Banks Less Optimistic about the Economic Environment

Based on the responses in in the latest quarterly Bank Sentiment Survey by the National Bank of Hungary (MNB), the banking system perceived a slight deterioration in the economic environment in 2024 H2.

According to the banks, the tightening of the regulatory environment, the increase in operating expenses, the decrease in the level of profitability in the case of some institutions, the deterioration in corporate creditworthiness, and the uncertainty about the international and domestic economic environment contributed negatively to their perception of the operating environment. By contrast, the increase in competition and in household credit demand had a positive effect. Looking ahead to 2025 H1, the banks expect the economic situation to remain unchanged.

Respondents in the survey said the economic environment had a negative impact on banks’ economic sentiment, similar to the previous wave of the survey. In 2024 H2, a net 22% and 35% of the responding institutions perceived a deterioration in the international and domestic macroeconomic environment, respectively. However, a quarter of the banks expect an improvement in the economic environment again in 2025 H1.

Market competition has intensified, thereby continuing to have a positive impact on economic sentiment. A third of the banks perceived increased competition against non-bank market participants and in the field of payment services, to which the increase in the financial transaction levy may also have contributed. Looking ahead, competition may intensify in all sub-segments, most notably in the retail sector, where a net 57% of the banks expect an increase. The expected increase in competition may reflect the use of voluntary pension fund savings for housing, the rural home renovation program, the Demján Sándor Program, the launch of the worker loan scheme, and the relaxation of the age requirement for the prenatal baby support loan.

Access to funds has improved slightly over the past six months, according to banks. In parallel with the decline in interest rates, the availability of short and long-term funds, as well as interbank liquidity, has also improved over the past year. Looking ahead, one-fifth of the banks expect interbank liquidity to worsen in 2025 H1.

Credit risks have not materialized due to a stable labor market, debt cap rules, and high corporate liquidity, and as a result portfolio quality has contributed neutrally to bank sentiment. The creditworthiness of retail customers has not changed significantly, but in the corporate segment, a net 32 ​​per cent of the banks perceived a deterioration in creditworthiness in 2024 H2, and a fifth of them expect a deterioration going forward. Nevertheless, portfolio quality may remain broadly unchanged in 2025 H1.

Half of the banks saw a pick-up in retail credit demand in 2024 H2, and they expect this to continue going forward. A net 5% of the banks saw an increase in demand for corporate loans, but 43% expect an upturn in the next six months. This confirms the results of the Lending Survey regarding the expected pick-up in forint lending, although there is still no sign of a turnaround in investment loans.

Half of the banks reported a tightening of the regulatory environment, and 35% expect this to continue in the next six months. Looking back, this can be explained by the countercyclical capital buffer (CCyB) activated in mid-2024, the tightened windfall tax, and the mortgage interest rate cap and, looking ahead, by the amended Capital Requirements Regulation (CRR3).

Nearly one-third of the banks reported a deterioration in profitability before impairment, and 55% reported an increase in operating expenses. Looking ahead, 32% of the banks expect a decline in the level of profitability, and 62% expect an increase in operating expenses.

On the whole, based on the Bank Sentiment Index calculated as the difference between the number of banks perceiving an improvement and banks reporting a deterioration in economic activity, the respondents perceived some deterioration in the operating environment in 2024 H2. Looking ahead to 2025 H1, economic sentiment is expected to remain unchanged, according to the MNB summary.