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Country Commercial Guides
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CHAPTER VIII. TRADE AND PROJECT FINANCING
A. Description of the Financial and Banking System
Despite the backdrop of a highly regulated and largely fee-driven European banking system, particularly when juxtaposed with its counterpart in the United States, the Hungarian banking sector has undergone a remarkable transformation during the past decade. It has emerged from a money-losing state-owned monolith to a largely privately owned service sector that has built a more customer-friendly appeal and began to realize some net gains. While its standards continue to lag behind the services U.S. banks offer, the Hungarian banking sector nonetheless is beginning to approach the quality of service and the variety of products offered by EU banks.
As early as the end of the 1980s, the Hungarian banking and financial sector emerged as the most developed such sector in Central and Eastern Europe. However, signs of the system's relative maturity dates back to the mid-70s and includes the following:
- The Hungarian National Bank (MNB) has been an active borrower in the European and Japanese bond markets since the beginning of the 1970s.
- Hungary joined the IMF and World Bank in 1982.
- In 1987, Hungary was the first country in the socialist block to establish a two-tier banking system.
- The Budapest Stock Exchange (BUX) was the first Western-style securities exchange to operate in Central and Eastern Europe. It was re-opened in 1990 after its closure in 1948.
By 1999, foreign ownership in the Hungarian banking sector reached 70 percent. Despite quick penetration by foreign investment in the sector, there are only two banks with major U.S. participation in the Hungarian marketplace today. They are Citibank and Budapest Bank, the latter of which is owned partially by GE Capital. While Citibank's capital exposure in Hungary is about $616 million making it the 11th largest bank in Hungary, Budapest Bank is ranked in the top ten with approximately $1.3 billion in assets.
As capital flows to Hungary outpaced all other countries in Central and Eastern Europe during the 1990s, the BUX closed an impressive year in 1997. Its market capitalization increased by 54 percent, which ranked as the third best performance worldwide. With external pressures on world markets, such as the Asian crisis, the Russian collapse, and the Brazilian devaluation, the BUX suffered a setback in late 1998, but is currently beginning to show signs of a cautious recovery.
B. Credit institutions
Hungary implemented a major bank reform in 1987, creating a two-tiered banking system by divesting commercial banking from the National Bank of Hungary (MNB). After the 1989 transition to a market economy had begun, and particularly during 1990-1995, the Hungarian Government committed over $4 billion in subsidies to the ailing state-owned banking sector to cover bad loans and prepare them for privatization. Actual privatization of Hungarian banks began only in 1994 after some delay. However, as a result of the Hungarian Government's steadfast commitment to this process and the country's improving economic risk status, foreign participation in privatization occurred rapidly. By the end of 1998, nearly three-fourths of the entire banking sector was in private ownership.
The legal framework in which the Hungarian banking system operates is continually changing. New modifications, in line with the legal requirements of the European Union and the OECD, include the following:
- single-tier regulation authorization has been replaced by a two-tier regulation system;
- minimum capital requirements of different categories of credit institutions have been raised;
- ownership share of a single owner (except for credit institutions, insurance companies and investment companies) has decreased from 25 percent to 15 percent;
- regulation of assets has been replaced by risk management;
- a new reserve item, the general risk reserve, has been introduced;
- responsibility of the deposit insurance fund was expanded in order to allow it to make emergency decisions to prevent a banking crisis.
Legislation that was introduced in January 1998 created the conditions for the establishment of branches of foreign enterprises in the financial sector and banks are now entitled to provide the full range of investment services, including trade in stocks and publicly placed corporate bonds. As the Hungarian banking system emerges, new types of credit institutions are prepared to enter the marketplace: several home-savings institutions and the first mortgage bank have already opened their doors to the public.
C. Mortgage loan companies
Act XXX of 1997 established an institution long missing in the Hungarian financial sector, by creating the legal framework for mortgage loan lending, in order to encourage the granting of long-term credits. A mortgage loan company may be established as a specialized credit institution, with subscribed capital of not less than 3 billion HUF. It is the duty of the institution to provide long-term credits to prospective customers by providing coverage in the form of liens based on real estate property. Due to the special character of these activities, such an institution may only be founded exclusively for this purpose, and its operations may only cover mortgage loans and closely associated banking activities.
D. The Securities Act
The statutory regulations introduced on January 1, 1997 and later amended in 1998, classify investment service providers in three categories: commission agent, comprehensive securities trading firms, and investment companies (domestic or foreign). The required capital for a commission agent license is 20 million HUF, 100 million HUF for comprehensive securities trading, and 1 billion HUF for an investment company.
E. Investment funds
The investment fund is typically a monetary fund that is also a legal person, the owners of which are investors. The capital of the fund is raised by purchasing the investment units issued by the company that manages the fund. The investment capital is then invested by the company in securities or real estate for specified charges.
An investment fund may be established as an open-ended investment fund or a closed-ended investment fund. Funds have to be registered through the Hungarian Banking and Capital Market Supervision. The minimum amount of start-up capital in case of a security fund is 100 million HUF and in case of real estate funds 500 million HUF. A fund may be established for a definite or an indefinite period of time.
F. Venture capital investment
Act XXXIV of 1998 allows the establishment of a venture-capital company and/or funds and serves as the regulatory framework for the development and management of such companies. Currently, there are 19 major venture capital funds active in Hungary; eight of these are so-called established funds and 11 are relatively new funds. A total of $1 billion has been invested in hundreds of Hungarian companies through foreign venture capital funds, and the funds are currently arranging for an additional $500 million in investment dispersion. In terms of geographical breakdown, 64 percent of venture capital in Hungary was raised by U.S. sources, 33 percent by Western European investors, and only about one percent originated in Hungary.
Foreign entities may control and manage venture companies also in the form of a branch institution. A venture capital fund may only be established as a closed-end fund. The company or fund may be created for a definite or indefinite period of time, but the duration of its operation may not be shorter than six years. The minimum required capital is 500 million HUF, which may consist only of cash contributions.
In order to reduce risk exposure, Hitelgarancia Rt. (Credit Guarantee Inc.) received authorization to provide a guarantee on capital investments that typically carry more risk than regular investment funds.
G. Deposit insurance funds
In order to mitigate unwanted losses, the National Deposit Insurance Fund was established. The insurance exclusively covers registered deposits. The indemnification of each depositor and each credit institution is up to 1 million HUF. The resources of the Fund primarily consist of joining fees, as well as contributions of credit institutions and 80 percent of the levied supervision fines.
H. The stock and commodity exchange processes
The Hungarian securities market began to take shape in the mid-80s after a 40-year break. The institutional framework was established when the first Securities Act was passed in February 1990, which led to the opening of the Budapest Stock Exchange in June 1990. Foreign investors, who provided four-fifths of total equity turnover early on, took a conservative position and invested largely in foreign-owned companies between 1990 and 1996. They only began to increase the ratio of Hungarian shares in their portfolios in early 1996. Total market capitalization of the Budapest Stock Exchange rose from 1.2 trillion HUF in 1995 to 5.1 trillion HUF by the end of 1997.
The Budapest Stock Exchange (BSE) totaled 63 members at the end of 1998 (62 brokerage firms and one bank). Trading is carried out in three ways: securities, government securities, and futures. As much as 96 percent of total trade takes place in the first segment. The number of securities listed and traded on the Budapest Stock Exchange is approximately 150. Of these, about 50 are equities, about 30 are government bonds, 7 are corporate bonds, 44 T-bills, 20 investment fund shares and one compensation bond.
The derivative section of the stock exchange has been functioning since March 1995. The most popular product has been the BUC index contract (with six maturities and two years in advance), followed by the U.S. dollar and the German mark.
The financial section of the Budapest Commodity Exchange is a competitor in the 3-month BUBOR, U.S. dollar, and German mark segments. It is also a contributor to the derivative section of the Budapest Stock Exchange.
The clearing of transactions of both the Budapest Stock Exchange and the Budapest Commodity Exchange is performed by Központi Elszámolóház Rt. (Central Clearing House, Inc. and the national depository.
The OTC market is less organized; broker firms publish information in leading business dailies (Napi Gazdaság, Világgazdaság) concerning public sales and purchase offers for securities of about 50 companies.
I. The Regulatory framework - The Hungarian Banking and Capital Market Supervision
The Hungarian Banking and Capital Market Supervision (HBCMS) was established by Act CXIV of 1996 through the combination of two separate supervisions which existed earlier. HBCMS is a public supervising authority of nation-wide scope operating under the auspices of the Hungarian government.
The scope of the supervision covers credit institutions and financial undertakings and the distribution (marketing) of securities and investment services. President of the HBCMS is appointed by the Prime Minister for a period of up to 6 years.
J. Market highlights
Market Profile
The number of credit institutions in Hungary operating as share-holding companies rose to 44 by the end of 1998, with 30 of them in majority foreign ownership. The Hungarian government continues to hold equity in a few banks. These include the National Savings Bank, Rt., commonly known as OTP (18 percent), the Commercial and Credit Bank or K & H Bank Rt. (28.8 percent), Postabank Rt. (47 percent), Budapest Bank Rt. (23 percent), Mezobank Rt. (5 percent), and Konzumbank Rt. (4 percent). There are currently two banks with U.S. equity in the Hungarian marketplace: Citibank and Budapest Bank (partially owned by GE Capital).
Statistical Data
1998 performance of the banking system can be highlighted as follows:
The estimated total assets of the five largest banks at the end of 1998 were estimated at $16.4 billion (all figures were calculated using the official average USD exchange rate for December 1998, which was 1 USD = 215 HUF). The top 5 banks at the end of 1998 therefore are listed as follows:
1. National Savings Bank - OTP ($7.6 billion)
2. Hungarian Foreign Commercial Bank - MKB ($2.8 billion)
3. Hungarian Commercial and Credit Bank - K & H Bank ($2.4 billion)
4. Central European International Bank - CIB Bank ($1.8 billion)
5. Postabank ($1.8 billion)Of the two U.S.-owned banks, Budapest Bank is ranked as the 7th largest bank in Hungary with assets of $1.2 billion and Citibank is ranked 9th with an exposure of $926 million.
In terms of global financial institutions, more commonly known as multilateral development banks, the following five institutions are currently active in Hungary with their respective loan portfolio size in parentheses:
1. The World Bank ($3.7 billion)
2. The European Investment Bank or EIB (1.3 billion ECU)
3. European Reconstruction and Development Bank or EBRD (1 billion ECU)
4. International Finance Corporation or IFC ($257 million)
5. International Monetary Fund or IMF (not available).The five largest securities trading or capital development banks are (with 1998 capital raised in parentheses):
1. ABN Amro Securities Rt. ($2.8 billion)
2. CA IB Securities Rt. ($1.9 billion)
3. ING Barings Rt. ($385 million)
4. Concorde Securities Rt. ($175 million)
5. OTP Securities Rt. ($70 million)The five largest venture capital companies are (with total capital managed or invested):
1. Central Europe Trust ($300 million)
2. Róna és Társai Rt. ($215 million)
3. Hungarian-American Enterprise Fund ($60 million)
4. DBG Eastern Europe Kft. ($50 million)
5. Bankár Holding Rt. ($50 million)K. Competitive analysis
As described above, the Hungarian banking and financial sectors are not yet up to par with U.S. standards. Procedures seem more bureaucratic, choices are more limited, and fees appear to be higher than those offered by U.S. banks and financial institutions. It is clear, however, that the Hungarian financial services sector has developed rapidly into the most competitive such sector in Central and Eastern Europe. The level of competition within the sector is increasing and consumer and business loans are becoming more readily available. After the introduction of the Euro on January 1, 1999, Hungarian credit institutions made rapid adjustments to the new currency, which signaled that the Hungarian financial sector is prepared to work in harmony with the EU.
In 1989, Hungary initiated a new national clearing system to regulate the way businesses and individuals pay each other through bank transfers. Although the Hungarian payment system was the first in the region to be reformed, it is still difficult to accurately gauge the amount of time it will take to transfer money from one bank to another. Both speed and quality of services vary greatly among banks.
Foreigners may open forint, convertible forint, and hard currency personal bank accounts. Interest rates on time deposits have significantly exceeded the rate of inflation, but real interest rates on current accounts have typically not kept pace with inflation. Overall, there are more cash transactions in Hungary than is customary in Western Europe. But other methods of payment are available: money can be transferred within Hungary by postal order within three days, and credit and debit cards are becoming a widely accepted means of payment, particularly in Budapest. Currently, 23 banks offer 88 different cards to the Hungarian consumer. Of the 88 cards, there are 22 gold cards, which offer premium services to an upper-income clientele. These cards can also be used to withdraw money at some banks. Automatic teller machines can now be found all around Budapest and in other cities in Hungary. The most-widely accepted systems are Cirrus, Plus, Eurocard, Mastercard, and Visa. Citibank introduced its Diner's Club in Hungary in 1998 and Hungarian Commercial and Credit Bank launched two types of American Express cards in the same year. Applicants are screened and the applicable standards are high. For example, for a Citibank Diner's Club card, the applicant needs to be at least 25 years of age, have a net monthly income of HUF 215,000, and is required to open a counter deposit account with HUF 600,000 on hold.
According to press reports, the banking sector in Hungary is likely to go through some consolidation in the near future. Because of keen competition in the marketplace, the number of banks in Hungary is expected to decline because of mergers and acquisitions. According to bank officials, the prime motivation to undertake mergers is to cut costs. This trend is already under way. For example, Citibank bought the European Commercial Bank Rt. (EKB), at the time Hungary's 19th largest bank, from Cariplo SpA and Bank Austria AG.
On the other hand, experts point out that 40-45 banks in Hungary is not excessive. They immediately refer to Austria, a smaller market, where banks are numbered by the hundreds rather than the tens. One official says that an alternative to consolidation is for the sector to become more efficient. If costs are reduced in the short run, some mergers can be avoided. Despite a climate of consolidation, there is general agreement that mergers between the top 5 banks in Hungary are unlikely. The consolidation process will affect mostly the smaller banks.
L. Foreign Exchange Controls Affecting Trade
The effects of the EURO
On January 1, 1999, the Euro became the official currency of the Economic and Monetary Union, which includes the initial group of 11 countries named in accordance with the Maastricht criteria. Effective immediately, companies in these countries may begin conducting their business transactions in Euros, while Euro notes and coins will be put into circulation no later than 2002.
The Euro has been praised because expectations are that it will ensure lower interest rates, lead to healthy public finances, and give the single market its full efficiency. In addition, the Euro is expected to facilitate the movement of goods and services within the European Union by eliminating exchange rate uncertainty and allowing companies to compare costs and, for example, to save money on foreign exchange hedging. These benefits will be particularly pronounced for small and medium-sized companies since larger firms are more likely to have the resources to manage and negotiate international financial transactions.
Banks and multinationals are largely prepared for the use of the Euro. The European banking sector intends to fully implement the principle of "no-compulsion, no-prohibition" for the use of the Euro as decided by the European Council. The changeover to Euro means that workloads will likely be reduced, working capital needs will decrease as will transaction costs, and currency spreads will be eliminated.
Banks with Correspondent U.S. Bank
All major Hungarian banks -- Budapest Bank (now partially owned by GE Capital Credit), Hungarian Foreign Trade Bank (MKB), Hungarian Credit Bank (MHB), K&H (Commercial and Credit Bank), Postabank (Post Bank), OTP (National Savings Bank) -- have correspondent banks in the United States. Additionally, there are a number of international banks that maintain representational offices in Budapest (most with offices in the United States): ABN Amro, Creditanstalt, Credit Lyonnais, and Giro Bank.
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[end of document] Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title 17, United States Code.
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