The four large banks have a mucn higher leverage under IAS data, mainly because of the negative impact of loan provisioning and write-offs on their equity capital. With a leverage of 21, their nominal ROE was as high as 66% and their real ROE no less than 2)% (Figure 5).

The two small and medium-size banks (both joint venture banks), for which IAS data are available, show a nominal ROA of 6. 1 _%._ This is only 30 basis points lower than that obtained from NBH data for all small and medium-size banks. With a leverage of 6, the nominal ROE was 34% and the real ROE 4%, again very close to the NBH data.

The IAS data for the NSB show big differences from the NBH data on savings banks, especially regarding the degree of leverage and the nominal ROE. Thus, the leverage cf the NSB was only 26 under IAS data against 37 (for the two savings banks) under NBH data. The ROA was slightly lower at 3.2% compared to 3.6% but the pre-tax ROE for the NSB under IAS definitions was 82.6% against 134% for the savings banks under the NBH definitions.

The IAS data include both pre and post tax figures. The two small and medium-size banks covered by the data had a relatively light tax burden that amounted to less than 9% of their pre-tax profits. This is explained by the special tax holidays granted to banks with foreign participation. In contrast, the large Hungarian banks and the NSB are heavily taxed. Their tax burden equaled 43% and 53% respectively of their reported pre-tax net income.

IAS data confirm the impression of high nominal spreads and ROAs for all groups of banks and high real ROEs for all the banks, except the small and medium size banks that operate with unusually low leverage. However, these data are also subject to the large uncertainty regarding the true level of nonperforming loans. The operating ratios of Hungarian banks will be much worse if nonperforming loans turn out to be larger than provided for. The likelihood that this may be the case has increased substantially as a result of the collapse of trade with the old Soviet block.

Assessing the impact of a bigger volume of nonperforming loans, and therefore of the adequacy of spreads and profit levels, is difficult without detailed information about provisioning policies. However, assuming that the 39 billion HUF of total provisions shown in the 1990 IAS accounts were obtained by applying a 60% average level of provisioning would imply a recognized volume of nonperforming loans of 65 billion HUF or about 12.5% of the total loans of 515 billion HUF of the four large banks. If the true level of nonperforming loans was substantially higher than this, both reported profits would be reduced by the suspension of interest accrual on the additional nonperforming loans and the banks' capital would be eroded by the need to make large additional provisions.

According to LAS data, the four large banks earned total profits, before provisions for loan losses, taxes and dividends, of just over 28 billion HUF in 1990. They used 6 billion for new provisions, were taxed to the tune of 9 billion HUF and paid dividends of 6 billion HUF. Their retained earnings amounted to nearly 7 billion HUF.

But, with inflation running at nearly 30%, their retained earnings would need to be about 10 billion HUF to maintain the real value of equity. This would leave 12 billion HUF for additional provisions and suspension of interest accrual. With an average lending rate of 28.6% for 1990 and an assumed average level of provisioning of 60%, the available funds would cover an increase in 11