So, an idle look through Stockopedia threw up this little gem - a commercial bank based in Hungary that has the most astonishing set of green lights in terms of financials (for a bank, especially).
What’s the catch? Well, OTP had a large number of branches in the Ukraine, and in particular in the Crimean Peninsula that were largely destroyed as a result of the civil war. In addition, there has been a history of changes in the regulatory environment in Hungary that affected the profitability of the financial services sector.
A read of the annual report here https://www.otpbank.hu/static/portal/sw/file/OTP_2014_Annual_Report_1.pdf makes for, well, remarkably straightforward and logical reading. In essence, the chairman and CEO is saying that the bank is performing well, the context stuffed the business up in 2014, but things are looking pretty strong. Unlike most jam tomorrow chairmen, he uses actual evidence throughout and is remarkably candid about the areas of weakness in the business. He’s also a very material shareholder in the bank and his interests a clearly long term and well aligned with other shareholders.
I did a comparison of the equity structure of OTP bank with Barclays and Secure Trust Bank.
1. Shareholders equity vs. loan book (the critical ratio that causes Terry Smith not to invest in any bank). Barclays - 1:20 Secure Trust: 1:7.5, OTP - 1:5. This matters because failures in the loan book come directly off shareholders equity first, so higher the ratio the greater the risk that a small degradation in loan repayments causes a massive loss of shareholder value. OTP's equity seems to be very safe compared to most financial institutions.
2. Cash and liquidity ratios. Barclays 13%, OTP 14%, Secure Trust 15% (and in fact, as set out in the report, OTP’s statutory liquidity figure is actually lower than the real ratio because of the very conservative provisions that they have put aside to cover the Ukraine crisis. Compare that with the provisioning policy of the UK banks where each successive misselling scandal seems to come as a complete shock)
3. Price to earnings (forward). Barclays 8.68, Secure Trust 13.9, OTP 5.34
So, you seem to be getting a bank that has less loan to equity than Secure Trust, a better liquidity ratio than Barclays, and a lower p/e than both.
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Excellent post, thank you. It will be interesting to see whether this article gets traction given that the stock is quoted in Hungary.
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