The government’s strikes have already hit Hungarian banks, but the black soup is only now being prepared

On Monday morning, the MNB published the preliminary supervisory statistics of the Hungarian banking sector for the third quarter. We now present the non-consolidated numbers of the banking sector, i.e. those that do not include, for example, OTP’s foreign subsidiary banks (the numbers of individual banking groups are the only exception to this), in order to have a closer look at the domestic processes of the Hungarian banking sector.

This year is a difficult year for banks

The Hungarian banking sector is going through a special first three quarters, as a number of one-off and temporary negative items affected its performance:

  • the government HUF 200-250 billion extra profit tax levied on the banking sector, the full annual amount of which was typically settled by the banks already in the second quarter,
  • the HUF 73.5 billion to the National Deposit Insurance Fund the sector had to pay in the spring due to the liquidation of Sberbank, but part of it was not recognized as a loss by the banks, counting on the expected return from the liquidation,
  • a increase in yield environment because of this, according to IFRS rules, the banks had to account for negative revaluations on many subsidized loans (the largest amount on baby loans),
  • a cost of interest stop at current BUBOR levels already HUF 190 billion per year means a minus for the banks.

DESPITE ALL THESE, THE SECTOR CLOSED THE FIRST THREE QUARTER WITH A TAXED PROFIT OF HUF 328, INCLUDING THE THIRD QUARTER OF HUF 120 BILLION.

On the other hand, the after-tax profit calculated without dividend income (a significant part of which is provided by OTP’s foreign subsidiary banks) was only 117 and 110 billion forints, respectively. Annualized, these numbers represent a very low return on equity (ROE) of less than 3%.

The figure below shows the profit of each bank so far this year: the buyer of Budapest Bank and the buyer of TakarĂ©kbank MKB Bank he was able to get to first place mainly because of that, because at OTP Bank (according to uncorrected data), the Russian-Ukrainian war caused significant negative items accounted for in Hungary in the first half of the year. Our chart shows the uncorrected numbers, but if we were to look at OTP Bank’s numbers without dividend income (mainly from abroad), then we would find a HUF 31.7 billion loss in the Hungarian operations of the largest Hungarian bank.

In addition to the listed negative items, there were also positive factors in the banking sector:

THE NUMEROUS NEGATIVE ITEMS WERE PARTIALLY COMPENSATED BY THE DRASTIC INCREASE IN THE INTEREST RATE ENVIRONMENT,

  • primarily on deposits held at the central bank,
  • secondly, on newly purchased government securities,
  • thirdly, on short-term repricing loans

the net interest income of the banking sector may have increased, the latter being significantly limited by the interest rate cap in the case of residential mortgage customers and, from November, SME loans. What we calculate is average the annualized value of the interest margin relative to assets rose from 1.8% in the third quarter of 2021 to one and a half times, to 2.7% in the third quarter of 2022.

If it had not been for the one-off and temporary items (especially the new special bank tax and the interest rate cap), then the profit of the banking sector would have increased significantly due to the increase in the interest rate environment, but the state would have benefited from the “extra profit” resulting from the increase in the interest rate environment, as well as the loan with variable interest rates introduced these measures citing the protection of owners.

Let’s see the details!

Some numerical details from recent statistics:

  • the banks net interest income in the first three quarters 50%-kalin the third quarter 66%-kal was higher than a year earlier,
  • a net fee and commission incomewhich now better reflect business activity and inflationary pressure than net interest income, in the first three quarters 17%-kalbut in the third quarter it slowed down slightly, 16%-kal they rose.
  • a operational costs in the first three quarters 38%-kalin the third quarter 31%-kal exceeded the previous year. Typically, the banks accounted for the new special bank tax imposed for the entire year already in the second quarter, so the cost increase was smaller in the third quarter.

In the diagram above, we only show the changes in the results of the third quarter, and below, the changes in the first three quarters compared to a year earlier.

However, perhaps the most important profit items in the near future will not be the above, but the risk costs. According to recent data, credit institutions (not consolidated)

A NET IMPAIRMENT OF HUF 126 BILLION AND TARGET RESERVE WAS CALCULATED IN THE THIRD QUARTER, WHICH IS THREE TIMES THAT OF ONE YEAR EARLIER, HOWEVER, it does not yet reflect the actual deterioration of the loan portfolio.

In the coming quarters, many customers may be in trouble due to the flight of overhead costs and the emerging chain debts, so a drastic deterioration in the quality of bank loan portfolios is also not excluded, and it is quite possible that the profit-generating capacity of the banking sector may slip into the negative range in some quarters.

At the end of September, however, the proportion of non-performing loans beyond 90 days was still low: mainly due to regulatory reasons, due to the increase in loans classified as Stage 2, the proportion of non-performing loans could only be over 4% (e.g. the mandatory classification of those in a long-term moratorium and certain sectors because of).

From the end of June to the end of September

the non-performing loan portfolio that is actually more than 90 days overdue increased by HUF 6 billion for households and HUF 46 billion for companies, from 1.47% to 1.50% and from 0.98% to 1.33%, respectively.

While the quality of the loan portfolio is expected to deteriorate in the coming quarters, lending activity may also deteriorate significantly due to the ever-higher interest rate environment, and this has already clearly started for the general public. Inflation has already brought about the stagnation of deposits and savings in recent months. All of this can also have a negative effect on the banks’ revenues. In an annual comparison between September 2021 and September 2022, there were no particular problems with this:

  • the household loan portfolio increased by 3.9%,
  • corporate loans increased by 21.6%,
  • household deposits increased by 11.8%,
  • corporate deposits by 22.3%

increased according to non-consolidated domestic credit institution data.

We wrote about the latest developments in the credit market in our article below:

Cover image: Getty Images


Source: Portfolio.hu – Bank by www.portfolio.hu.

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