Banks get tough

Hungarian banks are changing their business models in response to falling revenues, rapidly growing risk costs and a high level of fixed expenses. As profits in the Hungarian banking sector are eroding, they need to adapt to the new challenges. 

In response to the unfavorable changes in the business environment, Hungarian banks have no choice but to revise their business models, Raiffeisen Bank Hungary’s deputy CEO Ferenc Szabó said at the bank’s conference for investors. This will be a long and painful process, he noted. 

The first step was cutting operating costs, but this had a relatively small impact only. Labor costs were the next target for cuts through layoffs and the scrapping of bonuses. The next and most painful step will be closing branches. But while they are certainly not expanding their networks, banks are still not quite ready for shuttering their branches en masse. Nevertheless, they have already started developing new, cheaper distribution channels, such as internet banking and call centers.

Banks have been reluctant to touch their existing expensive infrastructure so far, as it ensures their market presence, Szabó said. As most units were built during the economic boom, the number of branches is quite high in Hungary. “Often, there are four or five different bank branches on the main square of small countryside towns with high rates of unemployment,” Szabó pointed out. 

On the revenue side, banks will focus on cross selling in order to increase income from banking products other than loans, Szabó said. An important goal is to sell a wider range of financial services to one customer rather than only one single product. Another consequence of the adaptation process is fiercer competition for good clients through stronger market segmentation. 

As a result of the new business model, banks will offer fewer, more expensive loans to customers, Szabó said. In the long run, both the number of banks and their infrastructure will significantly shrink through the consolidation of the market. The relative positions of market players will also change. In addition, banking products will become simpler and more transparent.