Hungarian Banks Thriving Despite Slower Lending in Budapest

Published: November 28 2023

Despite slower lending in Budapest, Hungarian banks are thriving and making significant profits by keeping their money in the central bank. However, there are potential risks that could impact this favorable situation.

The Hungarian banking system remains stable and resilient, with high profitability. The profits have been largely contributed by the interest income from keeping the money in the central bank. However, the government has imposed extra taxes on these profits and the central bank limits the interest rate on mandatory reserves.

The restrictive monetary policies of the central bank have significantly increased the net interest income of the banks, leading to higher profitability. These policies have been implemented in many countries to encourage investments in government securities instead of through banks.

Both corporate and household lending have slowed down, but they are still in positive territory. The non-performing loan ratio is low, although there are potential risks in sectors such as small and medium-sized enterprises and mortgage loans for commercial properties.

As inflation continues to decrease and the interest rate environment normalizes, the current high profitability of banks is expected to decline. Additionally, the correction in the overvaluation of the property market poses risks for banks, as it decreases the value of collateral for loans and makes the outcomes of ongoing property developments uncertain.

The housing market has experienced a significant decline in transactions, primarily due to unfavorable macroeconomic factors and a decrease in home purchases financed by loans. As a result, housing prices have slightly decreased. The overvaluation in the housing market has alleviated but remains high. The decrease in new contracts for housing loans can be attributed to both a decline in market loans and a reduction in government-backed loans, such as the interest-subsidized CSOK loans.

Overall, despite slower lending in Budapest, Hungarian banks are still able to generate substantial profits through investments in the central bank. However, potential risks and challenges in the market pose threats to their profitability and stability.

What does the report by the Magyar Nemzeti Bank say about the profitability of Hungarian banks? The report states that Hungarian banks have been thriving this year due to the high interest rates offered by the central bank and the restrictive monetary policy. The profitability of banks has been supported by the income from these high interest rates and the net interest income. However, there are risks that could potentially worsen this favorable situation.

Why have Hungarian banks been able to earn significant profits? Hungarian banks have been able to earn significant profits by parking their funds risk-free at the central bank, which has been offering high interest rates. However, the profits have been partially taxed by the government and limited by the central bank, which does not provide the same interest rate on mandatory reserves.

What measures has the Hungarian government taken to encourage investment in government securities? The Hungarian government has introduced a deposit interest rate cap to discourage institutional investors and private banking clients from accessing the high interest rates through banks. Instead, they have encouraged individuals to invest in government securities.

What has been the impact of the restrictive monetary policy on lending in Hungary? Lending has slowed down in both the corporate and household sectors, but it has remained in positive territory. The report suggests that the credit market may reach its lowest point this year. The non-performing loan ratio is low for both businesses and household loans, with a slight decrease after the end of loan payment moratorium in the first half of 2023.

What risks does the report identify for the Hungarian banking sector? The report identifies risks for certain types of loans, such as those for small and medium-sized enterprises and mortgage loans subject to the interest rate cap. There are also risks associated with project loans for commercial real estate financing and government-supported loans, such as the babaváró loans, if borrowers fail to meet the deadline for childbirth. Additionally, the report highlights the risk of a correction in the overvaluation of the real estate market, as well as the anticipated decrease in profitability due to the continuing deflation and expected normalization of the interest rate environment.

How has the recent situation in the real estate market affected the banks in Hungary? The transaction volume in the domestic housing market has significantly decreased, mainly due to unfavorable macroeconomic factors and the decline in home purchases financed by loans. As a result, housing prices slightly decreased in the second quarter of 2023. Although the overvaluation in the real estate market has eased, it remains high according to the report. The decrease in real estate values negatively impacts the banks' positions and increases their risks, as it reduces the collateral value behind loans and makes the outcome of ongoing real estate projects more uncertain.

How have the demand and availability of housing loans been affected by economic uncertainties? The decrease in the number of new housing loan contracts can be attributed to both the decrease in market loans and the decline in supported loans, particularly the interest-subsidized CSOK (Home Purchase Subsidy) loans. This indicates that the economic uncertainty, decrease in real wages, and deterioration of consumer confidence have had a significant impact on the demand for loans. The fixed 3% interest rate offered by the CSOK loans is not influenced by the otherwise high market interest rates, but the availability of CSOK loans has been affected to some extent. It has been observed that many people also take out market-based housing loans alongside CSOK loans.