Economy 2 June 2022, 5:25pm

Here is Hungary's latest bank ranking: anyone see 'extra profit'?

Portfolio

Last year, the Hungarian banking sector's domestic return on equity was just under 10%, which is just in line with the internationally acceptable benchmark and below pre-pandemic levels. Based on the annual reports published up to date, we briefly summarise what last year's figures for each of the big banks show.

According to data published by the central bank (MNB) in March, the Hungarian banking sector posted a consolidated profit of HUF 820 billion (including foreign subsidiaries) and a non-consolidated profit of HUF 555 billion (only domestic) in 2021, the latter of which would have been around HUF 430 billion without dividend income. The domestic return on equity was 10.1% including dividend income and 7.9% excluding it, which is not outstanding in international or historical comparison.

It is therefore difficult to talk about excessive profits at sectoral level, despite the fact that the banking sector's interest income and net fee and commission income, which is now planned to be taxed, rose by a total of HUF 281 billion in Hungary. Even so, the sector's domestic operations did not reach the record profits of 2017 even in nominal terms.

We also looked at the annual reports published by the 31 May deadline. On a consolidated basis, OTP's Hungarian operations, K&H and MKB Bank made the largest profits, and it can be said that around 90% of the sector's domestic profits were linked to the eight largest banks (the consolidated figures for the Takarék Group are not yet available, Takarékbank alone recorded a loss).

According to the types of income that are now planned to be taxed to the tune of HUF 250 billion, i.e. interest income, fee and commission income, all banks improved their performance last year, primarily due to lending growth and secondarily to margin expansion. The latter was indeed helped by the rise in the interest rate environment, but certainly no excessive profits were generated.

WE ESTIMATE THAT OTP'S SHARE FROM THE SPECIAL TAX WILL BE AROUND HUF 85 BILLION, WHILE THE THREE MEMBERS OF HUNGARIAN BANKHOLDING COULD PAY AROUND HUF 40 BILLION.

The big question in relation to the coronavirus pandemic was what will happen to risk costs. Most banks improved their figures in this respect, and there have been a good number of reversals, but overall we only see net provision reversals (i.e. when provision reversals are higher than provisioning) at K&H Bank.

In terms of size, the largest banks remain OTP, K&H and UniCredit. However, with the merger of MKB and Budapest Bank at midnight on 31 March, MKB Bank is now the second largest credit institution, and will next be on this chart right after OTP.

Based on the figures published in the annual reports, which are not necessarily calculated in a uniform way, we can say that OTP, Raiffeisen, MKB and K&H Bank increased their balance sheet total the most, while UniCredit boosted it the least. For the largest growing banks, the growth in size was typically driven by deposit growth, which translated to a large extent into excess liquidity on the asset side. On the credit side, OTP, Budapest Bank and K&H Bank appeared to be the most active, but the repayment moratorium had a significant distorting effect on credit dynamics last year, so it is not necessarily useful to compare banks in this respect.