Hungary central bank shows its independence with warning to OTP on Russia, S&P says

OTP Bank Nyrt.

04/06/2024 16:02

By Gergely Szakacs
       BUDAPEST, June 4 (Reuters) - The National Bank of
Hungary showed its independence by telling OTP Bank  OTPB.BU 
last week to curb its Russian exposure, analysts at S&P Global
said, amid repeated attempts by the Hungarian government to rein
in the central bank's powers. 
    Last Wednesday the NBH told OTP Bank, central Europe's
largest independent lender, that risks may arise regarding the
bank's Russian activities and payment transactions due to
Western sanctions imposed on Russia as well as differences
between Russian and European Union rules on preventing money
laundering, financing terrorism and compliance measures.
    "One of the key assessments for the Hungarian banking system
or any banking system that we look at, is that the banking
regulator is independent from political influence," S&P Director
for European Financial Institutions Anna Lozmann told Reuters in
an interview on Tuesday.
        "The fact that the National Bank has issued such a
statement for us is of huge importance underlying their
independence. So it's very positive."
    Led by Governor Gyorgy Matolcsy, the NBH has faced strong
pressure from nationalist Prime Minister Viktor Orban's cabinet
to cut the EU's highest benchmark interest rate even more
aggressively to aid the recovery from last year's recession.
    In late April, S&P affirmed Hungary's sovereign credit
rating at BBB- with a stable outlook but said that repeated
proposals to curb the NBH's independence could pose "a material
downside risk" to its assessment of the local banking sector.
    OTP has gradually decreased its footprint in Russia since
Russia's invasion of Ukraine, though its exposure is still
third-highest among European banks, behind Raiffeisen Bank and
UniCredit, based on a tally by Morningstar DBRS.
    "As time progressed the exposure got smaller, and for Russia
we're only speaking about an impact of about 6 to 10 basis
points to CET1 now," said Lukas Freund, S&P Associate Director
for European Financial Institutions Ratings.
    "So it's not material in the sense that this would cause any
capitalization problems, but of course there is the tail risk of
reputation," he said. "From a ratings perspective, we think it's
good that they have curbed their exposure to Russia."
    Orban's government has roiled EU and NATO allies by
maintaining close business ties with Russia even after its
invasion of Hungary's eastern neighbour in February 2022, and by
refusing to send weapons to Ukraine.
    
    MAINSTREAM BANKS ADJUST
    S&P projects single-digit lending growth this year for banks
in central Europe following recent sharp rate cuts in the region
and expects banks to continue to generate solid profits.
        However, with net interest margins likely having peaked,
lenders will have to redouble efforts to boost efficiency, said
Markus Schmaus, Managing Director - Analytical Manager for
Financial Institutions at S&P.
        The main risks to the region's lenders stem from any new
banking taxes, government intervention and geopolitics,
according to S&P.
    Schmaus also said fintech companies and startup firms were
unlikely to disrupt the business model of established lenders,
with mainstream banks adjusting quickly to the challenges posed
by growing digitalisation.
    "I think in 2016 we published a picture where you see a
fintech unplugging the banks. The power cord was unplugged by
fintech. We no longer believe that," Schmaus said.
    "I cannot really imagine that there will be something in
terms of disruption, which you can measure in terms of
profitability."

 (Reporting by Gergely Szakacs; Editing by Susan Fenton)
 ((gergely.szakacs@thomsonreuters.com ; https://x.com/szakacsg ;
+36 1 882 3606 ;
https://www.reuters.com/authors/gergely-szakacs/))