The profitability of large banks in the Czech Republic, Poland and Hungary is set to fall over the next two years as changes to central bank policies, growing costs and political risks weigh on lenders.

Most listed Czech, Hungarian and Polish banks are forecast to report lower return on equity (ROE) in both 2024 and 2025, S&P Capital IQ consensus estimates show, though the results will largely remain above 2022 levels. Poland's Alior Bank SA is expected to report a 35.3% drop in ROE for 2024, the largest decline in the sample, while Hungary-based OTP Bank Nyrt.'s ROE could decline 32%.

"The three markets in question will see their profitability moderating in 2024," Gunter Deuber, managing director, chief economist and head of Raiffeisen Research, told S&P Global Market Intelligence.

The dip comes after an exceptionally strong year for the region's banks, which could generate an ROE of at least 15% or 20% for 2023, Deuber said. "Overall we expect the highest banking sector profitability seen in recent years, coming close to the boom times in [central and Eastern European] banking prior to the global financial crisis."

ING Bank Slaski SA, the Polish unit of Netherlands-based ING Groep NV, and OTP Bank will report the highest ROE in 2023 among large publicly listed banks from the three countries, Market Intelligence data shows.

Margin pressure

High net interest margins (NIM) and net interest income (NII) could gradually decline this year amid a monetary policy easing cycle that is well underway in Poland and Hungary, Deuber said. The Czech central bank also began cutting rates in December 2023, from 7% to 6.75%.

In the Czech Republic, whose banking sector is dominated by the local units of Raiffeisen Bank International AG, Société Générale SA, Erste Group Bank AG, KBC Group NV and UniCredit SpA, NIM and NII will also be affected by the central bank's 2023 cancellation of interest payments on mandatory reserves. Société Générale unit Komercní banka a.s. estimates the hit to 2024 NII at 1.2 billion koruny, while Moneta Money Bank a.s. sees the impact at roughly 500 million koruny.

NII at Czech banks will stagnate in 2024, after which it could start growing slowly, said Milan Lávička, analyst at J&T Banka. While the drop will not be "dramatic," profitability in the sector will decline due to inflation-related increases in operating costs and the costs of risk normalizing from the record-low levels in recent years, Lávička said.

While ROE and NIM are forecast to drop across the sample of banks in the coming years, Commerzbank AG unit mBank SA and Banco Comercial Português SA unit Bank Millennium SA could improve ROE as pressure from forming legal provisions on their Swiss franc mortgage portfolios decreases.

Overall, Banks in Poland could report lower net interest income in 2024 due to the expected extension of credit holidays, but the sector's profitability will continue to be strong, Mikołaj Lemańczyk and Michał Konarski, analysts at mBank's brokerage unit, told Market Intelligence.

Net interest margins in the three markets could also come under pressure from potential increases in funding costs amid households' shifts to higher-yielding term deposits, competition from non-deposit investment products as well as from the rollover of funding to cover the minimum requirements for own funds and eligible liabilities (MRELs), Deuber said.

Sluggish lending growth

Lending growth in the three countries will be held back by tight financial conditions and borrowers' expectations of further rate cuts, according to Pedram Moezzi, economist, banking risk at S&P Global Market Intelligence, who forecasts an average nominal lending growth rate of about 4% in 2024. While loan demand will remain contained, a boost could be visible in some lending subsegments, Moezzi said.

The last few months of 2023 brought a slight revival of mortgage lending in the Czech market, and this trend will likely continue in 2024 although a significant bounce-back is not expected, despite the recently relaxed mortgage lending requirements for borrowers, said Michal Křikava, analyst at Patria Finance.

Demand for retail mortgages also recently improved in Poland due to a support scheme introduced by the previous government, but consumer lending growth will be limited to single digits in 2024, according to Lemańczyk and Konarski. The corporate segment could demonstrate stronger lending volumes, which could become a longer-term trend supported by the release of EU funds under Poland's new government, the analysts said.

Lending dynamics in Hungary could bottom out in 2023 and grow from 2024, although loan portfolio expansion is projected to remain low, ING Senior Economist Peter Virovacz told Market Intelligence.

Political risks

Banks operating in Poland continue to be exposed to legal risk related to their Swiss franc mortgage holdings. They also face an extension of the existing credit holiday scheme into 2024.

"There is no doubt that those in power will have to face a high budget deficit and expensive election promises to fulfill. This is where we see the risk for the sector," Lemańczyk and Konarski said.

As for the Hungarian market, which is also home to subsidiaries of RBI, UniCredit and Erste, analysts are divided on the possible introduction of additional bank-targeting measures by the country's government. Virovacz believes that they cannot be ruled out amid the government's efforts to reduce the budget deficit to 2.9% in 2024.

Similar to Hungary, Czech banks are also subject to a windfall tax, although budgetary proceeds from the levy this year will be significantly below the 33 billion koruny anticipated by the government. "Despite the fact that the debate on the introduction of some form of a bank tax is ongoing across the Central European region, I do not consider the risk of a permanent bank tax for Czech banks to be realistic," Křikava said.

However, from 2024 companies operating in the Czech Republic will face a higher corporate income tax of 21% instead of the current 19%, as well as taxation of employee benefits.

Overall, the structurally much higher earnings in central and Eastern European markets — with ROE about 6–7 percentage points above eurozone levels — compensate for a certain dose of political and regulatory risk, Deuber said.

As of Jan. 5, US$1 was equivalent to 22.59 Czech koruny.