Hungary has come under a lot of pressure in recent months, culminating in the passed resolution in European Parliament that stated that the country is no longer a full democracy. However, the country has recently signalled its willingness to carry out more reforms to align with Europe, in addition to creating an anti-corruption body as agreed with Brussels previously. Uncoupling Hungary’s energy system from Russian imports is still an area of contention.
Hungary hopes that these concessions will preserve billions of euros in funding, according to a recent Financial Times article. Hungary is in line to receive about €22bn of cohesion funding under the current 2021-27 EU budget, according to the European Commission, as well as an extra €7bn of grants and billions of euros more in loans under the recovery fund.
But the country faces other woes. On August 30, the National Bank of Hungary raised its benchmark interest rate to an 18-year high of 11.75%, in light of rampant inflation, a weakening forint and prospect of a worsening of the economy. While the economy grew by 6.5% in the second quarter of 2022, according to Hungary’s Central Statistical Office, many do not expect such a growth rate to continue.
The last time the interest rate reached this level was in 2004, after a fiscal shock caused by excess government spending.
The country’s biggest banks are well equipped to handle the oncoming headwinds. Hungary’s two largest lenders by Tier 1 capital – OTP Bank and Erste Bank Hungary – have continued to add to their core capital for the past five years. OTP Bank, the largest bank by far, has more than doubled its Tier 1 since 2017 and reported a 14.1% uptick from 2020 to 2021.
Kereskedelmi es Hitelbank Bank, UniCredit Bank Hungary and MTB, on the other hand, saw their Tier 1 drop year-on-year, by 8.1%, 12.1% and 10.1%, respectively.
All five banks took a hit in pre-tax profits (PTP) in 2020, but four managed to recovery profitability in 2021. Erste Bank Hungary saw the biggest jump in PTP, effectively doubling profits to $208m; while OTP reported the highest value of $1.6bn, a 67.7% increase. MTB was the odd bank out, with a second year of losses.
