Hungary’s banks thrive in era of nationalization
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Emerging Markets

Hungary’s banks thrive in era of nationalization

Since Viktor Orban came to power in Hungary, more than half of the share of the banking sector is controlled by the government. But the sector is healthier, more profitable and showing an appetite to expand into the wider region

For commercial lenders of all shapes and sizes operating in Hungary, the last decade has been a roller-coaster ride. When Viktor Orban swept to power in 2010, becoming leader of the CEE region’s most open and investor-friendly economy for the second time, the prime minister and his inner circle were quick to target the fading fortunes of the banking sector.


In a December 2018 research note, Moody’s Investors Service said that in the five years to the end of 2015, Hungary’s authorities “enacted a series of policies that benefitted taxpayers at the expense of the banks”. The list included a punitive “crisis tax” levied on local and foreign banks, a financial transaction tax, and new legislation that helped mortgage borrowers, often at the expense of lenders.

Keen to put more of the sector back in local hands, Orban made it clear that any foreign lender unwilling to commit fully to the market would be welcome to sell up and head for the exit. Many Western banks, scarred by the global financial crisis and busy scaling back to focus on core markets, were only too happy to oblige.

The first to walk away was BayernLB, which sold a controlling stake in MKB Bank to the government in 2014, for €55m ($49m). The German lender, bailed out by its government after racking up bad loans in 2008, was desperate to divest a unit that lost €409m the previous year. A year later, commercial lender Budapest Bank was also nationalised; its former owner, GE Capital, pocketed $700m.

MKB, busy rebranding itself as a pioneer of digital banking, was quickly re-privatised and sold to a tight-knit circle of local investors. The bank’s largest shareholder is now Lorinc Meszaros, a key associate of the prime minister, with a 46.8% stake. MKB is being touted as a possible buyer of Budapest Bank, the eight largest lender by assets, which was put up for sale by the state in early 2019.


A trio of foreign lenders — the Austrian pair of Raiffeisen Bank International and Erste Group, and Belgium’s KBC — have also signalled their interest in buying Budapest Bank. Another suitor is Takarékbank, a local savings and loan group transitioning into a full-service commercial bank. The government is believed to be keen to see the lender wind up in Hungarian hands.

All told, in the years following the global financial crisis, the state nationalised or bought minority stakes in six domestic lenders including Granit Bank, Erste Bank Hungary and Szechenyi Kereskedelmi Bank, boosting the share of the banking sector controlled by the government to 50.5% at the end of 2018, from 30% five years earlier.

Some critics saw the acquisitions as part of a catalogue of protectionist measures from an instinctively nativist government, but many analysts were more sanguine. “Every government wants its banking sector to be strong and relevant and in the main under local control,” notes Gunter Deuber, head of economics, fixed income and foreign exchange research at Raiffeisen Bank International (RBI).

“If you ask a French citizen if they want their banks owned 70% or 80% by CEE-region lenders, imagine what the answer would be. [The Orban administration] was not forcing banks to leave completely, or kicking everyone out and saying it wanted 100% national ownership — that was not their approach.”

Regional expansion

Combined post-tax profits posted by Hungarian banks rose 10% year-on-year in 2018, to Hfr648bn ($2.24bn), according to central bank data. Total banking assets rose 8% year-on-year, to Hfr42.1tr, with net interest income rising sharply, and sector-wide non-performing loans falling to 5.4% at the end of 2018, against 7.5% a year earlier.


In December 2018, Moody’s said it maintained a “positive outlook on Hungary’s banking system for [the] second year running. The outlook reflects our expectation that improved operating conditions will benefit banks’ loan quality and capital, and support sound profitability.”

Hungary’s bigger financial institutions are also making significant inroads into the region. OTP Bank, the country’s largest and most acquisitive commercial lender, with a 25% market share, is eyeing new targets across the Balkan region, as it seeks to tap into under-exploited and under-resourced markets, many of which offer double-digit returns on equity. OTP employs more than 36,000 staff at 1,500 branches across nine markets in emerging Europe and central Asia, including Russia, Ukraine, Serbia and Romania.

It is looking for assets in Croatia, where it is already the fourth largest lender, with a 10% market share, due in large part to its 2017 acquisition of Splitska Banka. Analysts say it is weighing up a bid for the local assets of either Erste Group or another Austrian lender, Addiko Bank. OTP generated a post-tax profit of Hfr180.4bn in the full year 2018, up 7% year-on-year.

There can be little doubt that Hungary’s financial service sector is in a better state and a healthier place. But challenges persist, while the decisions that defined the industry in the middle years of the decade continue to reverberate.

Even with over half the banking sector now under local control, RBI’s Deuber says there is “still talk about [more] renationalisation” in the Hungarian halls of power. And in December 2018, Moody’s warned that higher domestic ownership of local banking assets also “heightened the risk that contingent liabilities could crystallise on the government’s balance sheet”, particularly at a time when the wider economy, after years of strong performance, is starting to slow.

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