Fitch Ratings has maintained a negative outlook on Hungary’s banking sector citing high non-performing loans, muted credit demand, a sluggish economy and subdued performance, the rating agency said in a report on CEE banking sector. 

The sector returned to a profit in the first nine months of 2013 after two consecutive annual losses but profits were mainly concentrated at six banks while the other lenders or either around breakeven of suffered heavy losses, Fitch said adding that it expects this trend to continue in 2014. Stable interest income and lower funding costs helped margins held up in Jan-Sep. Credit demand is likely to stay weak as borrowers are wary of an uncertain operating environment, according to the ratings agency. Asset quality is likely to remain under pressure in 2014 due to high legacy exposures mainly concentrated in the construction sector and retail FX mortgages.

Fitch sees a possible M&A activity on the Hungarian banking sector, as foreign parents are scaling down their unprofitable subsidiaries and revising their strategic presence on the local market.

The rating agency expects the government’s unorthodox measures to weight on the banks’ performance in 2014. An aggressive solution regarding the ease of repayment of FX mortgages would cause large losses for the banking sector and consequently may drive some foreign owners to contemplate exit strategy from Hungary, Fitch said.