Hungarian banks will take a hit to their profits from the new tax on windfall profits

The proposed tax for 2022 is equivalent to 37% of the total profit of the Hungarian banking sector in 2021.
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A new tax on windfall profits in Hungary will deal a major blow to bank profits over the next two years as the government says key institutions have made “extra profits”.

Hungarian lenders are expected to pay 250 billion forints in 2022 and 2023 as part of a two-year windfall tax that will be imposed on several sectors that the government says have generated additional revenue amid rising prices. energy prices, rising central bank interest rates and Russia’s ongoing invasion of Ukraine. The government seeks to raise about 1.8 trillion forints by the end of 2023 through the temporary levy.

The 250 billion forint tax payment envisaged for 2022 is equivalent to around 37% of the Hungarian banking sector’s net profit and 11% of its net interest income and net fee and commission income for 2021, according to the data from S&P Global Market Intelligence. The new levy is expected to significantly reduce the sector’s profitability over the next two years, Jovan Sikimic, senior equity research analyst at Raiffeisen Research, told Market Intelligence.

“It looks like the banks could [find] it is difficult to mitigate the impact [of the tax] on the operational side,” said Sikimic.

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The banking sector will be the second largest contributor to the exceptional tax after the energy sector. The payments will be calculated on the basis of the net bank income generated in Hungary during the previous year, with a tax rate of 10% applied in 2022 and 8% in 2023.

“The tax base is net income instead of profit, which makes the situation somewhat worse because taxes are not necessarily related to the current economic situation of banks,” said Lukas Freund, partner at S&P Global Ratings.

Measures targeting the banking sector are not new in Hungary. The most recent include a general moratorium on the repayment of all customer loans during the COVID-19 pandemic and a freeze on residential mortgage rates from January 2022. Both of these measures were recently extended until the end of the year. Since 2010, Hungarian banks have also been subject to a tax based on the value of total assets, and in 2020 the government imposed a one-time tax on lenders to mitigate the economic implications of the pandemic.

In addition to the 250 billion forint tax, the government also plans to collect 50 billion forint from banks and financial institutions in 2022 through changes to the existing financial transaction tax.

The new Hungarian tax is the latest move by Central and Eastern European, or CEE, governments to mitigate the negative effects of monetary policy tightening and macroeconomic pressures on consumers. Poland previously introduced a borrower support program that will increase banks’ costs and reduce their profits. “Ripple effects on other Central and Eastern European countries cannot be ruled out in our view,” said Sikimic.

Lump sum

Hungary’s largest lender, OTP Bank Nyrt., will contribute 78.3 billion forints to the state budget under the new tax in 2022, more than 31% of the total of 250 billion forints. The payment will be recorded as a lump sum in the lender’s financial results for the second quarter. Details regarding the amount of windfall tax payment in 2023 are still under discussion. The bank did not provide comments to Market Intelligence regarding the impact of the tax on its operations.

OTP increased its net profit by 75.6% year-on-year in 2021, but posted a net loss for the first quarter of 2022, largely due to the conflict in Ukraine. OTP’s net profit for the year is expected to reach 189 billion forints, according to analyst estimates provided by the bank, although only three of the eight estimates take into account windfall tax implications.

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With OTP’s share price already suffering from the war in Ukraine, one-off tax plans have further depressed its price as investors priced in the potential extension of the tax beyond 2023, according to Raiffeisen’s Sikimic Research.

The stock has fallen around 50% since January, underperforming the Budapest Stock Exchange index as well as the STOXX Europe 600 Banks index. As of July 6, OTP shares were trading at 8,380 forints per share, well below the June 17 consensus average price of 14,825.23 forints apiece and offering nearly 77% upside potential, according to data from Market intelligence.

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Meanwhile, the local unit of Erste Group Bank AG, Erste Bank Hungary Zrt., told Market Intelligence that its contribution under the exceptional tax will reach around 19 billion forints in 2022. Other banks refused to disclose the tax burden or did not respond to requests for comment. .

Rough estimates of tax payments for 2022 could amount to around 13 billion forints for the UniCredit SpA unit UniCredit Bank Hungary Zrt. and 8 billion forints for the CIB Bank Zrt unit. of Intesa Sanpaolo SpA, according to Sikimic of Raiffeisen Research.

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The Hungarian banking association has criticized the government’s exceptional tax plans, arguing that the tax burden imposed on financial service providers further reduces the lending capacity of the banking sector. This could indeed be the case for the weaker players in the sector given the added pressure of a deterioration macroeconomic outlook due to the war in Ukraine and the related energy crisis, said Alessandro Boratti, financial institutions analyst at Scope Ratings.

Asset quality could also weaken as vulnerable borrowers grapple with debt servicing amid rising inflation and interest rates, Freund said, although Hungarian banks have enough reserves to absorb costs thanks to historically strong lending margins and healthy capitalization levels.

Long term promise

Hungary has been a profitable market for banks, with margins and return on equity significantly outperforming many other European markets. The sector’s ROE is expected to remain at 10% to 12% in the medium term, including windfall taxes on windfall profits in 2022 and 2023, according to Freund.

New tax adds to foreign direct investment uncertainty in Hungary, but this is already taken into account when assessing the profitability of banking operations in the country, according to Freund.

Boratti of Scope Ratings also believes international banking groups are unlikely to leave Hungary because of the new tax, although some groups may reconsider “if the risk/return profile ceases to be attractive”. In the event of a sale, domestic lenders would be among the most likely buyers, the analyst said.

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As of July 11, US$1 was equivalent to 406.91 Hungarian forints.

Laura T. Thrasher