Emerging Europe’s largest home-grown banking group has called for a reduction in taxes to help lenders weather the Covid-19 crisis. Laszlo Wolf, deputy chief executive of Hungary’s OTP Bank, says policymakers should try to keep “a reasonable balance” when introducing measures such as payment holidays.
“It is of great importance to support the players of the real economy, while at the same time observing the impact of such steps on the banking system,” he says. “Any extra burden that would be potentially put on banks’ shoulders should be compensated by tax reliefs, especially in countries where there are special taxes levied on banks.”
For OTP that means above all Hungary, which still accounts for around 50% of group assets even after a recent regional expansion spree.
Hungary’s Fidesz government, led by Viktor Orban, has announced the toughest measures of any central and eastern European (CEE) country to combat the Covid-19 crisis, including sweeping emergency powers and the introduction of a moratorium on all loan payments until the end of the year.
The local banking association has estimated that restrictions on the sector, which also include a ban on raising payment instalments after the end of the moratorium and a cap on interest rates on consumer loans, could cost the sector as much as Ft450 billion ($1.35 billion).
In return, Hungary’s central bank has supported the banking sector with substantial liquidity injections and an easing of collateral requirements. So far, however, policymakers have resisted calls to reduce either the industry levy or a tax on financial transactions.
This potential downturn in the wake of the coronavirus will be relatively short-lived and life will go back to normal in a couple of months- Laszlo Wolf, OTP Bank
Moratoriums and other measures to reduce the impact of the Covid-19 crisis on bank customers have also been introduced in several of OTP’s 11-country international network, which includes six countries in southeastern Europe, as well as Russia and Ukraine.
Wolf is unfazed by the prospect, however. “Operationally we do not foresee major changes neither in the short term nor in the mid-term,” he says.
“We believe that the stable, efficient and profitable operation of the bank is not jeopardized by the current economic challenges. We also believe that this potential downturn in the wake of the coronavirus will be relatively short-lived and life will go back to normal in a couple of months.”
He acknowledges that countries in OTP’s network, many of which are deeply integrated into the global economy, are vulnerable to supply chain disruption and weakness in large European Union member states such as Italy.
OTP expects the impact of the crisis to be felt most strongly in the tourism, car manufacturing and transport sectors, as well as potentially the oil and gas industry. Wolf notes, however, that the group’s exposure to these areas is limited.
“Our loan book is quite diversified both in terms of countries and industry sector concentration,” he says. “The total on and off-balance sheet exposure to the oil and gas industry is €1 billion and to the other crisis-sensitive sectors €0.8 billion, which is quite manageable.”
OTP’s overall loan portfolio stood at Ft12.9 trillion at the end of December, up 44% on the previous year. A substantial part of this increase came from inorganic growth. The group concluded six acquisitions in 2019 in markets including Slovenia, Serbia, Bulgaria and Albania.
Organic lending growth has also been running at more than 10% on annualized basis over the past two years – a rate Wolf says could be achieved in the second half of this year “if economies go back to normal by that time”.
He notes that most of OTP’s CEE markets have seen a substantial improvement in macroeconomic indicators in the past two to three years.
“With rebounding economic growth, the public debt ratios have typically declined; and fiscal balances and current account balances have shown a healthy picture in most cases, leaving room for governments to stimulate the economy in a downturn,” he says.
“Therefore, these countries might sail through the difficult times with relatively less pain.”
Hungary, in particular, is much better placed to withstand external shocks than it was in 2008, when a combination of twin deficits, high levels of foreign currency lending and inadequate reserves sparked a severe recession and an IMF bailout.
Today the economy is in better shape. GDP growth has averaged 4.5% over the past three years. The government debt-to-GDP ratio fell to 67% last year from a peak of over 80% in 2011, while the budget deficit has been hovering at around 2% since 2013 and the current account deficit is less than 1%.
The banking sector has also seen a major adjustment, particularly in terms of funding. Before the global financial crisis, loan-to-deposit ratios were in excess of 200%. Today, the overall figure stands at under 80%, according to Raiffeisen Bank International.
Capitalization is also strong, with a sector-wide capital adequacy ratio at around 20%. “There are no doubts concerning the capital position of the Hungarian banking sector, so the capacity to lend is there,” says Wolf.
He believes that the current crisis can work to OTP’s advantage. “OTP managed to get through the 2008 crisis without any major downsizing, which we believe turned out to be a competitive advantage when the economy started to catch up after the crisis,” he says.
“We believe that OTP Bank is well positioned to emerge as a winner from the recent turmoil and provide the households and companies with loans once this hopefully temporary situation is over and the economy bounces back.”