Cutbacks in corporate lending could lead to a wave of future business failures that would have disastrous effects on Hungary’s real economy, Julia Kiraly, deputy governor of the central bank, has warned.
“The Hungarian banking sector is well capitalized but loss-making,” she said. “However credit activity is very low – even by a regional comparison – and resources are being steadily pulled out.”
As a result, the “currently mild credit scarcity” could “increase dramatically,” meaning “currently viable companies could fail, destroying their production capacities and resulting in a significant economic damage,” Kiraly told a conference in Budapest this week.
Hungary’s banks, like their peers across the region, have been struggling to cope with an increase in non-performing loans resulting from the economic downturn.
However, their situation has been made all the more difficult by a punishing “crisis” tax based on 0.5% of 2009 assets imposed since 2012, along with government-imposed measures designed to ease the burden on lenders with foreign-currency mortgages.
As a result, Hungary’s banking sector lost an estimated Ft 300 billion (€1 billion) last year, according to Laszlo Bencsik, deputy chief executive of OTP Bank.
Meanwhile, non-performing loans to non-financial corporations surged from 10.8% to 15.4% in the 12 months ending 2011, according to the Hungarian Banking Association.
Most foreign-owned banks – which make up close to 80% of the total sector – have been deleveraging for the last two years to meet stricter lending requirements in their home country and reduce their exposure to the country’s anaemic business sector. This has led to vociferous complaints, especially from SMEs, regarding a lack of credit.
“For corporates it’s very hard,” says Tamas Bernath, head of financial services advisory at PwC in Budapest. “Foreign-owned banks in particular have practically frozen new lending, although the grey economy, particularly with SMEs, makes lending difficult.”
However, not all banks are equal, and OTP, Hungary’s largest bank, with relatively easy access to forint deposits, is intent on raising its market share in lending to all segments, Bencsik said.
“Our market share of new loans has certainly increased. Last year it was around 30% of new mortgage loans, and in consumer loans, cash loans, our market share was up to 50%,” he told Emerging Markets.
OTP also increased its SME lending by 8% in 2011, when it held an 8.6% slice of the corporate market.
“Our market share in corporate lending is much smaller than in retail [for historical reasons]. So we are unable to substitute for the lending of the foreign owned banks in this sector,” he said.
This made it important to honour the cooperation agreement between the banking association and the government signed last year, he added.
“In order for the owners to decide to allocate more funding and capital to Hungary, they have to be able to trust the economic policies of the government. Without lending there is no economic growth,” Bencsik said.