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