Hungary Commercial Banking Report Q1 2009

Abstract

The principal factor affecting the Hungarian economy in 2009-2010 will be a deep recession owing to
both external and domestic influences. We expect eurozone GDP to contract sharply this year and
recovering to only mediocre growth in the next, which will weigh significantly on demand for Hungarian
exports. In particular, with Germany entering technical recession in Q308, demand for high-value
Hungarian manufactured goods such as auto-parts is likely to continue to suffer, and this is already being
reflected in the industrial production data. The domestic economic outlook is similarly dire with credit
markets due to stay restricted, construction and retail sales contracting, unemployment rising and
consumer and business sentiment hitting record lows. In turn, the recessionary outlook is set to impact
upon political stability. We expect the Hungarian Socialist Party (MSZP) minority government to endure
through 2009, due mainly to the de facto backing of the Alliance of Free Democrats (SZDSZ). However,
we caution that the government’s policymaking ability and reformist drive will be further curtailed by
public unpopularity and parliamentary weakness.
This report is being written at a time when the global financial crisis, which arose as a result of the
evaporation of inter-bank liquidity, has moved into a new phase. Stock market participants appear,
reasonably, to have taken the view that the policy responses taken by governments, central banks and
multi-lateral institutions will be sufficient to prevent a total collapse of the global financial system.
Instead, stock market participants are focusing on the impact of a near-global recession on the earnings of
non-financial companies.
The number and size of stand-by facilities agreed by the IMF since early October supports our view that,
of the emerging markets whose commercial banking sectors are surveyed by BMI, the countries of
Central and Eastern Europe are those whose economies are most at risk of suffering adverse affects as a
result of the global financial crisis. This is partly because the macroeconomic imbalances are relatively
severe and partly because the Central and Eastern European countries are more directly affected by the
brutal recession that is unfolding in wealthier member states of the EU.
As yet, it has not been possible to collate hard numbers, for most of the countries whose commercial
banking sectors are surveyed by BMI, that clearly quantify the impact of the global financial crisis on the
banks. As we explain in the section that discusses changes that we are making to the report, we again
include a lengthy essay which attempts to identify the key issues. In essence, in the emerging markets –
and, indeed, the developed countries – of the Asia-Pacific, commercial banks appear well placed to deal
with the crisis. The same is, broadly, true of commercial banks in the various countries of the Middle East
and North Africa. Latin America, Chile, Brazil, Mexico and Colombia appear better placed than
Argentina, Venezuela, Bolivia and Ecuador. South Africa’s situation appears to have much in common
with that of Brazil. In contrast, Nigeria faces some of the same challenges as those that confront
Venezuela. The positions of most countries in Central and Eastern Europe, however, are alarming.
From Q209, we will include data that pertains to late 2008 and extend forecasts out to 2013. We will also
incorporate much greater discussion of the various protagonists in each country’s commercial banking
sector and a number of new features. We believe that the figures we compiled in mid-2008 provide
insights as to how the various commercial banking sectors will fare in the current, extremely uncertain,
climate. We have, therefore, left them essentially unchanged.
The figures on the tables above provide a snapshot of the banking sector in Hungary prior to the onset of
the global financial crisis. To place the figures in context, it may be useful to bear in mind certain aspects
of the 59 countries whose banking sectors are currently surveyed by BMI. Across this sample, the median
growth in assets in local currency terms was 21.3% (in Colombia), the median loan growth was 21.6% (in
India) and the median growth in deposits was 17.9% (in Brazil).
On their own, the ratios of loans to deposits, assets and GDP mean little. However, they can provide
useful hints when combined with other data. Across the 59 countries, the median loan/deposit ratio is
92.3% (in Greece), the median loan/asset ratio is 56.0% (in Poland) and the median loan/GDP ratio was
63.9% in India.
As in previous reports, we include a SWOT analysis for Hungary. The banking sector benefits from being
within a full member of the eurozone and a country where the regulatory framework is sound. The main
challenges come from the adjustments that will have to be made in Hungary to resolve major imbalances,
such as the current account.
Since Q108, we have calculated, on a consistent basis, a Commercial Bank Business Environment Rating
(CBBER) for each of the 59 countries surveyed. The CBBER includes an assessment of the limits of
potential returns. It does this by taking into account the size, growth potential and bancassurance potential
of the banking sector, as well as aspects of the economy in 2007. The CBBER also depends on an
assessment of the risks to the realisation of potential returns. This reflects BMI’s assessments of overall
country risk, together with the regulatory and competitive environment.
Hungary’s overall CBBER is 65.1. The banking market structure of the limits to potential returns has a
are significantly lower than the country structure with scores of 54.4 and 70.5 respectively. Conversely,
the banking market risks of the risks to the realisation of returns are slightly higher than the country risks
rating with respective scores of 76.7 and 74.1. In the context of the region, Hungary’s CBBER is high.