APRIL 29, 2021 3 © S&P Global Ratings. All rights reserved. No reprint or dissemination without S&P Global Ratings' permission. See Terms of Use/Disclaimer on the last page. OTP Bank PLC assessing the economic and credit implications associated with the pandemic. As the situation evolves, we will update our assumptions and estimates accordingly. Anchor: 'bb+' reflecting OTP's large activities in countries with economic risks higher than in the domestic market 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 '7' and an industry risk score of '5'. We take OTP's international exposure into account when analyzing its economic risks. OTP has about 60% of its operations outside its home market of Hungary, including subsidiaries in Bulgaria, Ukraine, Russia, Croatia, Romania, Slovenia, 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 assessment of the weighted economic risks of exposure at default of customer loans in those countries (rounded average of '7') and our industry risk assessment for Hungary lead to OTP's 'bb+' starting point for our ratings, which is one notch lower than for a purely domestic bank. We anticipate the share of foreign lending to increase slightly over the medium term as OTP's domestic growth is unlikely to fully balance out potential larger-scale acquisitions. However, this will not affect the anchor. Table 1 OTP Bank PLC Key Figures --Year-ended Dec. 31-- (Mil. HUF) 2020 2019 2018 2017 2016 Adjusted assets 23,096,837 19,879,548 14,423,577 13,014,159 11,145,634 Customer loans (gross) 14,363,281 12,942,009 8,751,957 7,726,630 6,639,754 Adjusted common equity 2,158,270 2,026,493 1,576,050 1,360,905 1,147,365 Operating revenues 1,207,759 1,165,195 947,871 819,660 765,147 Noninterest expenses 701,467 654,030 552,033 483,713 442,148 Core earnings 259,643 406,328 307,477 249,288 199,250 HUF--Hungarian forint. Business position: Market leader in Hungary and strong and diversified foreign franchise In our view, OTP's business position will remain a strength, compared to most peers. We look for relativities with leading banks in countries like Italy, Spain, Poland, or Slovenia, which have similar industry risk. S&P GLOBAL RATINGS360 APRIL 29, 2021 4 © S&P Global Ratings. All rights reserved. No reprint or dissemination without S&P Global Ratings' permission. See Terms of Use/Disclaimer on the last page. OTP Bank PLC Chart 1 OTP has been able to maintain its strong customer franchise and leading market position during 2020. Strong pricing power, expertise in operations in developing countries, and high geographical revenue diversification support our view that the bank will be able to withstand the COVID-19-induced economic slowdown. OTP's strong income generation capacity helped it cover high credit risk costs in the last downturn and we see a similar situation developing as the bank reported high credit losses in 2020, mitigated by its strong earning generation. S&P GLOBAL RATINGS360 APRIL 29, 2021 5 © S&P Global Ratings. All rights reserved. No reprint or dissemination without S&P Global Ratings' permission. See Terms of Use/Disclaimer on the last page. OTP Bank PLC Chart 2 OTP has a diversified loan book by regions and segments. Its broad mix of business activity and limited concentration risks strengthens its revenue predictability and business volume continuity. OTP is predominantly a retail-focused institution. It has about 33% of the Hungarian retail loan market and 37% of household deposits. In 2020, the foreign contribution to the group's consolidated net profit was 41% of the total, coming mainly from seven foreign markets. In contrast to many competitors in Western European countries, OTP was largely able to protect its lending margins at a robust level. Earnings metrics remained strong, in our view, demonstrated by a return on equity (ROE) of 13%, which is above average for many banks in Western and Central Europe. We believe that operating conditions will remain challenging for the bank during 2021, with governmental support measures as well as several moratoria finally running out in 2021. However, reflecting high buffer of provisions built over 2020, we expect OTP's ROE to increase again in 2021. S&P GLOBAL RATINGS360 APRIL 29, 2021 6 © S&P Global Ratings. All rights reserved. No reprint or dissemination without S&P Global Ratings' permission. See Terms of Use/Disclaimer on the last page. OTP Bank PLC Chart 3 S&P GLOBAL RATINGS360 APRIL 29, 2021 7 © S&P Global Ratings. All rights reserved. No reprint or dissemination without S&P Global Ratings' permission. See Terms of Use/Disclaimer on the last page. OTP Bank PLC Chart 4 In our view, the group's management team has sufficient capacity and the skillsets as well as the experience to govern this large, multinational group. We expect OTP's management to continue to meet its profitability targets.