Buoyed by an improving economy and more business-friendly regulation, foreign banks in Hungary could become profitable once more.

Squeezed by a flagging economy and onerous regulation, banking has been a tough business in Hungary over the past five years. 

In 2010, lenders in the country were burdened with one of the highest bank levies in the world. This was followed by the imposition of a financial transaction tax in 2012. Then, in 2014, bills were introduced that forced lenders to refund borrowers on charges deemed unfair and the forced conversion of foreign-currency loans.

At the same time, Hungary's economic growth has been sluggish, hovering at about 1% and briefly dipping into recession in 2012. This was reflected in declining balance sheets among regional banks; in 2014, assets of the five largest foreign-owned banks were 26% smaller than they were in 2010 (see chart one).

Chart one

There are signs that the situation could change in the coming years. The Hungarian economy is now bouncing back, growing 3.6% in 2014 and forecast to grow 2.8% in 2015 and 2.2% in 2016. The Hungarian government is also starting to mend its relationship with the banking sector; the banking levy will be reduced in 2016 and 2017, and the central bank announced that, starting next year, it will reduce capital requirements for banks that boost their lending to small-and-medium-sized enterprises (SMEs).

These measures could be just enough to help tip foreign banks in Hungary back towards profitability – the recent upswing in the economy was enough to lift two large lenders, Belgian-owned K&H Bank and Austrian Raiffeisen Bank International (RBI), back into the black this year (see chart two).

 

Chart two 2

K&H managed to return to profitability by growing its loan book by Ft164bn (€523.21) in the first half of year. Some of these new loans were given to SMEs, meaning that the bank could be poised to benefit from capital reductions offered by the central bank in the future. RBI, on the other hand, benefitted from reducing its stock of non-performing loans by €410m, which led to a reduction in provisions. As a result, the bank posted a €13m net profit, compared with a €301m loss for the same period in 2014.               

The most profitable of the foreign-owned banks, Italian Unicredit, also benefitted. The bank has managed to stay in the black throughout the past five years and make modest profits. Similar to K&H and RBI, it appears to have upside potential as it posted €87m in net profit, compared with €11m for the same time period in 2014.

For other foreign lenders, Hungary is still unprofitable but increasingly less so. CIB Bank posted a loss of Ft20.88bn for the first half of 2015, compared with Ft33.83bn for the same period last year. It was a similar story at Erste Bank Hungary, which posted a €47.2m loss in the first nine months of this year, compared with a €370.7m loss in 2014. Like RBI, in 2014 the bank was battling the issue of legacy loans, which forced it to set aside very large provisions, but by now it has managed to largely clean up its balance sheet.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter