Hungary started to remake its old state banking system into a privately run industry in 1987. Five years late, it remains impossible to say when a first major sale of stock to private investors will take place.
Hungary's major banks are weighed down by doubtful loans and are operating in an economy still in the painful transition to a market system.
"Don't expect the privatization of 50% of banking assets over the next 18 months," said Matthew Czepliewicz, an analyst at Credit Suisse First Boston in London. "It will be a gradual and very measured process."
Government Keeps Control
The country's three largest commercial banks, Hungarian Credit Bank, with $4.1 billion in assets at the end of 1991; Budapest Bank, with $1.8 billion; and Commercial and Credit Bank, with $2.8 billion, were spun off by the Hungarian central bank in 1987. But they are still majority-owned by the central government and other government-controlled entities.
Together, the Big Three banks have about one-third of all assets held by Hungarian financial institutions. More importantly, they hold the bulk of the shaky loans made to state-owned companies, many of which are staggering as old export markets dry up in the former Soviet Union or other Eastern European countries.
Other major banks include the Hungarian Foreign Trade Bank, which focuses on trade finance, and the National Savings and Commercial Bank, which is retail-oriented. A number of smaller private financial institutions also have been formed since 1987. On the surface, the Big Three posted good profits last year. Hungarian Credit Bank earned $61 million; Budapest Bank, $4 million; and Commercial and Credit Bank, $65 million.
Earnings Down from 1990
But 1991 earnings were sharply lower than in 1990, as loan quality suffered. Doubtful loans held by the entire industry doubled in 1991, to about $1.14 billion at Dec. 31, or about 4% of total loans.
A sign of the loan problem's depth was the government's move last year to guarantee up to 50% of loans to state-controlled borrowers that were inherited by the major banks in 1987. The value of the government guarantee was for up to $139 million at yearend 1991 currency values.
Bank balance sheets will also feel pressure from a new law governing bankruptcies.
The law required borrowers with debt payments overdue 90 days or more to file for bankruptcy by spring 1992 and to then renegotiate loan agreements within 90 days. About 2,000 companies have filed for bankruptcy under the law.
Besides tending to problem-loan portfolios, the Big Three Hungarian banks have other fundamentals to address: They must build modern computer systems for basic transaction processing and develop a work force that can handle credit analysis, marketing, and service functions.
While remaking themselves internally, the banks have been confronted by an economy suffering through the transition to capitalism.
"During the past two years, Hungary has faced some of the worst international circumstances for a new democracy," said a Salomon Brothers report.
Gross domestic product fell by 10.2% last year, inflation hit 35% and unemployment has been rising, to an estimated 9.7% by May, according to government estimates.
As a result, banks are emphasizing lower-risk short-term business loans - two-thirds of corporate loans at the end of 1991 had maturities of less than one year.
But there are some bright spots in the economy. Hungarian companies, most notably private-sector firms, have shown great adaptability, and last year, Hungary registered a surplus in its balance of trade.
And the banking business is still profitable enough to attract the interest of outside investors - 21 foreign banks have Hungarian operations.
"In Hungary, you have margin ad profitability figures that are impossible to match in the West," said Mr. Czepliewicz.
Observers like Mr. Czepliewicz have enough confidence in the Hungarian government's economy policy and in the industry to believe that privatization will take place, perhaps by next year.
"They are making real progress - the Hungarian banks are attractive business partners over the long term," said Ramin Habibi, of BREE Consulting, a Cyprus-based rating firm.Hungary'sTop ThreeRanked by assets;dollars in millions Year ending Percent World 12/31/91 12/31/90 change rankHungarian Credit Bank $4,130 $4,170 -1.0% 734Commercial and 2,830 3,110 -9.0 918Credit BankBudapest Bank 1,790 1,680 6.5 1,017Source: American Banker