Hungary special report 2015: Good times are here again

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Hungary’s banking sector is one of the region’s most exciting and innovative, stimulated by greater competition and government moves to tackle bad debts.

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Hungary's financial sector is on the move again. After years of slow growth and tepid profits, leading lenders are again preparing for a bright future.

Over the past year, a bloated banking sector has been winnowed down, with a brace of foreign investors departing the scene. In December 2014, Budapest Bank, an SME-focused lender previously owned by GE Capital, was absorbed by the state. Five months earlier, MKB, a far larger and better-known banking brand that ran into trouble in the dark days following the financial crisis, was folded into government ownership, having been acquired from Germany’s BayernLB.

Bright future

There are many good reasons to point to a bright future for one of the region’s most exciting and innovative banking sectors.

First and foremost, there is the prospect of greater competition. In the wake of the election of Viktor Orban as premier in 2010, domestic lawmakers, keen to inject fresh impetus into a lagging economy and a sluggish banking sector, wrestled with an industry boasting too many inactive players, many of them sitting on their hands rather than jostling for new business.

Some banks were clearly committed to a market with vast economic potential lying at the beating industrial heart of Central and Eastern Europe (CEE). Others were less determined. BayernLB, having received state aid from the German government following the financial crisis, already had one foot out of the door, while GE Capital had long flagged its global determination to focus on fewer markets. Thus the acquisition of both MKB and Budapest Bank by the state made good and timely sense.

Hungary’s government has made clear its lack of interest in retaining a controlling stake in either – or indeed any – commercial lender.  In December, financial policy minister Gábor Orban told Euromoney in Budapest that the state was "conscious of the risks of running a bank", and did not intend to retain control of either bank. The two outfits will likely be merged, to create the country’s second largest lender, before being sold to private local investors or listed on the Budapest Stock Exchange, with the government retaining a minority stake.
Péter Virovácz,  Századvég Economic Research Institute

Complete overhaul

The likely creation of a freshly-minted lender combining the heft of MKB and the nimble flexibility of Budapest Bank will also encourage rivals to work hard to secure new business. One of the aims of whittling down the number of powerful local lenders, says György Matolcsy, governor of the Central Bank of Hungary (MNB), is to "create a far more competitive banking system". He adds: "The entire industry needs a complete overhaul. We need far stiffer competition."

Financial policy minister Gábor Orban points to the need for another round of consolidation, to take place during 2015, with one or two more foreign lenders likely to exit the domestic market. An industry boasting eight large banks, each with a single-digit market share, is "unsustainable", the minister says, noting that the number of viable domestic banks will, in the medium term, be whittled down to five or six.

This creates a future scenario in which a select group of lenders emerges, capable of helping build and guide Hungary’s economic future. Most domestic and international analysts believe the winners will prove to be Budapest-based OTP Bank, the largest domestic lender, and a coterie of foreign-based peers, notably Austria’s Erste Group Bank, UniCredit of Italy, and Belgium’s KBC Bank, owner of local unit K&H. A few other names, including CIB Bank, owned by Italy’s Intesa SanPaolo, and Vienna-based Raiffeisen Bank International (RBI), may have to up their game to remain part of Hungary’s banking scene.

New taxes

Orban’s government has played a clever and balanced hand in dealing with the banking sector. A brace of new taxes imposed since 2010 - one directly imposed on lenders, the other levied on all financial transactions, including ATM withdrawals - helped shore up the
state’s budget, generating HUF140 billion ($520 million) in annual earnings. Banks grumbled, but the levies were necessary for both the country’s general financial health and that of the banking sector as a whole. In December 2014, premier Orban suggested that the state may trim the windfall tax in 2016 and 2017, noting that he wanted a "new chapter" to start soon for banks, with the state seeking to make their debt burdens bearable.

Another clear focus of the government is to begin the process of unclogging a banking sector still struggling with a backlog of non-performing loans (NPLs). In the years leading up to the financial crisis, many banks directed cheap funding into a raft of industrial projects, many of them in the residential property space. With the onset of the financial crisis, many of those projects faltered or failed. Households had also borrowed at a record pace before 2008, taking out mortgages and retail loans denominated in foreign currencies such as euros or Swiss francs. For some, the financial crisis proved ruinous, as the local currency, the forint, tumbled in value, leaving households facing spiraling debt repayments.