Hungarian central bank governor makes case for consolidation in banking sector

Hungarian central bank governor makes case for consolidation in banking sector
By bne IntelliNews March 7, 2019

Magyar Nemzeti Bank (MNB) governor Gyorgy Matolcsy suggested that consolidation of the banking sector would be preferable as the size of the Hungarian market can support five or six big universal banks sustainably.

In an interview published on March 6, Gyorgy Matolcsy, who has been appointed for another six-year term as MNB governor, said consolidation in the sector would support a rationalisation of operations and lead to lower costs for borrowers.

A recent report by the MNB showed that banking costs in proportion to income are the highest in Hungary among European countries. Local banks are more expensive in all income categories (low, middle and high) relative to net salaries. 

Low-income households spend as much as 1.13% of their net wages on banking compared to 0.74% in runners-up Bulgaria and Portugal.

The MNB has suggested for years that the market is ripe for consolidation, but industry insiders have noted that big foreign banks' decisions to maintain a presence in Hungary may be more a matter of strategy than profit.

At the end of 2017, there were eight commercial banks in Hungary with consolidated total assets of more than HUF1 trillion (€3.2bn). Five of the eight are foreign owned.

In the region, one of the least concentrated markets is in Hungary, where the top five banks own less than 50% of the total assets. Market leader OTP has a 21% market share and there are only 6 banks with a market share greater than 5%. In total, 40 locally-licensed credit institutions and nine foreign branches conducted business in Hungary as of December 2018

Total profit of the banking sector in 2018 exceeded even the record figure of 2017. Consequently, profitability ratios rose to a historically high level, though this varies greatly and is much lower in small institutions. 

At the same time, the exceptional profit was partially due to significant non-recurring items, such as high trading income and reversals of provisions.

The quality of banking sector assets has greatly improved and lending activity has picked up. The ratio of non-performing loans continued to decrease last year to around 5% from 8.1% in 2016 and 14% in 2014, according to figures from the MNB. The decline was mostly due to sales of portfolios to debt managers, but it was also supported by the increase in lending stock and the improving repayment capacity of borrowers.

Return on equity without one-offs is estimated at 8 %. It is still high in comparison to the EU average, thanks to high net interest income. However, low interest rates and intensifying competition are gradually eroding margins, bringing operating efficiency into focus.

The loan-to-GDP ratio in Hungary is just over one-third of the EU average and half of the other Visegrad countries, Matolcsy said, adding that credit expansion can exert its positive impacts on growth if companies use the money for technological development.

Matolcsy also made the case for a bigger corporate bond market. “The current scale of the corporate bond market in Hungary is behind that of those in most neighbouring countries, even though a developed, well-functioning bond market can give rise to healthy competition for bank loans," he added.

Matolcsy said Hungarian companies should be better familiarised with this form of financing, adding that a broader investor base for corporate bonds would be favourable, too.

He said that establishing a system of financing for companies that rests on a number of pillars could further reduce the cost of borrowing for businesses.

The MNB is weighing measures to support a move in this direction.

The outstanding stock of corporate bonds issued by Hungarian companies stood at HUF614bn at the end of last year, data from the MNB show. Hungarian banks' corporate lending stock was a little more than HUF 7.5 trillion at the end of 2018.