Excluding the effect of exchange-rate changes, the stock of loans provided by banks declined by 0.2% yr/yr in both the retail and the corporate sectors in the third quarter, according to a fresh analysis of the Hungarian Financial Supervisory Authority (PSZAF).

Banks operating as shareholding companies posted losses in the third quarter of 2011 after recording profits in the previous quarters, largely due to a deterioration of portfolio quality and risk provisions accumulated for projected losses resulting from the government’s early final repayment scheme.

PSZAF said foreign banks’ branch sites increased their profits dynamically, at 57% yr/yr in Q1-Q3, largely due to their moderate level of net impairment and risk provisions. Cooperative credit institutions suffered a major decline in earnings. Considering their income prospects, it is unfavourable that in spite of the increased net provisioning, provisioning in Q10-Q3 as a whole did not keep pace with portfolio quality deterioration, therefore, the sector’s coverage ratio (accumulated impairment/projected losses) was far lower in September 2011 than a year earlier.

Of the key factors determining banks’ profits, the substantial increase in impairment and risk provisions made the biggest impact. In September alone, the increase came to HUF 123bn. Banks accumulated risk provisions of close to HUF 100bn in September for losses resulting from the early final repayment scheme.

Considering the foregoing, the bank sector showed relatively good performance with pre-tax profit of HUF 87bn in Q-Q3 2011, just 13% down from its level one year earlier. It is important to emphasize though that polarization has increased within the sector, and the number of loss-making banks has grown.