Hungarian Banks Lack Resilience as State Interferes, EBRD Says

  • EBRD support conditional on government delivering commitments
  • Long-term funding, bad loan resolution needed for new loans

Hungary’s banking sector, saddled by "substantial" state involvement, lacks resilience and lenders need more long-term investment to bolster the sustainability of the industry, the European Bank for Reconstruction and Development said.

Under a deal signed with the EBRD last February, Hungarian Premier Viktor Orban pledged to ease the financial burden on local lenders and committed to predictable policies. The EBRD is looking at opportunities to participate in mergers and acquisitions and is ready to offer long-term funding through bond issuance, mortgage-backed lending and other securitised products as long as the cabinet delivers on its 2015 commitments, according to the lender’s country strategy for Hungary published on Monday.

Lending outside the central bank’s subsidized loan program aimed at small- and medium-size enterprise remains "hampered by risk aversion and tight credit conditions" and an overhang of non-performing loans, according to the EBRD. The central bank’s asset manager established to purchase non-performing real estate loans from banks may further support the sector "provided concerns over its governance structure are removed," the EBRD said.

While the government’s commitment to unwind state involvement in the banking sector has given a "welcome support to business confidence," it remains critical to create a "predictable and business-friendly tax and policy environment," as set out in the deal with the EBRD, it said.

In last year’s accord, the EBRD said it would buy a stake in the local unit of Erste Group Bank AG. The transaction is expected to close by the end of June after lawmakers approve a further cut in Hungary’s special bank levy in the 2017 budget, in line with the deal, MTI state news service reported Monday, citing Erste Hungary Chief Executive Officer Radovan Jelasity.

The bank tax, already halved this year, will further fall in 2017, the Economy Ministry said in a statement on Friday, adding that it regards a stable banking system and the expansion of lending as the basis for economic growth.