Despite to the challenging macroeconomic environment, banks are experiencing intense competition

Budapest, 29 March 2021 — In 2020, the Magyar Nemzeti Bank prescribed a new data submission, within the framework of which it regularly examines banks' economic sentiment and strategic plans. The MNB publishes the aggregated results of this survey on a quarterly basis. Based on the Bank Sentiment Survey for 2020 Q4, economic sentiment in the banking system as a whole deteriorated slightly in the second half of 2020. According to banks' responses, this deterioration could be ascribed to the macroeconomic environment and customer risks, as well as deteriorating profitability. On the other hand, improvement in sentiment was driven by intense market competition and demand, as well as the availability of funds. Looking ahead, banks expect significant improvement in the first half of 2021, which may be justified by the positive economic outlook.

In 2020, the Magyar Nemzeti Bank launched a survey of banks' economic sentiment and strategic plans, called the Bank Sentiment Survey. The questionnaire, which is largely built on a similar survey by the European Banking Authority, covers banks' business strategy, profitability, lending and portfolio quality expectations, asset-liability management and general economic prospects.

The purpose of this data submission is for the MNB to become familiar with banks' economic sentiment and strategic plans, which are also quantified by the Bank Sentiment Index produced by the central bank after summarising the qualitative responses of the banks. The Bank Sentiment Index can be used as an early warning indicator for the central bank to receive a timely signal if institutions perceive factors that threaten banking activity. This provides significant support in recognising both banking and other financial crises and in taking the necessary economic policy action in due time.

On the whole, in the second half of 2020, banks' economic sentiment deteriorated slightly compared to the first half of the year. However, the surveyed institutions are already expecting to see improvement in the first half of 2021. Overall, the assessment of the macroeconomic environment, risk-taking and profitability contributed to the deterioration in bank sentiment in the second half of the year, while the beneficial effects of increased market competition and demand and improved access to funds partially offset this.

• In the second half of last year, the external and domestic macroeconomic environment deteriorated, according to one half of banks in net terms. This ratio is in line with the previous quarter, but 40 per cent of banks expect an improvement in the first half of 2021.
• Market competition has intensified in all segments, and banks expect the process to continue, most notably in payment services.
• Access to funds also improved, according to one quarter of banks, which also had a positive effect on sentiment. About one half of the institutions plan to increase retail and corporate deposits as well as central bank funds.
• Indicators measuring the development of risk-taking deteriorated: according to banks’ responses, deterioration was also observed in the creditworthiness of corporate and retail customers, the quality of the loan portfolio and institutions’ risk appetite. 10-25 per cent of banks expect portfolio quality to deteriorate in each credit segment.
• One third of banks perceived an increase in corporate credit demand, and one quarter perceived an increase in retail credit demand. Looking ahead, banks expect rising demand, especially in the retail segment, in line with the expansion of family support programmes. These programmes are expected to boost demand in the housing market and, through this, credit demand. Overall, about one half of banks plan to expand their portfolios in the corporate and SME segments, as well as mortgages and consumer loans.
• For the first time in the past year, banks did not deem the regulatory environment to be tighter at the end of last year.
• One third of banks indicated a deterioration in profitability, while one fifth indicated an increase in operating costs – in respect of which further deterioration is expected for the next six months.

Economic sentiment varied slightly according to bank size: large banks already considered the economic situation unchanged overall, with this group of institutions expecting the largest improvement in the first half of 2021. Over the next six months, the positive turnaround in the economic environment may significantly improve the evolution of banks’ economic sentiment.

Note: The positive domain denotes improvement in economic sentiment, while the negative domain denotes deterioration compared to the previous half-year. The Bank Sentiment Index is the arithmetic average of the seven components (economic environment, market competition, availability of funds, customer risk, demand, regulation, profitability). The last data point is an estimation. Each value shows the unweighted net ratio, i.e. the difference between the number of banks indicating an improvement and a deterioration in the economy.

The detailed results and chart set of the Bank Sentiment Survey are available on the MNB's website at the following link: