Economy 25 April 2017, 10:26am

Hungary's banking system operates the least efficiently in Europe

Portfolio

The Hungarian banking system operates extremely inefficiently, which makes banking more expensive for customers, central bank (MNB) Deputy Governor Márton Nagy told a Portfolio conference on Tuesday. One of the key priorities for the sector at the moment is to improve its efficiency and stimulate price competition, he said in his keynote presentation at the ‘Lending 2017’ conference. Two MNB charts reveal that although the Hungarian banking system boasts one of the highest net interest incomes as a percentage of combined total assets both in European and global terms, it is also the least efficient in Europe based on operating expenses.

Highlights of Márton Nagy’s presentation:

Consultations with the Hungarian Banking Association on a concept of consumer-friendly real estate loan concept are still in progress therefore no details may be revealed at this point.
Lending to SMEs could reach 7-8% in annual terms in 2017-2018 and total corporate lending is seen rising by 3-5%.
The question is who will be able to replace the central bank’s Funding for Growth Scheme (FGS) in volume and quality after it is phased out. Consequently, product development by state-owned banks, guarantee institutions and commercial banks will have a much greater weight.
Retail lending is to expand again this year and go up by 2-3% in 2018, while amortisation is to remain constant and robust, according to MNB estimates.
Debt break rules guarantee good quality, but the comparability of products and price competition need to be stepped up. The Lerner index indicates great competition in corporate lending and poor competition in retail lending.
As regards digitalisation, Hungary is ranked 25th in EU28.
The premium on new housing loans is massively over the regional average. What clients experienced of the nominal interest rate reduction was “only what the central bank had done", while the premia did not fall.
The premium is especially high in the case of fixed interest rate loans, around 4.0-5.5%, versus 3.0-3.5% at variable rate loans. Moreover, there could be a 200-250-basis-point difference in banking conditions at the former.
“How is it possible you borrow for two percentage points more than you could if you walked just 100 metres to another branch? There is no such thing in corporate lending!"
When competition is weak, banks primarily focus on income. This is attested by the fact that the Hungarian banking system’s interest income is one of the highest in the world. Yet, it is the least efficient one in Europe based on operating expenses.

Larger price competition is a welcome objective; and improved efficiency does not necessarily lead to lower profits. You don’t need to give up profit; if the banking system implements a model change it could retain its profitability.
Hungary remains overbanked, and the central bank maintains its view that the country needs no more than five large banks. The number of branches is close to 3,000, which should be lowered further.