We did not see it coming: the dairy cow of the Hungarian banks became coronavirus

As reported yesterday, the Magyar Nemzeti Bank released the second quarter statistics of the Hungarian banking sector. On this basis, after HUF 3 billion in the first quarter, the sector made an after-tax profit of HUF 102 billion in the second quarter, but at the same time its return on equity (ROE) in the first half of the year. year was only 3.8%.

This is probably the first place we have in Europe: the Hungarian banking sector has shown the best return on equity in the EU in the last three years, but this was largely due to the reversal of previous impairments, so it did not it would have been sustainable at high operating costs. . Our chart below is from the latest MNB Competitiveness Report:

Compared to $ 106 billion this year, lenders made another $ 322 billion in profits in the first half of last year. What has now degraded the result is well illustrated in our figure below.

While the increase in revenue and operating expenses more or less extinguished each other, the impairments reduced profit by HUF 251 billion before tax.

In the first quarter of this year, credit institutions registered a net impairment of HUF 159,000 million, the last example of which was around 2014-2015, in the period of settlement of credits in foreign currency. The second quarter brought less deterioration, 90,000 million HUF. According to the MNB announcement, four fifths of the impairments were accounted for by three banks, as their market share is over 50%, and they are probably three of the largest loan banks.

The figure above may raise questions as to why we claim that provision reversals played a significant role in the high profitability of banks between 2017 and 2019 as we see numbers approaching zero in most quarters. On the one hand, the graph shows the net amortizations (that is, the difference between the actual amortizations and the impairment losses) and, on the other hand, on a cyclical average, the usual impairment is not zero, but 0.5-1 % of gross loans, which is around 175-350 billion per year. it would mean a deterioration in the banking sector.

If the economic environment were tolerated in the second half of the year and there was no further net deterioration, then

therefore, the net deterioration of HUF 250 billion so far would even fit the statistics of a year of economic slowdown.

It is almost an envelope that banks have a worse year than this.

The figures released at the end of the year depend to a large extent on the banks’ accounting practices, which is also indicated by the fact that the deterioration recorded so far is not evenly distributed across the sector. For the moment, the repayment moratorium masks the deterioration in the creditworthiness of clients. What results in the second half of the deterioration will depend at the same time

1. the intensity of the second wave of the epidemic in economic terms,
2. whether the repayment moratorium is expected to be extended and how (this will affect banks’ expectations of loan defaults),
3. how macroeconomic figures translate themselves into credit loss accounting by banks.

For the moment, it is not the actual development of the past due portfolio that drives the impairments. Those who may become insolvent have apparently fled the repayment moratorium, but the picture is complicated by the fact that not only can they live with the moratorium, so they cannot draw exact conclusions from the figures for the reductions.

The overdue portfolio stock has continued to decline since March, although within the population it has increased slightly, to which we will return in another article. The NPL ratio decreased from 4.2% to 4.0% in the banking sector at the end of June, from which it was 4.8% for companies and 6.6% for households (no corporate loans were withdrawn nor retailers). down – in a positive sense – the average).

It is also worth mentioning a few words about the evolution of bank income and expenses, as well as their most important items on the balance sheet. In the second trimester

• interest income from credit institutions increased to HUF 347 billion, 11% more than the previous year,
• the 194 billion HUF level in fee and commission income is 6% higher than the previous year,
• Operating expenses increased by 13% to HUF 382 billion, ie no major cost cuts were made.

The increase in the number of foreign OTP subsidiaries, which are also part of these statistics as a Hungarian-owned entity, may also influence the increase, sometimes in double digits, of the figures. It is also important to note that

Interest income from loans covered by the repayment moratorium continues to be accounted for by banks, even if they are not accrued: through deferred repayment (payments of principal and interest), they are converted into accounts receivable due in the future .

In terms of ratios, the cost / income ratio still does not indicate an increase in the banks’ operating efficiency: it stood at 67% in the first half of the year, a year earlier.

Of course, protection against the coronavirus has made it difficult for banks to control costs.

We recommend our Friday article on loans and deposit collections, based on which home loans returned to their previous dynamics, but the issuance of personal and corporate loans declined in the second quarter.

In addition to the increase in impairments, the decline in certain segments of the credit market is the main indication in the statistics that the Hungarian banking sector also understands the corona virus. This is especially true for corporate loans and personal loans covered by the APR ceiling.

According to current statistics, the loan portfolio of credit institutions increased by 28%, their deposit portfolio by 26% and their balance sheet by 24% in one year. be.

Due to limited space, there are no more physical seats, but online tickets are still available for Tuesday’s Lending 2020 conference!