Economic Strains Grow, but Banks Will Weather the Storm


Photo by George Khelashvili /

Rising inflation, the escalating energy crisis, interest rate freezes, and extra taxes have increased the strain on banks operating in Hungary. While their situation has become more complicated, banks are liquid enough to withstand even more severe economic circumstances. The Budapest Business Journal investigates the national banking market and industry sentiment.

The current economic environment fuels a growing uncertainty among retail and corporate bank clients. The housing market has slowed, and subsidies have been reduced. The rising interest rates and an interest rate freeze on variable rates and longer-term mortgages lowered the mood for borrowing and have prompted people and businesses to save.

The National Bank of Hungary (MNB) has sharply increased its base rate. From 2.9% in January 2022, the base rate had shot to 13% by September 2022, where it has remained: The MNB’s Monetary Council kept it there during its most recent monthly policy meeting on February 28.

Higher policy rates generally involve a higher cost of funding for banks, which is reflected in the higher interest rates on loans extended by them. Consequently, demand for credit decreases as it becomes costlier, especially for loans with longer maturity dates, such as mortgages. And the interest rate may climb higher.

“Current expectations are for the domestic benchmark interest rate to peak at 18%, which is already a high nominal interest rate environment,” the Corporate Communication Department of OTP Bank, Hungary’s largest lender, tells the BBJ.

“These factors and the risks related to the Hungarian economic outlook impact OTP Group’s results. Due to this, OTP Group recorded significant one-off losses last year but has been operating in a stable and predictable manner.”

More Vulnerable

The economic environment has not favored the country either, as Magyar Bankholding confirms.

“Despite Hungary’s robust growth performance in recent years, the country’s economy remained more vulnerable to external shocks than most of its regional peers, as exhibited by the impacts of the Russo-Ukrainian war on the forint and other Hungarian financial assets,” Magyar Bankholding’s Strategic Research Center told this newspaper.

Magyar Bankholding is the holding company overseeing the merger of three banks (Budapest Bank, MKB Bank, and Takarékbank) into one, due to be completed this year on April 30 under the unified brand name and image of MBH Bank Plc. This wholly Hungarian-owned bank will become the second largest market player in the country, considering total assets.

The Hungarian economy is heavily dependent on foreign energy, especially Russian gas. When prices took off as the energy crisis snowballed, both corporate and private bank clients started hemorrhaging money, flowing into utility costs that have jumped almost seven-fold. The deteriorating financial position of bank clients trickled through to the financial institutions themselves. Non-performing loans increased, further exacerbating the already present inflationary pressures.

“Whereas in the higher yield environment, banks have more room for maneuver to generate revenues, a sharp decline in lending activity coupled with the need to form higher net impairment and provision markedly reduces the profit outlook,” Magyar Bankholding says.

Hungary’s 20%-plus inflation is among the highest in the European Union, affecting banks directly through the deterioration of clients’ financial standing and higher operating costs. Corporate clients can, in some cases, pass on this burden to customers. Private clients usually have less leeway.

Rising Risk Costs

“Extending new credit hence becomes riskier, while the orderly servicing of outstanding debt may come under threat. A significant rise in risk costs thus looms on the horizon. Operating costs are also expected to grow due to rising wages and administrative costs, but those banks who invested heavily in digital solutions and processes earlier may be less vulnerable to rising costs,” Magyar Bankholding said. [See separate story on bank tech on page 18.]

But where does this inflationary environment take the market?

“Since high inflation involves high policy rates, and the Hungarian banking system has ample idle liquidity in the wake of the monetary expansion following the COVID pandemic, banks, in fact, earn hefty sums by keeping this liquidity in the central bank’s high-yielding deposit facilities,” Magyar Bankholding explains.

“The balance of the impact of high inflation on banks is thus a complex issue, but in the long run, a low inflation economy creates a more transparent environment for clients to make informed and established decisions, and hence also serves banks better,” it adds.    

Banks have also had to face extra tax burdens. Prime Minister Viktor Orbán raised the idea of windfall taxes in May 2022, targeting banks, energy companies and telcos, and businesses in a handful of other sectors. The premier said that the proceeds would protect Hungary’s regulated utility price system for households and upgrade the military.

“Banks became subject to a new extra-profit tax, the interest rates on some loan products have been capped, and most recently, the central bank significantly raised the rate of the mandatory reserves, which also points to the direction of a higher level of foregone revenues,” Magyar Bankholding points out.

“While access to funding is still not a crucial issue, as there is abundant liquidity in the banking system, the stock of client deposits may decrease as clients face higher costs, and thus, their expenditures are on the rise. On the other hand, there is also a switch to financial instruments (most notably securities) earning higher yields. On a positive note, however, the banking system is still adequately capitalized and has a secure level of liquidity to function smoothly even in stricter economic conditions than currently envisaged,” Magyar Bankholding concludes.

This article was first published in the Budapest Business Journal print issue of March 10, 2023.

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