Economy
Likelihood of Austrian banks exiting Hungary has increased - Fitch
Fitch analysts believe the banks can make efficiency gains to mitigate some of the pressures. But two of the largest - UniCredit Bank Austria and, particularly, Raiffeisen Bank International (RBI) - are “heavily exposed to Russia and Ukraine and are vulnerable to risks from a continuation of the crisis."
The analysts expect the two banks “to incur high loan impairment charges in Ukraine in 2015 as the operating environment weakens, although their direct exposure to the worst-affected parts of the country is limited."
They also project that “revenue in Russia will come under pressure as both banks have been more selective with underwriting and credit expansion. Asset quality will also continue to deteriorate, particularly in retail lending, but is likely to remain manageable in the short term."
“Local funding reduces the liquidity risks for both banks, but consolidated capital ratios may weaken with exchange rate volatility. Depreciation of the rouble and, to a lesser extent, the hryvnia, has already affected capital ratios this year."
The analysts noted that large Austrian banks have strong franchises in CEE, where earnings from most countries have remained subdued.
“In the banks' main markets, we expect a gradual but slow recovery in Romania in 2015 (especially at Erste Bank's subsidiary) and stagnation in Hungary (particularly relevant for Erste and RBI). The structurally low-margin domestic franchise means earnings from Austria are also sluggish, albeit stable, so further meaningful deterioration in the operating environment of key foreign markets would be negative for the banks' credit profiles. All large banks' performance will continue to rely on a small number of strongly performing markets, notably the Czech Republic and Slovakia."
The analysts believe that the banks are likely to shift their cost focus to domestic operations.
“Efficiency gains should mitigate the sluggish revenue outlook even though we expect operating costs to remain largely unchanged. This focus should also mitigate high regulatory costs in many of their key markets, including bank levies, and regular and extraordinary financial transaction taxes in Austria, Hungary and Slovakia."
“The risk of unorthodox policy measures is highest in Hungary, but the short-term outlook has improved following the government's decision to force the conversion of foreign-currency retail mortgages at close to the spot rate (rather than below market rate)."
By the end of 2014, the three Austrian banks - Erste, UniCredit and Raiffeisen - extended EUR 3.4 billion of the EUR 11 bn foreign currency loans of Hungarian households, Fitch analysts estimate.
The analysts warned, however, that “the high recurring regulatory costs, tough operating conditions and weak asset quality mean Hungary is likely to be an earnings burden in 2015."
Fitch analysts believe that the Austrian banks will fully support their Hungarian subsidiaries “as long as they are in possession of these".
“The likelihood of Austrian banks leaving this country has increased with the uncertainty in the market's long-term recovery prospects," they said. In their view, uncertainties about the strategic importance of the Hungarian market for Austrian lenders have been increasing, therefore the analysts cannot exclude the possibility that these assets will be divested.Hungary is ready to buy more banks should they decide to exit the country, Gábor Orbán state secretary in charge of taxation and financial affairs at the Economy Ministry, told CNBC on 2 December.
In the first nine months of 2014, the financial transaction tax (FTT) imposed on banks in Hungary made up 43%, 61% and 29% of the operating expenses of Erste, UniCredit Bank Austria and Raiffeisen, respectively, Fitch said. On top of that the three banks have made EUR 740 million provisions to cover the compensation payable to foreign currency mortgage holders, it added.
The analysts expect the two banks “to incur high loan impairment charges in Ukraine in 2015 as the operating environment weakens, although their direct exposure to the worst-affected parts of the country is limited."
They also project that “revenue in Russia will come under pressure as both banks have been more selective with underwriting and credit expansion. Asset quality will also continue to deteriorate, particularly in retail lending, but is likely to remain manageable in the short term."
“Local funding reduces the liquidity risks for both banks, but consolidated capital ratios may weaken with exchange rate volatility. Depreciation of the rouble and, to a lesser extent, the hryvnia, has already affected capital ratios this year."
The analysts noted that large Austrian banks have strong franchises in CEE, where earnings from most countries have remained subdued.
“In the banks' main markets, we expect a gradual but slow recovery in Romania in 2015 (especially at Erste Bank's subsidiary) and stagnation in Hungary (particularly relevant for Erste and RBI). The structurally low-margin domestic franchise means earnings from Austria are also sluggish, albeit stable, so further meaningful deterioration in the operating environment of key foreign markets would be negative for the banks' credit profiles. All large banks' performance will continue to rely on a small number of strongly performing markets, notably the Czech Republic and Slovakia."
The analysts believe that the banks are likely to shift their cost focus to domestic operations.
“Efficiency gains should mitigate the sluggish revenue outlook even though we expect operating costs to remain largely unchanged. This focus should also mitigate high regulatory costs in many of their key markets, including bank levies, and regular and extraordinary financial transaction taxes in Austria, Hungary and Slovakia."
“The risk of unorthodox policy measures is highest in Hungary, but the short-term outlook has improved following the government's decision to force the conversion of foreign-currency retail mortgages at close to the spot rate (rather than below market rate)."
By the end of 2014, the three Austrian banks - Erste, UniCredit and Raiffeisen - extended EUR 3.4 billion of the EUR 11 bn foreign currency loans of Hungarian households, Fitch analysts estimate.
The analysts warned, however, that “the high recurring regulatory costs, tough operating conditions and weak asset quality mean Hungary is likely to be an earnings burden in 2015."
Fitch analysts believe that the Austrian banks will fully support their Hungarian subsidiaries “as long as they are in possession of these".
“The likelihood of Austrian banks leaving this country has increased with the uncertainty in the market's long-term recovery prospects," they said. In their view, uncertainties about the strategic importance of the Hungarian market for Austrian lenders have been increasing, therefore the analysts cannot exclude the possibility that these assets will be divested.Hungary is ready to buy more banks should they decide to exit the country, Gábor Orbán state secretary in charge of taxation and financial affairs at the Economy Ministry, told CNBC on 2 December.
In the first nine months of 2014, the financial transaction tax (FTT) imposed on banks in Hungary made up 43%, 61% and 29% of the operating expenses of Erste, UniCredit Bank Austria and Raiffeisen, respectively, Fitch said. On top of that the three banks have made EUR 740 million provisions to cover the compensation payable to foreign currency mortgage holders, it added.
