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Hungary’s banking sector flourishing

Total assets of Hungary's banking sector increased a more-than-expected 18% last year, largely because of the big rise in foreign currency-denominated loans, and foreign currency-denominated assets accounted for 40% of total assets at the end of 2005, financial market regulator PSzÁF said in a report published on Thursday. Almost one-third of new retail banking loans and nearly half of new corporate loans were denominated in foreign currency in 2005, up from just 4% and 41%, respectively, in 2003. PSzÁF noted that clients, not banks, are carrying the risk associated with the forex loans.

 

The banking sector's pre-tax profits increased 20.4% to Ft 387.6 billion, but after-tax profits rose at a slower pace because of a bigger tax burden, including the extraordinary bank tax, to Ft 320 billion. Banks drew 43% more from foreign sources to finance their lending in 2005 than a year earlier, and these sources accounted for more than one-fifth of total assets. The growth rate of banks' forex liabilities was  nearly three times as high than in 2004. At the same time, the share of total assets made up by domestic deposits, interbank deposits and domestic issues of securities fell.

 

Despite falling rates, the banking sector managed to maintain a high level of profitability. The sector's return on equity was 22.6% in 2005, slightly less than in 2004. Return on assets was 2%, improving from the year before. Banks' interest margin fell only slightly from 3.94% to 3.89%, despite a significant reduction in the base rate. Interest revenue and interest expenditures fell at practically the same rate during the year.