(Refiles to include quote clarifying Patai’s stance on Budapest Bank in para 21)
By Marton Dunai and Gergely Szakacs
BUDAPEST, Nov 23 (Reuters) - Hungary’s top commercial banker expects more pressure on profits as the central bank helps borrowers to lock in the benefits of ultra-low interest rates.
The National Bank of Hungary has eradicated toxic foreign currency loans and driven interest rates to record lows, often at steep costs to the banking sector, as it turned the economy around after the economic crisis a decade ago.
On Tuesday, it went a step further, announcing a two-part plan to drive long-end bond yields lower and help make fixed-rate loans cheaper for households and businesses.
Mihaly Patai, chairman of the Hungarian Banking Association, told Reuters that banks expect they would have to swallow some of the costs of those borrower incentives.
“The profit squeeze is an explicit goal of the central bank leaders. It will force banks to review their cost structure and their strategy once again... Banks can only use volume growth to counteract the margin squeeze,” Patai, who is also head of Italian bank Unicredit’s Hungary operations, said in an interview on Wednesday.
However, he said banks would eventually benefit from the economic boost from ultra-low interest rates.
“The measures of the national bank so far also served the interests of the national economy, which is also in the interest of the bank sector. Take the example of the rate cuts ... There is no use complaining. It is a factor we need to live with,” Patai said.
“Banks need to accept... the NBH are the hunters, banks are the antelopes. The hunters don’t listen to the antelopes before making decisions.”
Hungary was hard hit by the global financial crisis a decade ago and its banks have more recently seen margins squeezed by the government’s unorthodox policies, including Europe’s highest bank tax, a hefty transaction tax and the mandatory conversion of foreign currency loans into forints.
The NBH is led by Gyorgy Matolcsy, a former economy minister and a close ally of Prime Minister Viktor Orban, who faces elections in 2018. It currently has the loosest monetary policy in central Europe, as global central banks and neighbour the Czech Republic have started tightening.
But Patai - a close friend of the central bank governor - said banks were now seeing a silver lining as the economy is growing, lending is expanding and profits have returned.
With its latest measures the central bank expect lenders to offer more and cheaper fixed-rate loans, as fixed-rate loans are currently sold at a steeper premium than anywhere else in Europe, the NBH said.
But Patai said cutting rates had limits as Hungarians are more prone to allow their loans to slip than other central Europeans - and the taxes paid by banks in Hungary are also among the highest in the region.
He said retail lending could expand in the double digits for at least 2-3 years, helping banks achieve a 7-8 percent return on equity from normal banking operations.
Hungarian banks have seen some ownership changes, with some new owners having ties to the government and growing influence in the sector, although Patai said this would not deter foreign investors.
“These hunting grounds will form as it happens all over the world,” he said, referring to the growing role of domestic lenders, including some with links to the government. “In Hungary they have yet to crystallise, and for sure they will, as players usually respect such special hunting grounds.”
“Several foreign owners consider their presence in Hungary important for geostrategic reasons and they are willing to make huge sacrifices to keep their positions... I expect no drastic change in the next decade,” he said.
Forthcoming activity in the sector is due to include the government’s plans to sell state-owned Budapest Bank, which it acquired from GE Capital for $700 million.
There is no sign of an imminent deal and Patai did not wish to speculate on when there might be a sale.
“I cannot answer that question because it concerns one of our member banks,” he said.
The sector as a whole, meanwhile, will remain alert to the authorities and their frequent policy initiatives.
“I think in recent years the antelopes have learned that there is no alternative than to adapt,” he said. (Reporting by Marton Dunai; Editing by Susan Fenton)