Hungary OTP chief complains about excessive and unpredictable burden on banks

Sándor Csányi, Chairman-CEO of OTP Bank, has given a keynote presentation entitled "Challenges of the banking sector" at the Budapest Economic Forum. Among other things, he said:

Over the past 10 years, the EU has lagged behind the US in terms of growth, mainly due to lower productivity and population growth, and government measures (e.g. subsidised loans, the Baby Loan) have not been able to reverse the trend in Hungary.

Europe has also become a laggard in technological development and innovation, with a much larger share of US and Asian firms in number, share and value,

over the past ten years, US bank loans have grown at nearly three times the rate of eurozone loans, by 67% in the US and 24% in the eurozone between 2014 and 2023. European GDP could be 6% higher, at €850 billion, with the same credit growth.

The 2008 crisis in Europe's banking sector was largely caused by the financial crisis in the US and the housing bubble and sovereign debt in "peripheral" countries, with public bailouts between 2008 and 2015 amounting to €354 billion (3.5% of GDP) in the eurozone and €295 billion (2.9% of GDP) in the US.

Credit rating agencies were primarily to blame for the crisis, governments failed to learn the lessons as sovereign indebtedness continued to grow.

Of the causes of the crisis, only the re-emergence of housing bubbles has been prevented by essentially macro-prudential regulation (regulation of the loan-to-value ratio and the payment-to-income ratio).

In response to the crisis, capital requirements in Europe have increased 2.5 times more than in the US, with OTP's core capital requirement at 11.5% and the US bank OTP's Northern Trust Corporation at 7% today,

The average risk-weighted asset value of European banks increased by 10% between 2014 and 2023, and by 34% in the US, with the importance of government bonds growing much more in Europe than in the US,

The return on equity (ROE) of European banks is half that of US banks (5% vs 10%), with eurozone banks performing at 60% and US banks at 110% of expected returns,

I do not invest in any other European bank but OTP, which, like Pelé, can deliver outstanding performance with lead in its shoes,

said Csányi who thinks banking investments are not attractive in Europe.

Despite all this, EU policymakers see further regulation as the key to the solution, rather than easing banking regulation and capital requirements, and the Draghi report sees a more regulated banking and capital markets union as the solution, he added.

Overregulation gives a competitive advantage to players outside the banking sector.

We will soon reach the point where OTP will also have to launch a payment service provider outside the euro area to serve Hungarian customers.

Another challenge is the digital central bank money that central banks are planning to introduce, and it is unfair that the Treasury and other state actors do not pay taxes. In addition, the banking system, especially in Central and Eastern Europe, is still subject to heavy tax burdens.

The growth and profitability of our region's banking system is better than that of the euro area, despite the extra burden, and the fact that banking penetration is still much lower than in Western countries plays a role in this.

Consolidation would be necessary to make the banking sector more efficient, but the examples of UniCredit and Commerzbank show how much politics can thwart such an opportunity when it arises.

At the beginning of 2020, OTP was also seriously considering buying Commerzbank, and would have had the resources to do so. In the end, the high bargaining power of the German employees and the political risk put them off.

The Hungarian banking system's credit growth is close to that of Central and Eastern Europe, but its profitability was even lower than that of the euro area, with the Hungarian banking system's return on equity excluding one-off items at 10.7% last year.

No other country intervenes in the life of banks as much as the Hungarian government through various measures. Yet, between 2014 and 2023, the Hungarian banking sector's loan portfolio grew by 76%, the amount of government securities on banks' books increased 2.3 times, and the Hungarian banking sector's equity increased 2.6 times.

The Hungarian banking sector achieved a greater return than expected only twice in the past decade.

The burden of the local banking sector is not only high, but also unpredictable. The worst thing is that most promises made when a tax is introduced are not fulfilled - the extra profit tax, for example, should no longer exist this year.

There is so much injustice. For example, those who did not listen to the warnings of the central bank and the banks and took out variable-rate loans were much better off than those who took out fixed-rate loans.

It's a strange logic that we should have a 5% interest rate cap, but I don't hear a word about the government making any inflationary commitment in return,

"and there must be a link between the two, at least there used to be."

Despite the difficulties, OTP Group is still able to succeed, with a high return on equity and a CET 1 ratio only slightly lower than at Raiffeisen which has the highest CET 1 ratio.

If OTP wanted to sell its Russian bank, it would only receive 5% of the value estimated by the Russian state valuer, which would be a gift to the Russian state.

S&P Global's analysis has ranked OTP as the best performing European bank, and the European Banking Authority's stress test has ranked it as the 4th most stable European bank.

Cover photo: Portfolio