Published: December 05 2023
Despite limited lending and special taxes, Budapest banks have recorded record profits, with their net income being three and a half times higher than last year. This blog post will examine the factors contributing to the banks' booming profits and discuss the key trends in the banking sector in Budapest.
The Factors Behind the Record Profits
- One-time items: The staggering net income of the banks is partly attributed to substantial one-time items, such as the release of reserves formed due to the war and the return of funds from Sberbank. Additionally, dividends received from subsidiaries have also contributed to the improved performance of the banks.
- Limited lending and special taxes: Despite the challenges posed by limited lending and the imposition of special taxes by the government, the banking sector in Budapest has managed to achieve remarkable profits. This highlights the resilience and adaptability of the banks in navigating adverse conditions.
- Dividends and reversals: The banks' profits have been amplified by significant dividends received from subsidiaries, which have bolstered the overall results. Furthermore, the reversal of previously incurred losses, mainly due to the impact of the Russian-Ukrainian war, has also played a significant role in boosting profits.
- Virtual factors: The banks' profits have also been influenced by virtual factors, such as changes in bond prices. Supported loans, evaluated based on the current bond prices, can generate virtual gains if the prices rise, contributing to overall profitability.
Challenges in the Banking Sector
- Limited profitability from lending: The core activity of lending has not generated substantial profits for the banks. While interest income increased by 119.5% compared to the previous year, the rise in interest rates resulted in even higher interest expenses, causing the net interest income to only be 37% higher than the previous year.
- Impact of fees and commissions: Despite banks typically increasing their fees by the previous year's average inflation rate, the growth in fee and commission income (8.8%) did not fully reflect the 14.5% inflation rate. This discrepancy indicates potential challenges in aligning fee structures with inflationary pressures.
- Changing customer behaviors: The volume of customer deposits decreased by 6.5% compared to the previous year, particularly as households withdrew funds from banks due to a rise in living costs and the attractiveness of alternative investment options, such as government bonds, during a period of high inflation.
- Growth in corporate lending: While the overall loan portfolio expanded by 3.9% during the third quarter, corporate lending experienced more significant growth compared to household lending. This trend highlights the focus on supporting businesses and driving economic growth in Budapest.
Despite the obstacles posed by limited lending and special taxes, Budapest banks have managed to achieve record profits. The factors contributing to this success include one-time items, dividends from subsidiaries, reversals of previous losses, and virtual gains. However, challenges such as limited profitability from lending and changing customer behaviors remain, highlighting the need for banks to adapt and innovate in an evolving financial landscape.
Questions & Answers
What is the current situation of banks in Budapest and Hungary? Despite limited lending and special taxes, banks in Budapest and Hungary have recorded booming profits. The sector's consolidated after-tax result reached 1591 billion forints, nearly tripled compared to the previous year.
What factors have contributed to the record profits of banks in Budapest and Hungary? The record profits of banks in Budapest and Hungary are attributed to various factors, including the release of reserves formed due to war, the return of money from Sberbank, and dividends received. Furthermore, the profits were also boosted by one-time items such as the repayment of OBA contributions related to Sberbank and dividends received from subsidiary companies.
Are the profit figures influenced by foreign subsidiaries of Hungarian banks? Yes, the profits reported by Hungarian banks include the earnings of their foreign subsidiaries. Therefore, for a more accurate picture of the Hungarian banking sector, it is recommended to consider the non-consolidated data.
What role does the war in Russia-Ukraine play in the banking sector's profits? Last year, the banking sector suffered significant losses amounting to 363 billion forints due to the impact of the Russian-Ukrainian war. However, this year, the sector recorded a positive result of 9 billion forints under the rubric of impairment and specific provisions. This indicates that the number of defaulted loans due to the war was not as high as initially anticipated.
How have changes in the value of government bonds affected bank profits in Budapest and Hungary? Changes in the value of government bonds can affect bank profits in Budapest and Hungary. The fluctuation in bond prices can lead to the revaluation of supported loan portfolios and create virtual gains or losses for banks depending on the direction of the bond prices.
What are the main sources of revenue for banks in Budapest and Hungary? The main sources of revenue for banks in Budapest and Hungary are interest income and fees and commissions. While interest income increased by 119.5% compared to the previous year, interest expenses grew at a higher rate of 183.1%. As a result, the net interest income was 37% higher than the previous year, and fee and commission income increased by 8.8%.
How has the lending activity of banks in Budapest and Hungary performed? The lending activity of banks in Budapest and Hungary did not generate as much profit as in previous years. Although interest income increased, it was overshadowed by higher interest expenses. The loan portfolio expanded by 3.9% in the third quarter, with corporate loans increasing at a higher rate than household loans.
Have deposits in banks in Budapest and Hungary increased or decreased? In the last quarter, there was a slight increase in customer deposits. However, when compared annually, the volume of deposits decreased by 6.5%, with households withdrawing a significant portion of their funds from banks. This decrease can be attributed to the rising cost of living and the attractiveness of other investment options, such as government bonds or other securities, amidst high inflation.
What is the total balance sheet of the banking sector in Budapest and Hungary? The non-consolidated total balance sheet of the banking sector in Budapest and Hungary amounted to 73,348 billion forints. Nearly half of the resources consisted of deposits, and more than half of the assets were represented by the loan portfolio.