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Bank tax is not solely to blame for banks’ profit dive

The after-tax profits of Hungarian banks in 2010 fell back to one-fifths of their 2009 results, which was widely communicated as due to the bank tax. However, the situation is more complex.

Hungarian banks had combined after-tax profit of HUF 38.5 billion in 2010, down sharply from HUF 209.1 billion in 2009, the preliminary report of financial watchdog PSzÁF shows.

The extraordinary tax on financial sector companies ate into profits in 2010: banks' combined “other non-interest revenue” – the line that contains the tax – came to negative HUF 343.2 billion in 2010 compared to negative HUF 84.3 billion in 2009.

However, the crisis tax is not the only reason for the setback.

“Even without the bank tax, the sector would have seen a significant fallback,” Erika Marsi, vice president of the International Training Center for Bankers, told the Budapest Business Journal. “The bank tax accounts to about one-thirds of the loss. The rest was caused by deteriorating portfolios,” she explained.

The return-on-assets (ROA) ratio of the bank sector fell to 0.2% last year from 1.17% in 2009. According to Marsi, the ROA would have been 0.8% without the bank tax.

While operational costs have not significantly changed from last year, there was not a real credit portfolio expansion at Hungary’s commercial bank, meaning that the overall credit portfolios have further deteriorated, Marsi said.

The slowing portfolio deterioration that the retail sector saw at the end of last year and the beginning of this one has come to a halt with the significant raise in the CHF/EUR exchange rate. As 70-80% of the retail loans are denominated in CHF, it accelerated the deterioration.

As for corporate loan portfolios, they are expected to get better. As a result of the better performing German economy, which is Hungary’s main export market, export-oriented companies are now in a better situation, benefiting from the strong foreign currencies – and thus improving banks’ loan portfolio. “Banks have now started to compete for these companies,” Marsi said.

Maybe another positive sign for the future is that the amount of corporate deposits has started to increase at the end of last year. “We can assume that companies are preparing for further investments, establishing the optimistic financial background for that,” Marsi noted.

She also warned that the PSzÁF figures are non-audited ones, so results can be quite different later. The financial sector reports its audited figures by late spring. “Banks’s pre-tax profit was HUF 300 billion in non-audited numbers in 2009, but audited reports later showed that it actually amounted to HUF 246 billion,” Marsi said.

Marsi thinks that the portfolio deterioration might come to an end this year. However, its effects can only be felt in the longer term. “I expect a healthy, but slow growth in the next one or two years.”