Hungary Commercial Banking Report Q2 2008

In March 2008, we updated all data for the 59 countries surveyed with official figures, sourced from central banks and regulators. In most cases, we were able to find data that pertained to the end of 2007: in almost all other cases, the data pertains to September 30 2007. As a result, the insights that we derive on particular countries are based on consistently sourced information that is far more current than it had been previously.

Although we gather data for countries such as the US, Japan, Australia and the eurozone, the vast majority of the 59 countries whose banking industries we survey are, or are generally seen as being, emerging markets. For all the widely publicised problems of large banks in developed countries, in the wake of the subprime banking crisis in the US, 2007 was an extremely good year for the banking sectors of the emerging markets. In local currency terms, the median growth in assets was 21% (in Brazil). The median rates of growth in loans to non-bank customers and in deposits were 22% (in India) and 18% (in Morocco). In some countries - and not just those enjoying oil booms - the figures were spectacular. In Ukraine, for instance, assets and deposits rose by 76% and 62% respectively. Loans grew by more than one-third in Bulgaria, Estonia, Latvia, Lithuania, Romania, Russia, Serbia, Slovenia, Peru, Bahrain, Iran and Nigeria. Deposits also rose by more than one-third in most of these countries.

In absolute terms, Hungary's banking sector enjoyed reasonable growth through the year to December 31 2007. In local currency terms, total assets, total loans and total deposits increased by 17%, 11% and 9% respectively. Of the 59 countries surveyed, Hungary ranks 37th in terms of local currency asset growth, 48th in terms of local currency loan growth and 48th in terms of local currency deposit growth.

Hungary's rankings in terms of its loan/deposit, loan/asset and loan/GDP ratios are fifth, 14th and 18th, respectively. Of these ratios both the loan/deposit and loan/GDP ratios are rising, while the loan/asset ratio is falling. The country has per capita GDP of US$13,280 and deposits per capita of US$6,827.

In Q108, we envisaged that total assets, total loans and total deposits would rise by 15%, 15% and 10% annually through the 2007-2012 forecast period. Now, and using an improved forecasting method, we are looking for growth rates of 11%, 9% and 8% respectively.

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 equivalent figures for the US and the eurozone are 84.8 and 84.6, respectively. Hungary is second only to Greece (65.9) of the Central and Eastern European (CEE) countries surveyed by BMI. Within the CBBER, the most important aspect is the banking market structure of the limits of potential returns. This element accounts for 42% of the overall CBBER.

Hungary's rating for this element (54.4) is significantly lower than the overall CBBER and significantly lower than the country structure of the limits of potential returns (70.5). In contrast, Hungary scores highly in the banking and country elements of risks to realisation of returns, 76.7 and 74.1, respectively.

These scores act to offset the low banking market structure element of limits to potential returns in Hungary's overall CBBER.

Sharp declines in domestic consumption will continue to depress economic activity in Hungary over the medium term. While an anticipated improvement in government finances will help to justify new spending commitments beyond 2008, we are concerned that Hungary will continue to fall behind its regional peers in terms of competitiveness, which is bound to present further risks to economic growth.

Extensive spending cuts and tax hikes introduced by the government in 2006, amid a gaping budgetary shortfall of 9.2% of GDP that year, will continue to set the tone for the overall macroeconomic picture in Hungary over our forecast period. The fiscal tightening measures will continue to weigh on economic activity in the medium term.