28 August 2023

The MNB conducted its Bank Sentiment Survey in July 2023. The responses suggest that the banking system experienced a deterioration in economic sentiment also in 2023 H1. Banks perceived the decline in demand for loans compared to 2022 H2 to be the largest contributing factor to this. In addition, the uncertain macroeconomic environment, as well as the negative changes in customer risks, profitability and the availability of funds also had an adverse effect on the banks’ assessment of the situation. The increase in market competition remains the only factor having a positive effect on economic sentiment. In addition to market competition, the banks expect an improvement in the macroeconomic environment as well in 2023 H2.

In July 2023, based on the Bank Sentiment Index[1] calculated from the difference between the banks experiencing an improvement and a deterioration in the economic sentiment, a net one-third of the respondents indicated that they perceived a worsening in the economic situation in 2023 H1 compared to 2022 H2. Looking ahead, a growing number of banks expect a positive shift in the economy in the second half of the year. However, overall there is still a narrow majority of those who predicted an unfavourable economic environment, indicating only a slow improvement in the trends.

Several reasons can be identified behind the recent worsening in economic sentiment:

  • Although the perception of the macroeconomic environment has improved both in the domestic and the international scene, it continues to make a negative contribution to banks’ economic sentiment. While nearly all institutions had a negative assessment of the impact of the macroeconomic environment in 2022 H2, only a net 40 per cent of the banks (i.e. the ratio of the difference between the banks detecting an improvement and a deterioration compared to the total number of banks) indicated the same for 2023 H1, while a growing proportion of responding institutions assessed this component neutrally or even positively. In the next six months, this factor may become positive in terms of economic sentiment, which has not been seen in the last two years.
  • Perceptions of access to both short and long-term funds have deteriorated. Partly as a result of rising funding costs and also due to the reallocation of deposits, 30 per cent of the banks reported a deterioration in access to long-term funds, with 14 per cent indicating the same for short-term funds. Over the next six months, 16 per cent and 22 per cent of the banks, respectively, expect a deterioration in the availability of long and short-term funds.
  • The responses indicate that customer risks increased in 2023 H1. 59 per cent of the banks perceived a deterioration in creditworthiness in the household sector due to falling real wages and the increased costs of living, and 43 per cent experienced a deterioration in creditworthiness for corporate customers, which was attributable to the uncertain economic outlook and industry-specific risks. A third of the responding institutions reported a decline in portfolio quality and a fall in risk appetite. Looking ahead, a similar proportion, 51 per cent of the banks expect a decrease in retail and 41 per cent in corporate creditworthiness.
  • Banks perceived a further decrease in credit demand in 2023 H1 relative to 2022 H2. At 59 per cent, a slightly higher proportion of banks reported a decline in household demand for credit compared to the previous survey, and 49 per cent indicated a fall in demand for corporate credit products. Looking ahead, household credit demand is not expected to fall further in the second half of the year.
  • A tightening of the regulatory environment was indicated by nearly half of the banks in relation to the past half year and by 24 per cent for the next half year as well.
  • A deterioration in profitability before impairment was reported by 22 per cent of the banks, and 68 per cent indicated an increase in operating costs. Some banks’ profitability may have been negatively affected by the modified extra profit tax and rising funding costs, which was partly offset by a wide deposit interest margin. In the next six months, two-thirds of the banks expect an increase in operating costs.

 

Based on the banks’ responses, the increase in market competition remains the only factor having a positive effect on economic sentiment. According to the responding banks, competition has intensified in the retail and corporate credit markets, as well as in payment services and with non-bank market participants, and looking ahead, they expect competition to increase further.

Changes in the Bank Sentiment Index by bank size

Changes in the Bank Sentiment Index by bank size.png

Note: The Bank Sentiment Index is the arithmetic average of seven components (economic environment, market competition, availability of funds, customer risk, demand, regulation, profitability). The last data point is an estimation. Source: MNB Bank Sentiment Survey.

During the Banking Business Survey, the net ratio is obtained by dividing the difference between the number of banks reporting an improvement and banks reporting a deterioration in response to the given question by the number of responding institutions. The answers are not weighted by the market share of individual institutions.

Detailed results and the figures of the Bank Sentiment Survey are available on the MNB’s website at the following link:

https://www.mnb.hu/en/financial-stability/publications/bank-sentiment-survey

[1] The Bank Sentiment Index is made up of seven components: economic environment, market competition, availability of funds, customer risk, demand, regulation, profitability. The Bank Sentiment Index is given as the arithmetic mean of the ratio of the difference in responses to each component (improvement and deterioration) in relation to the entire scope of observation.