BUDAPEST: Profits at Central European banks are set to rise faster than at Western rivals over the next two years thanks to improving loan portfolios, rising interest rates and stronger economic growth, analysts said.

While margins at most banks in Western Europe are coming under pressure, their rivals to the east are seeing profits pick up as political pressures on the sector abate following a series of tax increases.

Central Europe’s largest independent lender, Hungary’s OTP Bank, as well as Poland’s PKO and Romania’s Banca Transilvania have outperformed the STOXX Europe 600 banks index.

Analysts say there is room for further outperformance in the coming years given the relatively benign backdrop.

“Compared to the Western-EU peers ... CEE banks offer good quality for the long term,” said Norbert Harcsa, an equity analyst at Ipopema Securities.

Banks in Hungary have recorded the biggest turnaround. In 2016, the sector reported pre-tax profits of half a trillion forints ($1.7 billion), nearly 10 times the level in 2010, when Prime Minister Viktor Orban imposed a huge windfall tax.

The government started cutting bank taxes in January 2016, the economy is set to expand by 3-4 percent over the next two years and non-performing loans have fallen to 13-15 percent of overall lending. The upswing in the economy has also enabled banks in Hungary to sell distressed mortgages and project loans to private investors seeking higher returns. That could further reduce the overall rate of bad loans this year.

OTP’s profits more than doubled in 2016 from a year earlier and its chief executive flagged in an interview this month that it was looking for acquisitions in the region.

In Poland, bank profits are also improving as economic growth accelerates, allowing lenders to find ways to shift some of the costs of a new annual bank tax worth 0.44 percent of assets to clients by raising fees.

In Romania, the banking system got a boost from a court ruling rejecting a potentially costly conversion of Swiss franc loans into the local currency at historical rates.—Reuters