Tim Gosling in Prague -

Hungarian bank branch closures spiked in the first half of 2012, as foreign-owned banks pull back on investment in the country in the face of the government's "unorthodox" economic policy and the Eurozone crisis.

In the first six months of the year, Hungarian banks closed a total of 94 branches, Vilaggazdasag reported on July 4. By way of comparison, Hungarian banks closed just 31 branches in 2010 and 60 in 2011, according to the business daily's survey of 14 commercial banks. Hungarian banks are still reversing the investment boom in the bubble ahead of the 2008 crisis that raised the number of branches by close to 50% to 1,596 in 2009, but the process is being accelerated as the reinvigorated Eurozone crisis meets government policy.

In the first half of this year alone, Erste Bank Hungary shut down 40 branches, or 22% of its previous network, as part of efforts to streamline operations after sustaining a HUF157bn (€567m) loss in 2011. UniCredit closed 12 outlets, followed by AXA (10), CIB (9), FHB (9) and MKB (8).

Squeezed by the EU's raised capital ratio requirements and the Eurozone crisis, the worry across CEE is that the European banking groups that control so much of the region's banking sector will pull back on support for local units in a bid to make savings. In light of that, they are being forced to make tough decisions on where to pull back. That has set up a vicious circle where lowered lending is helping to slow economic growth, leading to poorer forecasts and profitability.

Both bankers and analysts fret that Budapest's ongoing pressure on the country's banks makes that choice all too easy for the likes of UniCredit, Erste Bank and Raiffeisen Bank International (RBI), which control so much of the market. After coming to power, the Fidesz government applied a high "crisis" tax on them, and followed that up with a scheme that forced them to absorb huge losses on foreign exchange mortgages.

Erste announced a decision in December to close one quarter of its 184 branches in the first quarter of 2012, and lay off 15% of staff. The bank blamed "limited income opportunities" caused by the economic crisis, an "extremely high" banking tax and "immense losses" from the government's early FX loan repayment scheme. A few days later, RBI's CEO Herbert Stepic blamed the same causes as he announced the closure of 10 branches.

Those measures led bankers in Vienna and Rome to complain of a "hostile regulatory environment" in Budapest, and drove the Hungarian industry to its first overall loss in 2011. The Hungarian Banking Association is currently fighting the government's plans to introduce a financial transaction tax, which reports suggest it hopes could raise as much as HUF320bn (€1.12bn) or more in budgetary revenue per year from the sector.

By way of contrast, local bank OTP, the market leader by asset volume, continues to have the widest network, and boasted 396 branches at the end of June. Many claim that the government's policies since 2010 have clearly favoured Hungarian businesses over foreign investors. Taxes and regulation in the telecoms and retail sectors have also attracted such criticism.