Hungarian Banks Under Pressure
Posted by hkarner - 25. September 2010
The Hungarian banking sector is generally less fit than its regional peers —with a higher-than-average loan-to-deposit ratio and a below-average capital adequacy ratio—and considerable challenges lie ahead. The main risks relate to asset quality. Non-performing loans (NPLs) as a percentage of total loans jumped from 4.7% at year-end 2008 to 10.1% at year-end 2009. The deputy CEO of OTP, Hungary’s largest bank, says the NPL ratio will keep climbing as long as lending declines, and this state of affairs looks set to continue.
A controversial three-year bank tax, passed by the government in July 2010, will weigh on banks’ balance sheets and keep lending constrained. Meanwhile, the strengthening of the Swiss franc, which has gained more than 15% against the Hungarian forint year-to-date, will make it challenging for Hungarian households, who have borrowed heavily in this low interest rate currency, to pay back their loans. Over 60% of household loans are Swiss franc-denominated. The macroeconomic backdrop, in turn, also makes Hungary a challenging banking environment. In contrast to other Central European economies, which are in recovery mode, RGE sees Hungary’s economy stagnating this year, which will adversely affect loan quality.Figure 3: Top 5 Banks in Hungary (as of end-2008)
Source: Raiffeisen Research
The latest challenge to the beleaguered banking sector comes from the government’s mortgage relief proposal, which would allow borrowers to extend their mortgages by five years without penalty, according to reports. (See related Critical Issues on Hungary’s Bank Tax and Foreign Exchange-Denominated Lending in Eastern Europe.)