* Current high profitability seen unsustainable
* Banks can endure adverse economic scenario -survey
* Impact of rate shock on bank system “considerable”
BUDAPEST, Nov 29 (Reuters) - Most banks in Hungary would remain profitable in the next two years even under an economic stress scenario, the National Bank of Hungary (NBH) said on Wednesday, adding however that current high profit rates were unsustainable.
On Tuesday, the NBH said the Hungarian bank sector posted a net profit of 495.8 billion forints ($1.89 billion) in the January-September period, the highest since the 2009 financial crisis and exceeding 2016’s level.
But in its biannual report on financial stability, the NBH warned that kind of profitability was not sustainable as it was largely bolstered by a reversal of loan-loss provisions as banking portfolios improved due to strong economic growth.
“As reversals of provisions have an impact on credit institutions’ profits to an unsustainable degree over the long-term, the currently observed profitability indicators may present a distorted picture of the sector’s profit originating from its primary activity,” the central bank said.
Compared with a 16.3 percent pre-tax return on equity (ROE) in the third quarter, adjusting for average levels of loan loss provisioning, the underlying ROE of the banking sector was about 5 to 7 percent, the central bank said.
The NBH, led by Governor Gyorgy Matolcsy, a close ally of Prime Minister Viktor Orban, has slashed interest rates to record lows and flagged additional easing for the 2018 election year to curb borrowing costs for households.
Those measures could squeeze banking profits further and force strategic adjustments, the head of the Hungarian Banking Association told Reuters, adding however, that banks would still benefit from higher lending and economic growth.
“In real terms and compared to the interbank rate, the banking sector’s sustainable income is similar to the values observed immediately prior to the outbreak of the crisis; therefore, the current profit level cannot be considered very low by historical standards,” the central bank said.
It said even under a stress scenario, which projects economic growth almost 4 percentage points lower and interest rates more than 200 basis points higher than in the baseline scenario, most banks in Hungary would remain profitable.
However, it said the impact of a possible interest rate shock on the banking system was “considerable”.
“The earlier relatively balanced impact at the systemic level has been replaced by a substantial net loss based on the current (interest rate) positions,” the central bank said.
About half of Hungary’s banks are foreign-owned, with major lenders including Belgian KBC, Austrian Erste Group Bank and Italian UniCredit. ($1 = 262.06 forints) (Reporting by Gergely Szakacs; Editing by Alison Williams)