The IAS data show that the four large commercial banks had arn average interest margin of 4.8% in 1990. Adding net fee and other income of 2.9% raises the gross income margin to 7.7%. The large banks also had relatively large total expenses (including provisions for loai' losses) of 4.5% of average total assets, resulting in a pre-tax ROA of 3.2%. The four large banks also had a total cost/income ratio of 59%, leaving them with a high pre-tax profit ratio of 41% (Figure 6). The relatively low cost/income ratio and their high profit ratio reflect the largely wholesale nature of their business. This is further underlined by the high level of noninterest income, which contributed 38% of gross income. The four large banks earned a pre-tax ROE of 66%. Allowing for inflation, this amounted to a real pre-tax ROE of nearly 29%.

The two smaller banks covered in the sample of banks with IAS accounts reported an average interest margin of 6.5%, a gross income margin of 8.3%, a total cost to assets ratio of 2.2% and a pre-tax ROA of 6.1 %. Their total cost/income ratio was 26.4% and their pre-tax profit ratio an extremely high 73.6%. Despite these impressive operating asset and income ratios, the small banks earned rather low real ROEs. As already discussed above, this was mainly due to their high leverage in conjunction with the high rate of inflation. It is worth noting that despite their reliance on trade finance and modern financial services, their noninterest income contributed only 21 % of gross income or nearly half the level reported by the four large commercial banks.

The operating asset ratios of the NSB reflect its involvement in housing finance, although its operating costs are probably understated in the analysis undertaken in this paper. The item "other operating expenses" mostly covers expenses relating to nonbanking activities, such as the construction of flats, and for this reason two-thirds of such expenses have been netted out from noninterest income. It is not clear to what extent the one-third of other operating expenses that is treated as banking operating expenses provides an understatement or overstatement of such costs. On this basis, the NSB reported in 1990 an interest margin of 2.7% of average total assets and a gross income margin of 7.9%. Deducting total costs of 4.7%, leaves a pre-tax ROA of 3.2%. The total cost/income ratio of the NSB was only 59%, resulting in a pre-tax profit ratio of 41 %. It is interesting to note that net noninterest income amounted to 65% of gross income, which is much higher than the corresponding ratio for the four large commercial banks and is unusually high by international standards. However, the share of noninterest income, the gross income margin and the cost/income ratio are highly sensitive to the treatment of other operating expenses. On the other hand, neither the ROA nor the ROE would be affected. The pre-tax ROE of the NSB was an impressive 82.6%, corresponding to 41.6% in real terms.

The data on costs and revenues allow an analysis of the gross income of banks between the direct cost of intermediation and the cost of capital. In the case of the large Hungarian commercial banks, their gross income margin is divided between a direct cost of intermediation of 5.9% and a cost of capital of 1.8% of average total assets (Figure _??)._ The former consists of staff costs (0.6%), depreciation Qess than 0.1%), other operating expenses (3.0%), annual provisions (0.9%) and income taxes (1.3%). The latter is allocated between dividends (0.8%) and retained earnings (1.0%).

The data also allow an assessment of the impact of explicit and implicit taxes. These include taxes on bank income, dividends paid to the state, the opportunity cost of reserve and liquidity requirements and the effect on taxes on interest income earned by households'".

" The large banks held virtually no household deposits and were not affected by this tax.

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