Banks in Hungary reported an aggregate pre-tax profit of HUF163.1bn (€522mn) in the first nine months of 2015, versus a loss of HUF314.5bn a year previously, data from the central bank showed on November 27.

The figures suggest the sector is on track to close the year with a profit. It posted a record-high loss of HUF486bn in 2014, as lenders were saddled with high provisions to cover losses from the government-mandated forex loans relief scheme.

The improvement this year mainly reflects the significant drop in provisions and one-off items for lenders, due to the conversion of foreign currency mortgage loans into forints. Write-offs and provisions resulted in a HUF669bn burden in the first nine months of 2014, but boosted profit by HUF546.2bn this year.

"Credit risks in the retail portfolios ... were significantly reduced by the conversion of foreign currency residential mortgages into forint and smaller monthly loan instalments," Fitch Ratings noted in a report released on November 27 that states the recovery of Hungarian banks is underway.

The sector’s profitability is expected to improve further in the medium term. Following years of punitive policies implemented by Prime Minister Viktor Orban’s government, the state is offering some relief. Budapest is seeking to urge the banks to resume lending in order to stave off a slowdown in the economy. At the same time, the state now has skin in the game, having bought two large banks in the last 12 months.

The government has pushed through a bill that will see the country's high banking tax gradually fall starting next year. It is also offering incentives for banks that increase their lending.

At the same time, Fitch cautions that the issues that have haunted Hungary's banks will take some time to work their way through the system. "[A] material improvement in loan portfolio quality will take time, due to muted demand for new credit and the slow workout of defaulted loans," the ratings agency suggests.

Alongside high state debt, the issues surrounding policymaking and the banks have helped persuade the rating agencies to keep Hungary in junk status since 2011. However, a Februray peace deal agreed with lenders has them expecting prospects for the sector to improve. That led Moody's and Fitch to move to a postive outlook on the soveriegn this autumn.

“The operating environment for banks in Hungary has improved, due to positive developments in the economy and the government's intention to facilitate a gradual normalisation of the banking business environment,” Fitch sums up. “The latter reflects the government's commitment to the EBRD (in February 2015) to refrain from implementing new onerous banking legislation and its decision to reduce the bank levy in 2016 and then further in 2017.”