Hungary's OTP Bank Nyrt. outperformed its regional peers in the third quarter as lenders in Poland and the Czech Republic grappled with regulatory burdens and higher loan loss provisions.

OTP Bank posted third-quarter consolidated profit after tax of 189.2 billion Hungarian forints, or about €468 million, up from 76.1 billion forints in the second quarter and from 120.2 billion forints one year ago. Chief Strategic & Financial Officer László Bencsik described the result during an earnings presentation as a "historic high."

The Hungarian lender was the only bank in the sample of the three countries' largest lenders that grew profit on both a quarterly and annual basis. The result was supported by foreign exchange dynamics, but the bank also pointed to a strong performance of its units in Serbia, Slovenia and Croatia, while its operations in Russia and Ukraine stabilized amid the ongoing war.

Polish banks suffered for the second quarter in a row due to heavy regulatory burdens, including costs related to Poland's mortgage repayment deferral scheme. Almost all Polish lenders from the sample posted negative financial results for the third quarter, with mBank SA recording the biggest loss.

In addition to the regulatory burdens, mBank also set aside significant provisions for legal risks related to its Swiss franc mortgage portfolio. Despite those challenges, mBank's German parent, Commerzbank AG, confirmed its profit target for full year 2022 and reported consensus-beating earnings for the third quarter.

For ING Groep NV's Polish unit ING Bank Śląski SA, it was the first quarterly loss in 14 years, CFO Bożena Graczyk said during an earnings presentation. Banco Santander SA unit Santander Bank Polska SA was the only Polish bank in the sample that reported a profit.

The Czech Republic's three largest banks — Komercní banka a.s., Česká spořitelna a.s. and Československá obchodní banka a.s., or ČSOB — all reported profits for the third quarter, but they were lower compared with the previous quarter due to increased loan loss provisioning, among other factors. Profits at Česká spořitelna and ČSOB were also lower year over year.

Despite the turbulent third quarter, many large Polish banks are likely to end 2022 in the green thanks to earnings generated earlier in the year. Poland's largest lender, PKO Bank Polski SA, expects the regulatory burdens to ease and hopes to restore profitability in the fourth quarter, according to CFO Bartosz Drabikowski. Poland-based Bank Polska Kasa Opieki SA, or Bank Pekao, sees its third-quarter loss as a one-off event and still plans to pay dividends from earnings generated in 2022, CEO Leszek Skiba said.

Meanwhile, Hungary's OTP Bank is aiming for its full-year return on equity, excluding Russia and Ukraine, to exceed the 2021 level of 18%, while Czech banks are headed for what could be a record year of profits, according to local analysts.

Polish banks in the sample saw an increase in their third-quarter cost-to-income ratios, a parameter showing operating expense as a percentage of operating income. MBank's cost-to-income ratio surged to 321%, S&P Global Market Intelligence data shows.

"It was not the inflation that was a great challenge for us cost-wise in the third quarter. ... It was regulatory risk," PKO Bank CFO Drabikowski said during the lender's third-quarter earnings call.

Meanwhile, the cost-to-income ratios at the Czech lenders and Hungary's OTP Bank remained flat or improved quarter on quarter despite inflationary pressures. "This is the important indicator to look at how cost-efficient we are in this high inflation environment," OTP Bank CFO Bencsik said.

Société Générale SA's Czech unit, Komerční banka, had the lowest quarterly cost-to-income ratio in the sample at about 37%.

Faced with geopolitical uncertainty and an energy crisis, the majority of the banks in the sample increased their loan provisioning in the third quarter.

"Development of net provision caused by net provision creation in Q3 2022 [is] reflecting [Česká spořitelna's] approach to potential impacts of current geopolitical risks," Erste Group Bank AG's Czech unit said in its earnings presentation. In addition to growing loan provisioning, the financial performance of Czech banks could be also affected in the future by a three-year windfall tax to be implemented in the country in 2023.

Polish banks noted that the quality of their lending portfolios remains stable, but the uncertainty has prompted some of them to raise loan loss provisions, and they expect an increase in the cost of risk in the coming quarters.

Moody's recently changed its outlooks for banking sectors in several countries, including the Czech Republic, Hungary and Poland, to negative from stable amid concerns that high inflation and rising interest rates could affect the creditworthiness of bank clients, triggering the formation of new problem loans.

As of Nov. 21, US$1 was equivalent to 398.47 Hungarian forints.