By Margit Feher

BUDAPEST--OTP Bank Nyrt. (OTP.BU), Hungary's largest bank both by market share and total assets, expects the deterioration of its loan portfolio, a key factor for its profitability, will slow in the short term, the bank's chairman said Friday.

The slowdown will enable the bank to reduce its risk provisions, Sandor Csanyi, OTP Chairman and Chief Executive, told shareholders at their annual meeting.

Central and Eastern Europe, together with Russia and Ukraine, where OTP is present, has been undervalued by investors despite the region having a growth potential of 2.6% this year, significantly higher than that of the European Union, Mr. Csanyi said.

He said OTP is seeking to expand both organically--through its existing operations--and also by acquisitions, as its strong capital position is making that possible.

"Naturally, we have to grow, first of all, organically but also by acquisitions. We are looking for targets both in Hungary and abroad, we don't see many but we do see expansion possibilities," Mr. Csanyi said. OTP is eying targets that would provide "serious synergies," he added.

He said the company is not giving exact forecasts, just like its peers, and warned shareholders that "amid the current economic conditions in Europe and Hungary, decisions could be easily brought about [by unidentified policy makers] which could undermine our forecasts."

OTP projects that its loan-to-deposit ratio, one of the indicators reflecting a bank's liquidity status, will remain 100 this year, Mr. Csanyi said.

OTP expects its loan stock, when adjusted for the different currencies of the countries it operates in, will increase slightly this year, including a double-digit rise forecast in its lending in Russia, Ukraine, Slovenia, Slovakia, Romania and also in its corporate loans in Hungary, the country of its bread-and-butter operations.

OTP forecasts that the deposits it collects will increase in line with the rise in loans, Mr. Csanyi said. Operating expenses won't rise more than headline inflation, he added.

Mr. Csanyi also praised the Hungarian central bank's latest plans to help boost Hungary's shrinking economy.

"After a long time, the central bank has started to care about the real economy and not just about inflation and currency stability, which are also important," Mr. Csanyi said.

OTP projects that Hungary's economy will expand about 1% this year, a swing from a 1.7% contraction last year, due to a rise in households' real income in the face of sharply slowing inflation, he added.

The shareholders also approved Friday, as expected, the payment of 120 forints ($0.52) a share on the company's 2012 net profits, up from HUF102 a year earlier.

Mr. Csanyi said that share buybacks, which he prefers to increasing dividend payments, would be a viable way to benefit shareholders who want to hold OTP stock in the long term. OTP has no share buyback plan in place at present, he added.

Write to Margit Feher at margit.feher@dowjones.com

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