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Bank levy, early repayment eat into bank profits

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 in portfolio quality as well as risk provisions accumulated for projected losses resulting from the government’s early FX mortgage repayment scheme.

The latest data from financial market watchdog PSzÁF showed that the 13 local credit institutions operating as branch offices of their foreign parents increased their profits dynamically, up 57% yr/yr in Q1-Q3, largely due to their moderate level of net impairment and risk provisions. Cooperative credit institutions, however, suffered a major decline in earnings.

The Erste group generated €531.7 million net losses in Hungary in the first nine months against an €9 million loss one year earlier. Most recently, Erste Bank Hungary announced it would lay off around 15% of its staff, or approximately 400-450 people, in the early months of 2012 and plans to close down 43 branches.

Raiffeisen Bank booked a €286 million loss in Hungary in Q1-Q3. Losses in Hungary are expected to reach €320 million for the full year.

In the first nine months of the year, OTP Bank had consolidated after-tax profit of HUF 109.6 billion, up 9% from the same period a year earlier. The bank booked a HUF 1.9 billion loss during the period on the government early repayment scheme , but added that the scheme could generate a total loss of about HUF 39.5 billion.

Considering their income prospects, it is unfavorable that in spite of the increase in net provisioning, provisioning in Q1-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.

However, PSzÁF head Károly Szász insisted that Hungary’s banking system is stable and will remain so after the early repayment scheme runs out at the end of the year, adding that banks’ losses because of the scheme will depend on how many borrowers take advantage of it.

National Bank of Hungary governor András Simor, on the other hand, has urged that the bank levy be scrapped, or at least reduced to levels more in line with the European average, in the interest of improving the competitiveness of the banking sector and boosting corporate lending.

He said that the elimination of the mandatory private pension fund system and the limiting of foreign currency-denominated lending were unfavorable for the banking system.

The introduction of the bank levy was especially painful for banks. Simor acknowledged that bank taxes had also been introduced elsewhere in Europe, but noted that the one in Hungary was five or even ten times the size of those.

Simor counted the lifting of the moratorium on evictions and the introduction of reference interest rates for retail borrowers among the government measures that have affected banks positively in 2011.