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Costs rise, margins fall as Hungary's OTP Bank pushes loan volume, CFO says

As it tweaks its acquisition-driven strategy more toward growing the assets of its existing units, OTP Bank Nyrt. said first-half costs jumped on the back of wage inflation and heightened business activity across the group, while margins have been falling.

The leading Hungarian bank will strive to drive down expenses in the second half, CFO László Bencsik told analysts Aug. 10, while adding that the net interest margin is set to continue dropping. Although loan volume growth is likely to "materially" exceed 10% across the group for the year, margins will keep falling, the CFO warned, guiding analysts toward full-year NIM of around 4.23%, compared to 4.31% in the first half.

The bank has increased its market share of mortgages in Hungary to 29.4% in the first half from 27.7% in 2017, while controlling 38.1% of the cash loans sector in the country, up from 37.9% over the same period. Its share of savings stood at 31.6%.

"This is a very active and dynamically growing market and in this growing market we have managed to gain further market share," Bencsik said. Total loans increased by 17% in the second quarter compared to the same period of 2017.

However, costs also jumped, partly owing to the wage inflation gripping the whole region where OTP is active, as well as overall increased operating intensity, he said.

"It does have an impact on cost. In Hungary we started to increase the headcount in the branches in order to keep up with the service level while we are having so much more activity," he explained. "This is true for most of the countries where we operate."

As a large-scale employer in Eastern Europe, OTP is affected by macroeconomic trends that it can do little to change, the banker said.

"Most nominal wages increased quite drastically in the region. This is good news if you look at loan demand and business activity of our clients because disposable income is growing, consumption is growing and at the same time loan quality is very good. But this money is coming from corporates ... who have to pay higher and higher wages in order to retain a talented workforce. So we do that," he said. "We try to stay in competition in wages and this is actually not easy, but inevitable."

Cost growth for the whole year could come down to 6%, Bencsik said, after touching 7.5% in the first half, but the bank will not sacrifice growth for the sake of keeping down expenditure. "We have not given that target," he said. "It's possible but it's going to be tight and there is a lot of work needed on our part to get there and we will do everything sensible to make it happen, but obviously the first priority is growth."

OTP reported first-half accounting profit after tax of 154.6 billion Hungarian forints, up 16% on the first half of 2017.

As of Aug. 9, US$1 was equivalent to 276.94 Hungarian forints.