CEO of K&H Bank: the second wave of the coronavirus could trigger liquidity crises

English2020. júl 9.Harsányi Péter

Our smaller corporate clients used a large portion of their liquidity but they could cope with the challenges - explained David Moucheron in an interview with novekedes.hu. According to the CEO of the K&H Bank Group they definitely want to protect two areas. Namely their employees and their ability to innovate. As he said, during these hard times, clients markedly changed their behavior. Customers who have not used digital services and preferred cash have largely moved towards digital solutions and they used a higher proportion of bank account money.

In your view, how fast can economic recovery be possible in Hungary in the Central and Eastern European region? How can Hungarian GDP growth develop this year and next?

Today there is a lot of uncertainty. We see almost every day new projections from banks or other international institutions. KBC Group expects a strong recovery next year, when growth could reach 5 percent in Hungary. However, we see a significant contraction this year, which may reach 9 percent.

The extent of the decline will largely depend on whether there will be a second wave of the epidemic and how effectively fiscal and central bank support measures can be implemented.

We have broadly similar growth expectations for the Czech Republic or for the CEE region. Coronavirus definitely causes a big shock this year.

How is K&H Bank preparing for the next difficult period? What levels can provisioning and profitability develop for K&H? Can redundancies be expected within the bank?

The epidemic had a negative impact on our numbers already in the first quarter. The damage can be estimated at 8 billion forints for K&H Bank so far, but this is only the beginning. Significant losses may arise in the next quarter due to an increase in non-performing loans and risk costs. The entire KBC Group expects a credit loss of around 1.1 billion euros.

However, in Hungary, the real realization of losses will be visible only in 2021 when the moratorium stops. Until then, we only have estimates. As a result, provisioning will increase in the second quarter, but profit figures are still difficult to project.

Although Covid-19 has a huge impact on the economy, the Hungarian banking system is solid and resilient.

We see decreasing revenues and higher credit losses, therefore cost management becomes more important. Nevertheless, we definitely want to protect two areas. Namely our employees and our ability to innovate.

How did K&H Bank survive the quarantine? Will home office remain in the bank?

The transition went smoothly. In the last few years, we have already taken several steps toward digitalization and remote working. As consequence, we could cope with the situation, home working and digital transition functioned very well.

But we also need to stress the importance of our colleagues in branches, who remained at their desk during the entire period to keep serving our customers. 

During these hard times, clients markedly changed their behavior. Customers who have not used digital services and preferred cash have largely moved towards digital solutions and they used a higher proportion of bank account money.

What do you think of the possible merger of Takarékbank, MKB Bank and Budapest Bank? To what extent would such a merger rearrange the balance of power on the domestic market?

It would certainly have an impact on the domestic market. If the merger takes place it would create a large new banking institution. That would undoubtedly change the structure of the market.

The KBC Group and K&H Group have expressed their interest in Budapest Bank should it become available, several times, also formally to the government, believing that we would be able to make a competitive offer.

But of course, this will not distract us from our core business: In the future we will continue to focus on servicing our clients and acquiring new ones. We will also continue to improve our services and our digital solutions. In the longer term, if this new institution comes to the market after the merger, I am also convinced that it would strengthen the position of K&H Bank as an alternative. K&H is an independent Hungarian bank, part of a large international banking group.

In recent times, the disbursement of consumer loans and personal loans in the sectors most affected by the epidemic has fallen sharply. For many customer risk profiles, the introduced maximum interest rate of 5.75 percent does not cover bank costs. Do you think it is necessary to raise the interest rate ceiling or to introduce a progressive system depending on volume?

You have summarized well the current situation. I believe it was not the government’s original intention to reduce the credit availability for households.

I also agree that it is important for loans to be cheap and widely available. However, if the credit risks incurred are not covered by interest income because of the introduced interest rate ceiling, banks do not lend to avoid losses. I hope we will see a revision of that measure before the  end of the year.  

What can corporate and retail lending dynamics be in 2020 and 2021 in Hungary and the region? What areas does K&H Bank focus on?

We have seen a surprisingly strong credit demand through the crisis. There is a slowdown, but much less what we have originally anticipated. The demand of our clients is specifically strong for mortgage loans and Babaváró loans.

Also, on the corporate side there is a sustained demand for loans, in particular for working capital solutions. Investment loan demand for project financing is also at healthy levels. Thus, I am confident that 2020 and 2021 will not be a very bad period for the evolution of credit activity.

We see slowdown in some areas. For example, we are seeing a slowdown in lending regarding commercial real estates due to the long-term effects of coronavirus for offices and retail stores. But in general, we have found a surprisingly strong credit demand in the market.

What percentage of customers at K&H Bank have used the credit moratorium so far?

We are tracking the numbers on a daily basis. Overall, less than 50 percent of our retail customers have chosen the moratorium so far. Of course there are differences. The use of moratorium is higher for cash loans and Babaváró loans.

On the corporate side, less than 40 percent of our partners used the moratorium, which is an indication of a very strong credit portfolio.

In addition, we found that smaller firms preferred to use the moratorium to a greater extent in order to stabilize their liquidity position. Larger companies are relatively easier to get through this period without outside help.

How many months can K&H Bank's corporate customers get through if the epidemic drags on?

It depends on the course of the crisis. The vulnerability of corporate clients is influenced by two main factors. On one hand, sectors that are hit hard by the epidemic are more vulnerable. Hotels, restaurants and manufacturing sectors are most affected. On the other hand, the size of the company is also very important. Smaller companies have usually more difficulties, as they have much less cash reserves on average compared to bigger ones.

Despite the epidemic the corporations are resilient in general. Although our smaller corporate clients used a large portion of their liquidity but they could cope with the challenges. We do not see anything unusual in terms of their additional liquidity needs.

All in all, the business sector in Hungary has been quite resilient and companies will be able survive the epidemic. Currently, the biggest risk is the emergence of a second wave of the coronavirus, which could cause a huge economic damage and could trigger liquidity crises.

What do you think of the new bank tax?

Hungary is the leader among the countries paying bank taxes. Banks have already contributed to the burdens with the moratorium on loan repayments. The moratorium costs the banking sector around 55 billion forints.

The new bank tax is an additional burden. The current crisis is not caused by the banking sector, banks are also victims as other economic entities. Banks are trying to provide cheap credit, which is extremely important to support growth.

The bank tax  worsens the profitability of banks, leading to cost control and more cautious lending. Anyway, we will comply and pay.

What initial experience do you have with MNB's NHP Hajrá?

We were among one of the first banks in the market who implemented NHP Hajrá. I believe it is a very good program. We discussed the details with our clients and helped them to benefit from NHP Hajrá.

One very important feature of the new program is that working capital solutions are also available. At this stage it is a huge help for small and medium-sized enterprises to improve and consolidate their liquidity position.

With the taking of longer-term investment loans, some clients are still waiting. Uncertainty is still too high right now, but in the medium-term investment loans of NHP Hajrá will provide significant help for growth.

There is no typical distribution of the types of companies that use NHP Hajrá. Agriculture and the food industry may be a little bit above, but they're not significant. So far, we have contracted nearly 10 billion forints under the program.

Is there any element of the economic protection measures put in place by the Belgian Government that could be successfully applied in Hungary?

I think the key crisis management measures are similar in both countries. There were only slight differences in the implementation of the measures.

What Belgium benefits today is the solid economic shock absorbers that have been built over the past many years. The safety net is also very strong in Belgium. Although it is very costly, but in situations like this it helps absorbing the shock.

I would like to mention the very good Belgian health care system, as well. Thanks to the strong starting position it was easier for the Belgian government to deal with the epidemic.

The Hungarian government decided also to boost investment in the health care sector in the upcoming period and in my opinion it is the right direction for the country.