Despite Good Numbers, Hungarian Banking System Feels Under Pressure

It’s been some ride for the Hungarian banking sector. The extra profit tax meant to be abolished last year has stretched well into 2024, interest rate caps on existing loans were extended, and a “voluntary” interest cap was introduced for new loans.

Tough times call for tough measures may well have been the motto of the recent past, given sky-high inflation, a slowing economy and the resulting gloom among households and enterprises alike.

Accordingly, analysts weren’t surprised to see the home mortgage market halved and total retail lending fall by one-third in 2023. In nominal terms, the volume of home mortgages and the total retail lending segment hit seven- and five-year lows, respectively.

However, it was a telling sign that the personal loans that normally finance consumer spending exceeded 2022 levels. On the other hand, business lending was rescued from a complete collapse only by cheap foreign exchange-denominated loans and state-subsidized programs.

According to the report of the National Bank of Hungary (MNB) on the sector’s 2023 performance, published in early March, total credit volume was up 6.2% year-on-year, and the net consolidated earnings after taxes doubled compared to 2022.

The latter jump is mainly due to the interest-driven income, up 30%. Lending was boosted as year-end was nearing from dropping interest rates and the last-minute rush for certain state-subsidized family loans.

End of the Tunnel

Market players can’t wait to see the end of the tunnel, though, especially regarding government interventions. The 2024 extra profit tax can be reduced by up to 50%, but only if substantial amounts of government bonds are purchased.

Voluntary interest caps on business loans will be gone as of April 1, but the retail loan interest caps are due to stay through June 1, subject to further review. Since last October, credit institutes have been obliged to commit themselves to a mortgage lending cap in line with the government’s ambition to put lending back on a growth path.

The Hungarian Banking Association has repeatedly expressed its concerns about the distorting and damaging effects of such measures. Stakeholders would prefer to see more regulation on the digitization front, which would cut costs and benefit all.

Several steps have been taken in this field, but a new detailed roadmap has now been drawn up. It outlines how to make day-to-day banking more efficient through digital tools and what it will take to introduce fully digital consumer lending and a 15-minute mortgage application approval, an unparalleled eventual European invention.

Meanwhile, stakeholders are busy meeting compliance requirements. Phase 2 of the new Instant Payment Scheme went live as of Feb. 1, with an obligation to use uniform data entry standards.

Developments are underway to join the Central Fraud Filter System and embrace the government’s data wallet-based Digital Citizenship Program. AI is also banging on the door, with Erste Bank’s innovative digital banking service “George” personalizing investment portfolios and K&H’s “Kate” handling voice command transactions.

All in all, 2024 is expected to bring about falling revenue because of the more modest interest rates, although costs may push up as a spill-over effect of the past year’s high inflation. It won’t be all quiet on the banking front any time soon, for sure.

Cross-border Power

OTP is deemed an agile player on the European level, and recent activities have only further strengthened this image. Its organic evolution has seen two acquisitions in Slovenia and Uzbekistan. The former move took the lender to the market-leading position in Hungary’s southwesterly neighbor, while the latter purchase in the Central Asian country marked OTP’s debut in a region that promises a vast market.

The company is rumored to be in the hunt for Ukraine’s Sense bank, which, if merged with OTP’s existing local branch, would give it the fourth largest bank in Ukraine. Moving in the opposite direction, OTP is leaving the Romanian market after it sold its share in Banca Transilvania.

With its balance sheet total exceeding EUR 100 billion, up to 66% of OTP’s total profitability now comes from its foreign subsidiaries’ performances. In no small part thanks to this diverse portfolio, it was rated as the fourth most stable bank in the EU, according to the European Banking Supervision stress test in 2023.

Riding the Digital Wave

The “Fastest Growing Digital Bank in Hungary” in 2023. That’s just one of the awards Gránit Bank received based on its performance last year. Apart from the title, courtesy of the renowned British financial journal Global Banking and Finance Review Magazine, Gránit also shared the “Bank of the Year” title with OTP and finished first in three additional categories at Mastercard’s annual awards.

The magic HUF 1 trillion balance sheet total threshold was surpassed in 2022, which moved the lender to mid-sized. Uninterrupted growth now translates into 140,000-plus customers, over 90% of whom use digital channels.

Betting on digital has been part of the company’s DNA since its foundation. Minimizing the number of brick-and-mortar branches and offering cutting-edge e-solutions were critical factors that helped Gránit stand out of the crowd and keep costs low. Hence the remarkable cost/revenue share of 32.2%, compared to the market average of 41.9%.

Gránit has also, as a result, assumed a pioneer’s role: it was the first lender to introduce video banking in Europe and led the charge in Android-based payments in Hungary. One of its novelties is that a popular state-backed loan available for couples planning or expecting children could be taken out remotely and within 30 minutes.

As CEO Éva Hegedüs pointed out in an earlier interview, the bank aims to provide high customer experience, grow profitably, and give back to the clientele from the gains that emerge due to the abundance of digital services.

This article was first published in the Budapest Business Journal print issue of March 22, 2024.