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Hungary banker says profits to erode, bad debt to rise

  Hungary’s banks will just break even this year, after lucrative profits for years, but are unlikely to resort to government aid because of the tough conditions attached, the country’s top banker told Reuters on Tuesday.

The global financial crisis will hammer the sector’s profits, lift the share of non-performing loans by more than 50%, while a further weakening of the forint currency could pose a systemic risk to the sector, Péter Felcsuti, the Chairman of the Hungarian Banking Association, said.

“Based on the numbers we see, our current expectations are for the sector to break even this year ... Yes, that assumes some banks will be loss making,” Felcsuti, who is also the chief executive of Raiffeisen International’s Hungarian unit, said in an interview.

His projections are sharply down from an October estimate when he predicted the sector’s return on equity would be in low double digit or high single digit territory after years of experiencing returns of more than 20%. The sector’s prospects deteriorated as the global financial crisis deepened and the country projected its economy to shrink by up to 3%, faster than its October forecast for a 1% drop.

“The stock of non performing loans could rise by 50% or even more compared to a year earlier,” Felcsuti said. “Banks must increase their tolerance with regard to non performing loans. Not out of kindness but it’s simple business logic,” Felcsuti said.


Felcsuti said conditions of the government’s HUF 600 billion ($2.63 billion) package to aid banks, part of its late-2008 deal with the International Monetary Fund, are so strict it was unlikely that banks would tap into it. “The requirement for capital funding is so strict, it’s hard to imagine that a bank, particularly a foreign owned bank, would opt for this,” Felcsuti said.

Most of Hungary banking sector is held by foreign investors with the notable exception of OTP, Central Europe’s biggest independent bank, which operates subsidiaries in nine central- and east-European countries. As part of the package, the government set aside HUF 600 billion in capital aid and guarantees for the banks, although its terms have come under fire for giving too much control to the government is exchange for help.

“When the government realizes this money can’t be drawn, I hope they’ll go back to the IMF and ask to use this money somewhere else,” Felcsuti said. He said the guarantee is unlikely to function because it would need to be sold on international markets, which are already saturated with issues by bigger and stronger countries, and Hungary’s weak credit rating would make it too expensive. “If the market says this is still a Hungarian issue and starts pricing at 400 basis points, in line with CDS spreads, then this facility doesn’t appear functioning,” Felcsuti said.

Hungary was one of the hardest hit countries in the global financial crisis and needed a $25.1 billion IMF-led rescue package to avoid financial collapse. Felcsuti said the forint’s weakening against the euro so far poses a manageable risk for banks but an exchange rate above 300 would pose a systemic risk to the sector as the share of non-performing foreign currency denominated debt would rise sharply.

“If we’re not talking about extreme movements, and sadly, I have to say that I no longer consider 300 extreme, there’s perhaps no systemic risk,” Felcsuti said. “There will be a rise in non performing loans but each bank should be able to handle that. If we’re weaker than 300, you can’t rule out a systemic risk.”

Hungary’s forint hit an all-time low of 304 against the euro in early February, but bounced back and traded in a 287-292 range on Tuesday. (Reuters)