MNB urges banks to improve cost efficiency

The MNB noted in its biannual Financial Stability Report that the return on equity of the Hungarian banking sector reached almost 9% in the first half of the year, in part due to one-off factors such as the release of provisions, but it warned that narrowing interest margins would put banksʼ structural profitability under pressure in the mid-term. The central bank and financial market regulator added that the sectorʼs cost-effectiveness has not improved significantly over the past several years, in spite of efforts to streamline, and that the management of non-performing loans "continues to take up substantial capacities."

The MNB suggested that meeting these challenges could require a consolidation of the banking system, adaptation to new digital trends in banking, and a reduction in NPLs. Cost efficiency can be fostered by competition, especially price competition in the retail segment, it added.

The MNB said it will "devote special attention" in the near future to examining measures that could stimulate competition in the banking sector, while stressing the importance of preventing any market playerʼs "excessive dominance" on a post-consolidation market. The MNB warned of the risk of oligopolies forming in certain regions if banks, rather than consumers, are the benefactors of improved cost efficiency. It suggested that the digitization of banking services could prevent this by eliminating geographical constraints, but said that Hungariansʼ financial literacy, as well as relevant legislation, needs to be "adjusted accordingly" for the benefits to be realized.