The Hungarian financial sector has undergone rapid change and development in recent years. Changes that commenced in the 1980s continued into the 1990s, establishing a multi-faceted, broad-based industry regulated by legislation aimed at harmonizing the Hungarian financial sector with that of the EU.
The financial sector counts some 44 retail, commercial and consumer finance banks, over 80 investment companies and brokerage houses and 30 or more representative offices of foreign banks and financial institutions.
Recent years have seen substantial growth – one could in fact speak of a boom – in the industry, with banks expanding their range of services and networks. Foreign banks have been strong in establishing themselves in the market either through joint ventures or by buying into the market through the privatization process.
With an improved country rating, greater liquidity, a relatively stable market place and the appetite of banks for new business, competition within the finance sector is intense.
Off-the-shelf products continue to be at the forefront and are for the most part price-driven. The lending business has been generally short-term in nature – both as regards forint loans and foreign currency loans; yet in recent months loan tenors have started a push towards the medium term. However, margins continue to fall along with forint base rates. Loans that commanded a margin of 175 basis points two years ago today can be arranged for under 100bp. Top corporates and financial institutions have successfully come into the market and raised long term funds at under 35bp – and it has not only been Hungarian-based banks that have been eager to take on such assets. The syndicated bank loan market has been subject to rapid growth, despite aggressive pricing, and many facilities have been oversubscribed, with European and Asian banks keen to book Hungarian business.
Project and structured finance is becoming more common and not yet subject to lower margins and lower return on equity. For example, in the energy sector, with privatization having been completed, some suppliers are now turning to project financers and state agencies to upgrade plants and equipment. Whilst banks are looking at project and structured finance to cover infrastructure developments, so too are the many export agencies and bodies such as the EBRD and the EIB. The scope for new business for banks is large, yet here too the competition is evident. There are various official finance programmes, ranging from the EIB’s “Hungary Financial Sector Loan” facility (with funding possibilities of up to 14 years) to programmes established by the German State of North Rhine Westfalia to promote NRW – Hungarian business. In addition to such external programmes, domestic programmes are in place to promote small business and agricultural development.
But can the sector sustain its growth on the back of straight lending with falling margins and increasing competition? Possibly in the short term; in the long-term, however, changes are anticipated.
Other product areas are less price-sensitive. On the service side, domestic payments are processed through the Giro clearing system (similar to the German system) with the Giro – which is managed and organized by members from the sector – levying set fees for processing payments. The service will be enhanced later this year with the “Uj Giro” (New Giro) coming on line to cover direct debits, standing order payments and automated crediting of payments. Electronic payments services and systems have been heavily promoted by banks in an attempt to bind corporate customers and establish client loyalty. Such services continue to be developed to cater for additional client needs such as concentration accounts, electronic statements and cash pooling.
With the development and installation of electronic banking services at the customer end, banks are able to generate new business and to win over new clients throughout the country, without the need to establish costly branch networks to cover corporate clients.
Even so, a substantial amount of business – both domestic and international – is still undertaken on a cash basis and this is likely to continue for the foreseeable future.
International payment systems are equally advanced – with certain institutions offering same-day processing and same-day value. This is surely a service area which will continue to be developed with banks investing heavily in new systems and up-to-date technology.
Given the geographic location of Hungary, its existing business links to other central and eastern European nations and the advanced state of the financial sector, Hungary is becoming a hub for business between western Europe and the east. Existing businesses that have been trading with eastern European partners for decades often serve as counterparties for east-west trade, and maintain a different risk perception to their western counterparts. Eastern European political risk may be more easily absorbed by the corporate sector and the commercial banks in Hungary than by their west European counterparties.
International trade finance services – be they in the form of documentary collections, trade-related guarantees or letters of credit – are marketed by a range of banks and extend to ancillary services such as domestic and cross-border factoring, forfaiting and international leasing. Here there has been, and continues to be, an opportunity for certain banks to develop niche positions providing quality service or having the ability to absorb risk at competitive rates.
Advisory services in the post-privatization period are also being promoted by both international institutions and Hungary-based banks. Whilst still at an early stage, M&A business is being looked into by a number of institutions and no doubt the market will open for M&A transactions – albeit on a modest scale. Other advisory services – which range from IPO transactions to capital markets business within the bond markets – have started to open up to corporate borrowers. Undoubtedly, the importance of the capital markets will grow with the pressure on loan margins.
In July this year, the Hungarian parliament passed legislation making it mandatory for employers to provide pension schemes for employees. Prior to the passing of this legislation, many banks had already established pension funds and were marketing the corporate and institutional sector to win new pension fund members. With the coming into force of the new legislation – in operation from January 1998 – those banks that are not yet active in this field may well rush to establish open pension funds in order to generate forint income and manage assets.
The face of the banking sector and the services provided by this sector have changed rapidly over the last few years and will continue to do so into the new millennium. The competition between banks has become tougher, with joint venture banks and large privatized banks seeking to establish market share in one of central and eastern Europe’s smaller and yet more advanced regions. Regulatory changes – which are ongoing – have forced the sector to respond with new strategies, products and services.
The question arises as to whether the market is large enough to sustain the number of financial institutions in Hungary. No doubt some will adjust their strategies, others may establish alliances and some may fall by the wayside. But one thing seems certain – lending business at low margins cannot generate the growth needed to expand and develop in the Hungarian market. Product and service innovation and development – in treasury, trade finance, investment banking and other areas – may be the key. EU membership will bring with it changes in the banking sector and at the same time contribute to greater competition.
