2022 poses great challenges, rising rates will dampen demand in new lending in Hungary

Rising lending rates, stagnant deposit rates (in other words, widening margins) and strong business activity despite the pandemic – would I be right in saying this your recipe for making money in banking this year?

Indeed, the bank sector’s revenue and profits will rise this year compared to the last, when it was hit by the pandemic. And the same is true of our results. There are four components to the improvement in profitability: the rise in the base interest rate, the increase in business activity, the surplus interest income from the preferential deposit of the national bank’s NHP Hajrá! (Funding for Lending Scheme GO!) scheme (due to end on 1 January 2022) and the significant decrease in loan losses (which amounted to more than HUF 200 billion last year at sector level).

The former two may serve to further improve the financial performance of banks, whereas the latter two can essentially be seen as temporary factors. Meanwhile, on the cost side, the sector is under strong wage pressure as are other industries, and we have to reckon on the ripple effect of high inflation: because of this, an increase in costs should be expected even with tight cost management. This is likely to be a major challenge in 2022, so I expect to see a slowdown in the improvement of results.

How long can near-zero deposit rates be maintained in a rising interest rate environment?

In the long run it’s certainly not sustainable nor desirable that while interest rates rise, this is not reflected on the deposit side.

Interest rates on corporate deposits have already started to rise, and this should be reflected on the retail side as well. Overall, however, I think the gap between deposit rates and the base rate is going to increase gradually in the next year.

Last year, the banking sector flooded companies with low-interest corporate loans with rates fixed for the long term, and this year, it’s home loans (mortgages) that are the big hit. How do you expect the credit market to finish this year compared to 2020?

There’s already a slowdown in the large companies’ segment, and the Bond Funding for Growth Scheme is also having a crowding-out effect, but if we look at the two together, volume growth here too is still 10-12%. SME and retail lending are stronger than last year when the pandemic hit, with record activity in housing loans in the first three quarters of the year, and this is primarily what’s driving the overall credit market. In contrast, a slowdown in the pace of growth is expected next year, especially due to changes in the interest rate environment.

Loans will be more expensive and property prices are expected to rise due to inflation’ growth.

Even though there’s a wage increase trend on the consumer side, it will be increasingly difficult to shoulder the repayments. As a result, I expect to see a slowdown of the new lending dynamics next year.

What inflation path do you expect to see?

Inflation is expected to rise over 7% in November and I think it will remain high in the first half of next year. This is now a longer inflation trajectory than previously expected by national banks in the region, so a sustained rate hike can be expected. I don’t think that in terms of interest rates we’ll reach a level that would be particularly detrimental to the existing loan portfolio, as the majority of retail loans already have a fixed interest rate and two-thirds of SMEs have also switched to a fixed interest rate through the NHP Hajrá! (Funding for Lending Scheme GO!) and other loan schemes.

In new lending, I see the risk that interest rate hikes will dampen demand, especially for mortgages,

but this can still be offset by opting for a longer term.

There’s no sign of a substantial rise in the price of personal loans as yet. Is it true in this segment as well that, sooner or later, the central bank rate hike should be reflected in the interest rates on new loans, even though the loans we’re talking about here are not reference-rate loans?

Absolutely. In general, lending rates are expected to rise. Even though these products have a higher margin than mortgage loans, due to generally higher credit risk costs. What has already appeared in the rise in the price of mortgage loans is also expected in personal loans.

The repayment moratorium has expired for the majority of participants. Based on the experience of the first two weeks, will there be a problem with the willingness and ability to pay of those starting to make payments again? What sort of NPL ratio do you expect to see until mid-2022 and beyond?

It’s difficult to take stock for the moment. In any case,

the first couple of weeks didn’t bring any increased activity in terms of soft collection, meaning we didn’t have to call customers reminding them to make their payments.

It will take a month or two to see the true effects clearly. Of our total loan portfolio, 5% remained in the moratorium, which is significantly lower than in the previous phase of the moratorium, with tens of thousands of our customers getting back to making payments. I’m optimistic about the expected ratio of non-performing loans, with only 20-25% of retail customers that have remained in the moratorium saying they decided to do so due to falling incomes. Many of our affected corporate customers would also be able to make payments, but they decided that staying in the moratorium would make the most sense for them in the short term. There are two mistakes we can make when trying to predict things: we label someone as non-performing who will end up paying, or we label someone as performing who will not end up making payments.

We expect the two effects to broadly offset each other, so an increase of up to 1-2 percentage points is likely compared to our current NPL rate of below 4%, mainly on the retail side.

You mentioned the projected cost-side challenges due to inflation, but according to central bank comparisons, Hungary already has one of the least cost-effective banking sectors in Europe.

At CIB Bank, improving cost efficiency has been one of the key objectives in recent years. In three years, our cost/income ratio has improved by 20 percentage points, and we achieved this by increasing our revenue by 36-38% and keeping our costs flat. Our effort to achieve economies of scale has worked very well. The cost efficiency of the banking sector will also be helped primarily by revenue growth, and digitalisation will drive this forward in addition to cost cutting.

Before the financial crisis of 2008, CIB Bank ranked among the top three commercial banks in Hungary, but at the end of 2020 was in eighth place in terms of total assets. In February next year, Intesa Sanpaolo will announce a new four-year strategy – what will be the growth target for Hungary?

We’re increasing our loan portfolio by HUF 100-120 billion annually, and assuming we maintain this pace in the coming years, we’ll be able to grow above the market average. This will allow both cost efficiency and return on equity to improve greatly at the bank. There’s no need for a radical change in terms of strategy compared to what we’ve been doing so far. Our basic goal is to continue with our digitalisation developments, increase our interest income, and put more focus on ESG requirements. We see further expansion opportunities in insurance brokerage and asset management, and this will essentially support the growth of fee and commission income. Our goals include implementing a fully online mortgage application system and increasing the use of remote signatures, both of which offer additional sales opportunities that will be convenient and efficient for our customers as well.

Other banks say similar things. What’s the strategy that will set CIB Bank apart from other banks?

This is an old dilemma, as the same recipe tends to work for everyone if they’re operating in the same market environment with the same market characteristics. Retail customer churn in Hungary is very low.

Just 4-5 percent of customers switch banks each year, which makes it difficult for the banks to achieve substantial growth relative to each other.

Nowadays, you can compete primarily through customer experience and a strong, likeable brand. Accessibility, tangible customer focus and the quality of customer relationships distinguish CIB Bank from the average. The distinction is mainly reflected in terms of speed and the quality of service, a peculiarity that leverages on the best practices we can put in places, thanks to the belonging to a leading European Group like Intesa Sanpaolo. We are at the forefront in a number of areas, such as fully digital lending in personal loans, or the unique innovation of the Intesa Sanpaolo Group in international export-import financing, which is known as our Confirming service.

During the first waves, Italian-owned banks – understandably – settled on what were perhaps the most stringent of protocols for managing the pandemic. What does pandemic management and the ratio of office to home-based work look like now?

In the fourth wave of the pandemic, we had to gradually bring back the measures taken during the previous waves, despite the fact that the vaccination rate of our staff is fortunately sufficiently high, at almost 90%. Wearing a mask is compulsory in the Bank’s buildings, non-vaccinated colleagues are required to produce a negative test twice a week (we provide the testing, of course), and working at the office is voluntary for all those who can do their work from home. Due to its nature, the branch network is different: we’re open for business, as we always are, and we do our best to ensure the safest possible environment for both our front-office staff and our customers. At the same time, trusting that the pandemic situation will end one day, we’ve decided to significantly change our internal work at the head office departments. We launched this project at the beginning of the summer:

we will have one headquarters instead of the current two; we will refurbish one of them and sell the other,

and in the meantime, we will also completely transform our work-related infrastructure. We’re reckoning on an average of 60% office versus 40% home-based work in the future, as this is in line with the revised work processes, which will, logically, bring with it a fundamental change in the office environment, while taking sustainability principles into account as far as possible. In terms of motivation and HR, this will be a great advantage for our bank, with the new system due to go live early next year. There aren’t many banks where I’ve seen such a pronounced change at many banks – but here it’s something that everyone will see with their own eyes when we’re done.

Carlo Messina, CEO of Intesa Sanpaolo, recently ruled out significant foreign expansion, with the exception of the Swiss private banking market. Does this mean that you won’t be improving your economies of scale through acquisitions either?

The organic strategy has so far proved successful in improving cost-effectiveness and profitability. We will continue on this growth path.

The effects of climate change are becoming increasingly evident and extreme, unfortunately. Aren’t you worried that stricter standards for green bank financing and ESG investments will do more harm to existing economic structures through their abandonment of certain sectors (and thus, indirectly, perhaps even to climate protection structures) than the good they’ll bring in terms of environmental benefits?

That’s a very difficult question. It won’t be easier or cheaper to switch to green operations later, so it’s advisable to do it as soon as possible. There’s also a one-off high cost that needs to be acknowledged, but fortunately the impact is spread over a longer period of time. The Intesa Sanpaolo Group is taking this matter extremely seriously, and it’s no coincidence that it is one of the 100 most sustainable companies in the world. Like its parent bank, CIB makes genuine commitments that it fully intends to keep. We don’t content ourselves with simply offsetting our environmental load through carbon credit purchases: the point is to reduce our direct and indirect environmental footprint in a significant, structured and continuous way. In other words, we want to improve our own environmental performance, which is fully in line with the international commitments of our banking group.

Apart from Revolut, the fintech and big tech companies have not really taken a big slice out the market cake of the Hungarian banking sector so far. Do you see exciting fintech innovations outside or inside the banking sector that could disrupt any of your (sub-)markets in the next 5-10 years?

The challenge has diminished during the pandemic, as the banking sector itself has made considerable strides in terms of digitalisation. I increasingly believe that it’s possible to cooperate with the fintech companies.

I see a greater threat in big tech companies like Amazon or Meta: due to the size of their customer base, these are likely to present a bigger challenge over the next 5-10 years.

A major task for us over the next decade will be to move forward in terms of designing ecosystems and forging fintech collaborations. I can see potential in doing this through service platforms that can be integrated into mobile and internet banking systems: I think we can generate significant improvements in customer experience and value through online service sales.

Photos by: Ákos Stiller / Portfolio