Hungary's Orbán is poking these bears - 7 revealing charts on parent banks

After the departure of the foreign-owners of MKB Bank (BayernLB) and Budapest Bank (GE Capital) five banks remained in Hungary with foreign owners. Based on their size these are: K&H Bank, UniCredit, Raiffeisen, Erste and CIB Bank. Hungary’s own OTP is nearly three times as large as the largest of these five subsidiaries.

In the international arena, however, OTP is dwarfed by its sector peers. The ranking of the largest parent banks based on size is completely different and is almost mesmerizing for the Hungarian eye. Italy’s UniCredit Group, for instance, boasts total assets that are nine times larger than Hungary’s annual GDP and 25 times larger than total assets of the entire OTP Group.

The Hungarian operations represent a mere 0.8% weight in the balance of the two Italian banks, UniCredit and Intesa Sanpaolo. The Hungarian subsidiary has the largest weight at Raiffeisen Bank Inernational, which comprises the foreign interests (and some other areas) of the Austrian banking group, but it is not greater than 5.4%.

Size does not matter in this case, though. It is the profit generating capacity of a particular subsidiary and the costs of exit that determine whether an operation should be continued on a foreign market or not. Exit costs are not so stellar than even a few years ago, because most of the banks switched to local financing (e.g. their loan/deposit ratios are below 100%). As for the profitability, the situation is far from pleasant in Hungary. Since the start of 2010 Hungarian operations caused EUR 3.3 billion (HUF 1,035 bn at the current EURHUF rate) losses for the five parent banks, according to IFRS. Only UniCredit posted profit in this period. The single biggest loss-making case was Hungary’s management of foreign currency loans, including the early FX mortgage repayment in 2011 and the settlement of unfair loan charges in 2014.

One of the most critical periods for the parent banks was the year 2011 due to goodwill write-downs and impairment losses suffered on the first shockwave of the real economic crisis. The second wave hit in 2013 in Italy and in 2014 in Austria. The latter had to do with the settlement banks were obliged to pay for Hungary’s forex borrowers, but in most part it was a consequence of write-downs in Romania, Ukraine and Russia.

Several large foreign-owned banks in Hungary would not have survived the massive losses incurred in 2014 if it was not for their parent bank support. The sector had HUF 442 billion worth of capital increases last year after HUF 357 bn in 2013. Parent banks raised the capital of their Hungarian operations by a total of HUF 1,297 billion (!) over the last five years.

As the larger write-down related losses are concentrated on three (different) quarters at most of the parents, and because the same is true for the subsidiaries, it is worth presenting how the Hungarian operations contributed to the parent’s results without these quarters.

The cleaned data show positive contribution by K&H and UniCredit Hungary, representing a share of 4.0% and 4.2%, respectively, in the profit of their parent over the last five years. Intesa Sanpaolo and the two Austrian banks, however, had their Hungarian units worsen consolidated results by 9-14%. The share to profit is higher at every Hungarian arm than their share in total assets, but it is negative in many cases. The negligible contribution of the Hungarian operations to group profits suggests that every parent bank could do without their local unit.

As regards the future, there is little chance of a spectacular improvement in the Hungarian subsidiaries’ cleaned profits (i.e. those that exclude one-offs such as the FX loan-related losses), because the:

• shrinking interest margins,
• the mandatory contributions to the National Deposit Insurance Fund (OBA), the Investor Protection Fund (BEVA) and the Quaestor Fund (for the compensation of the victims of failed brokerage Quaestor); and
• the low interest rate environment

eat into the profits of the Hungarian banking sector by more than HUF 100 bn annually and at least by half as much to the profits of the five subsidiaries in question. This is only partly offset by the reduction of the bank tax next year, the abolishment of the exchange rate cap scheme and the extra profits to be generated by strengthening economic growth.

The chart above shows that the banks in the region are far from their pre-crisis performances not only in terms of their profits but also their share price. Raiffeisen’s share price is less than a fifth of where it was seven years ago and the share price of even the best performer, Intesa Sanpaolo, is below the pre-crisis level.

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• economy,
• companies,
• banking system,
• mortgage,
• equity,
• foreign currency