Polish, Czech, Hungarian banks brace for revenue hit amid rate, government risks

Czech, Hungarian and Polish banks could see declining revenue in the coming quarters amid recent central bank decisions and the risk of government interventions.

Poland's central bank began easing monetary policy in September with a higher-than-expected rate cut, which will impact lending income at banks that are already facing pressure from troublesome Swiss franc mortgage portfolios and the potential extension of a borrowers' support program. Political uncertainty could also affect banks in Hungary, with mixed signals from the authorities about higher taxes. The Czech central bank will abolish interest payments on banks' required minimum reserves from October.

The Polish central bank's key rate cut of 75 basis points to 6%, compared with an anticipated 25-basis-point reduction, is credit negative for banks as it will reduce their net interest income (NII) and net interest margins (NIM), according to rating agency Moody's. NII and NIM indicate how much revenue banks are generating from lending and deposit-taking.

"We expect [rated] banks' net interest margins to decline from their relatively strong 3.5% as of June 2023," Moody's said in a September report.

Santander Bank Polska SA estimates the rate cut will reduce its NII by up to 545 million Polish zlotys (about €118 million) over the next 12 months. Another 25-basis-point cut could widen the drop to 700 million zlotys (€152 million). Poland's PKO Bank Polski SA said in August that a 100-basis-point rate reduction could trim 4.7% off annualized NII, or 813 million zlotys (€177 million).

Other large Polish banks did not respond to S&P Global Market Intelligence's query regarding their expectations for the rate cut's effects on NII.

The Czech central bank's move to remove reserves interest payments would cost local banks 2.1 billion koruny (€86 million) in lost interest income this year if the key rate stays at 7%, Milan Lávička, a senior analyst at Czech investment lender J&T Banka, said in a note. In 2024, the impact could reach 6.6 billion koruny (€271 million) against a 5.5% key rate projected by the Czech banking association. Central bank Gov. Aleš Michl recently said the 7% key rate would not be cut in the coming months as inflation is still high.

Komercní banka a.s., Société Générale SA's Czech unit, estimates the central bank's decision to have a "material impact" on its financial result, reducing its interest income by approximately 115 million koruny (€4.7 million) per month, based on the 7% key rate. The calculations indicate a reduction in Komercni's expected full-year profit of roughly 2% in 2023 and 7% in 2024, according to J&T Banka's Lávička.

The final impact of the Czech central bank's decision will be moderated by lenders recouping earnings by passing costs on to their customer base, according to Pedram Moezzi, banking risk economist at S&P Global Market Intelligence.

Komercni's NII was equivalent to €274 million in the second quarter. The lender demonstrated the lowest quarter-on-quarter NII growth and the highest annual NII drop in a sample of nine largest banks in the Czech Republic, Poland and Hungary. Erste Group Bank AG unit Česká sporitelna a.s. and KBC Group NV unit Ceskoslovenská obchodní banka a.s. (ČSOB) — the other two Czech lenders in the sample — also underperformed their Hungarian and Polish peers. The Czech lenders also had the lowest net interest margins in the sample.

ČSOB did not respond to requests for comments. A spokesperson for Česká spořitelna told Market Intelligence that the bank would not speculate on the effects of the central bank's decision on its financial results.

The five Polish lenders in the sample all showed robust NII growth on a quarterly and annual basis with ING Groep NV unit ING Bank Slaski SA demonstrating the highest, 14% quarterly NII growth among the analyzed banks. Santander Bank Polska had the highest NIM in the sample.

Hungary's OTP Bank Nyrt. demonstrated the second-highest jump in quarterly NII and the largest NII increase on an annual basis.

With inflation falling in Hungary, the central bank has been cutting its one-day deposit rate — which effectively replaced the base interest rate in October 2022 — by 100 percentage points on a monthly basis since May. OTP Bank estimates that a further 100-basis-point rate cut would boost its annualized NII by roughly 7 billion Hungarian forints (€18 million). Its NII would rise rather than fall because of certain government-imposed interest rate caps.

Political risk

Polish banks are also facing higher Swiss franc mortgage provisions following a borrower-friendly judgement by the European Court of Justice in June, Moody's said.

They also face the extension of the country's mortgage repayment deferral scheme, which has been in place since August 2022. Prime Minister Mateusz Morawiecki recently said prolonging the scheme into 2024 would be one of first initiatives by the ruling party PiS after the October elections, although the renewed scheme will be only available to financially vulnerable borrowers.

Hungary's OTP Bank is also facing political uncertainty after Finance Minister Mihaly Varga recently suggested the ministry could propose increasing taxes on local banks to prop up the country's budget. Hungary's ruling party, Fidesz, later denied this plan, according to media reports. But high uncertainty related to the risk of government interventions will weigh on OTP Bank and other Hungarian banks' longer-term prospects, Fitch and S&P Global Ratings said in recent notes.

OTP Bank declined to comment regarding the potential tax changes.

OTP Bank posted the highest second-quarter net profit in the sample, while its quarterly return on equity exceeded 43%, Market Intelligence data shows. The result was supported by contributions from OTP's foreign units, recently completed acquisitions, and windfall tax write-back in Hungary.

Poland's ING Bank Śląski and Bank Polska Kasa Opieki SA (Bank Pekao) had the second- and third-highest return on equity in the sample, while the profitability of PKO Bank Polski and Commerzbank AG unit mBank SA were hit by legal provisions on their Swiss franc mortgage exposures.

All three Czech banks in the sample showed quarterly growth in net profit, with ČSOB and Česká spořitelna also demonstrating year-on-year improvements.

As of Sept. 27, US$1 was equivalent to 23.15 Czech koruny, 4.40 Polish zlotys and 373.43 Hungarian forints.