Willing to give more? Not yet


EBRD board member András Kármán sees the low revenue-generating ability of Hungarian banks as their mayor shortcoming in comparison to their regional peers. As long as this issue remains, banks’ willingness to lend will not improve, Kármán told the Budapest Business Journal.


Q: Since 2008, corporate lending volume has shrunk in Hungary. Is this the result of the banks’ limited ability to lend, as many studies suggest, or due to the low number of viable projects? Are banks in Hungary unable, or unwilling to lend?

A: One can make arguments for both. The decline in corporate lending in Hungary is rather a complex matter, in which both supply and demand are a defining factor. On the supply side, the major issue may be the low profitability of the domestic banking system. Many of the banks in Hungary are now loss-making. This has an impact on their lending and risk-taking capacities. This is coupled with a more difficult or limited access to long-term, cheaper resources.

The firms that banks would be willing to finance, usually large Hungarian firms with a good credit rating, balance sheet and a strong focus on exports, don’t plan to take up many loans. Many of these companies are not planning or have postponed expansion or investments as they can’t see whether it is worth it, or because there is so much uncertainty in, for example, the regulatory or taxing matters pivotal for the investment that they feel the profitability of it is questionable.

Small- and medium-sized companies obviously face the curb on bank lending more. Lending for large firms, however, is dependent on their investment plans.

Q: So banks have a hard time placing loans?

A: The ratio of non-performing loans in the corporate sector is around 15-20%: very high. We may be over the worst, though, and the rate is slowly beginning to drop. Still, it translates into a very high profit margin for banks to be able to compensate for that much loss, for every sixth debtor that is insolvent. This high margin deters many companies from borrowing – with interest rates so high the profitability of their investment would suffer. As seen, the problem is layered, so there needs to be several methods to address it. The banks’ withholding tax should be cut. This would result in lower lending interest rates. Credit risks must be evaporated too, or partly taken over: Eximbank may be able to offer some important services to banks in return for a guarantee fee for which it would take over risk of non-performing loans. Of equal importance is that the willingness to invest in the region/sector increases: after all, companies will borrow if they see the chance of prosperity. So the solutions are various, and probably this is also the very same reason why the results take time to show.

Q: Compared to their peers in the region, are local banks taking enough risks?

A:  The regional angle is vital because many banks are present in multiple countries in the region, and parents measure performance at a regional level. Hungarian banks are the weakest in terms of the amount of profit made on each unit of funds allocated here. Hungary fares poorly in this race. Losses stemming from foreign currency loans and the banking tax, higher than anywhere else in the region, both play a role in it. Opportunities are more limited – Hungarian subsidiaries have to fight to receive more funds from parents. This also means that banks cannot participate as much in financing the Hungarian economy.

Q: In some Central European countries such as Bulgaria or Ukraine, Western parents’ lower funding capacities are offset by loans from Russian banks that are quite willing to lend, despite the economy. Can Eastern banks take over lending from their Western counterparts?

A: Considering the shock that hit the sector, fairly little consolidation has taken place. Most of the bigger players insist on having a strategic role in the region. Except for a few, I have seen very few withdrawals: KBC is one. The bank withdrew from Poland and sold its stakes to Banco Populare Santander. Santander wasn’t a significant player but, with that move, it has appeared on the map. The takeover of Volksbank’s subsidiaries by Russia’s SpersBank’s is another example of Russia gaining visibility in several countries. Russian banks have been on the offensive in former Soviet states – indeed, they have an expansion strategy. This is a potential script scenario, though so far we have seen only small steps.

Q: How about Chinese banks – could they become significant players in the longer-term?

A: Chinese banks have focused more on Chinese firms – they don’t seem to wish to become universal players in a market so far away from them. The stepping forward of Russian banks is more imminent, and I would expect a more enhanced role in countries that they are culturally closer to.

Q: How will the Hungarian National Bank’s growth program affect lending activity?

A: Within the second pillar of the program, companies can replace part of their existing FX loans with forint ones. Being low interest rate loans, they won’t see losses in the interest. Firms will underwrite the losses of exchange rate though. The question is whether companies are ready to swallow these losses or are still waiting for a weaker Swiss franc that could scrap some of the exchange rate losses. I believe a number of firms will choose this program but only a smaller fraction. Large companies usually have euro-loans tied to export financing; SMEs are more likely to have borrowed FX loans speculatively. Overall, I believe that the program will affect only a small portion of FX loans.

These steps alone cannot trigger an effect: they should be applied consistently and aim in the same direction. I find steps trying to get banks interested in underwriting losses very good. The MNB’s growth program also has an added benefit. Yet these steps are incomplete without a calculated cut in the bank tax that improves revenues and return on equity. Just as important is the improvement of an investment-friendly business environment. By that I mean calculability of regulations and taxes in the first place. Today these two pillars are the weakest.


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