Report on Financial Stability
November 2013
Financial stability heat map
May 2013
November 2013
November 2013
Prociklikusság
Procyclicality
May 2013
Sokkellenálló-képesség
Shock-absorbing
capacity
2
Key messages of the Report on Financial Stability
1.
The contraction in corporate lending is expected to halt in the coming years, in which the
Funding for Growth Scheme play a dominant role.
•
Sustained recovery in lending will require further easing of credit conditions on the supply side.
•
Some of the activities of deleveraging large banks may be taken over by smaller banking market
participants. This, however, will require improving the capital position and funding capacity of
those institutions
2.
The indebtedness of households in foreign currency poses significant financial stability
risks, thus its management is in the interests of all parties.
•
The most important duty is the elimination of exchange rate risk.
•
The rules of transparent pricing should be mandatory in the case of outstanding mortgage loans.
•
It should be considered to cap the interest margin above the benchmark rate on mortgage loans in
order to limit the interest risk of households.
3.
The domestic banking sector is marked by persistently weak profitability outlook, which
may prompt some banks to revise their market strategies.
•
This may lead to the consolidation of the market, whereby smaller banks and cooperative credit
institutions may boost significantly their market share; while the entry of new participants cannot
be ruled out either.
3
Key risk and their mitigation measures I.
Key risk:
Risk mitigation measures:
1. Deteriorating
investor
sentiment
undermines the growth outlook
1.
Maintaining prudent domestic fiscal policy and
supporting sustainable economic growth in Hungary
remain a priority in order to mitigate the impact of
potential adverse shocks from the external environment.
2. Domestic banking sector does not
support economic growth through
lending
2.1. Credit market problems in lending
to the corporate sector,
particularly in SME lending
2.1. The second phase of the Funding for Growth Scheme is
expected to lead to a further improvement in SMEs’
access to credit at favourable interest conditions.
2.2. High interest margins on loans to
households
2.2.1. The rules of transparent pricing should be extended
bindingly to cover outstanding mortgage loans.
2.2.2. Maximising the interest margin on mortgage loans,
even on outstanding ones.
4
Key risk and their mitigation measures II.
Key risk:
Risk mitigation measures:
3. Households’ unhedged foreign currency
exposure
may
speed
up
the
deterioration in portfolio quality
3. Adjusting the exchange rate cap scheme so that the
exchange rate risk is mitigated more than previously or
completely for households without a natural hedge.
4. The high share of non-performing loans
is leading to profitability problems and
impedes bank lending
4.1. Ratio of non-performing corporate
loans continues to rise
4.1. Speeding up the process of portfolio cleaning, which
could be facilitated by regulatory measures and/or
incentives as well.
4.2. In the household sector, the high
share of non-performing household
mortgage loans poses a risk
4.2. Introducing the institution of family bankruptcy as soon
as possible would help manage non-performing
portfolios,, while ensuring a ‘clean-sheet’ for
overindebted customers.
5
Key risk and their mitigation measures III.
Key risk:
Risk mitigation measures:
5. Banks’ profitability remains persistently
low
5.1. Competitive disadvantage in access
to external funding
5.1.1. The FGS has helped ease financing constraints by
providing access to cheap central bank funding.
5.1.2. Foreign currency funding is ensured in large part
under Pillar 3 of the FGS without an increase in swap
market exposure.
5.2. Market consolidation accompanied
by stronger deleveraging
5.2.1. Paying increased attention to banks’ resilience in
issues affecting the banking sector.
5.2.2. Strengthening participants (smaller-sized banks,
cooperative credit institutions) which could partially
replace larger-sized credit institutions even over short
run.
6
Lending developments
The drop in corporate lending occured at large banks, while their
role in new lending remains dominant
Annual growth rate of and cumulative
changes in corporate loans by types of
institutions
Large banks
Foreign branches
Financial enterprises
Source: MNB.
1,100
4 1,000
2
900
800
0
700
-2
600
-4
500
-6
400
300
-8
-10 200
100
-12
0
Other domestic banks
Cooperative credit institutions
Growth rate, YoY (right-hand scale)
HUF Bn
HUF Bn
*
2008 Q1
Q2
Q3
Q4
2009 Q1
Q2
Q3
Q4
2010 Q1
Q2
Q3
Q4
2011 Q1
Q2
Q3
Q4
2012 Q1
Q2
Q3
Q4
2013 Q1
Q2
Q2
2013 Q1
Q4
Q3
Q2
2012 Q1
Q4
Q3
Q2
Q4
2011 Q1
Q3
Q2
2010 Q1
Q4
per cent 6
Q3
Q2
HUF Bn
2009 Q1
500
250
0
-250
-500
-750
-1,000
-1,250
-1,500
-1,750
-2,000
-2,250
-2,500
-2,750
-3,000
Quarterly volumes and annual average of
loans granted to corporations broken
down by lenders
Large banks
Foreign branches
Annual average
Other domestic banks
Cooperative credit institutions
Note: (*) annualised average.
Source: MNB.
8
1,100
1,000
900
800
700
600
500
400
300
200
100
0
Policy rate cuts translate into more favourable SME lending rate,
but only for a narrow range of companies
Pricing of new corporate HUF loans in Hungary and the MNB’s policy interest rate
16
per cent
per cent
16
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
Jan 2005
May
Sep
Jan 2006
May
Sep
Jan 2007
May
Sep
Jan 2008
May
Sep
Jan 2009
May
Sep
Jan 2010
May
Sep
Jan 2011
May
Sep
Jan 2012
May
Sep
Jan 2013
May
14
Margin on policy interest rate
Interest rate on new corporate loans up to 1 million EUR
Policy interest rate of MNB
Source: MNB.
9
Owing to the FGS the interest burden of SME-s has eased
significantly both for new and refinanced loans
Fall in interest rate on loans refinanced in Pillars I and II
3.5
3.0
percentage
point
percentage
point
3.4
3.5
3.0
3.3
2.5
2.5
2.0
2.0
1.5
1.5
1.5
1.0
1.2
1.0
0.5
0.5
0.0
0.0
Investment loans
Working capital loans
Pillar I
Pillar II
Source: MNB.
10
The FGS has significantly improved the credit availability of the
SME segment
Loans disbursed under the FGS by size of business
Micro enterprises
Contracts
Small enterprises
HUF Bn
Contracts
HUF Bn
Medium
enterprises
Total sum
Contracts HUF Bn Contracts
HUF Bn
Sum
4,554
214
3,596
226
1,694
261
9,844
701
New loans
3,159
84
2,053
99
752
107
5,964
290
Investment*
2,145
66
1,133
54
401
56
3,679
176
Working capital
1,014
18
920
45
351
51
2,285
114
1,395
130
1,543
127
942
154
3,880
411
Pillar I
536
26
976
66
655
90
2,167
182
Pillar II
859
104
567
61
287
64
1,713
229
Redemption
(*): Including loans granted to pre-finance EU financial support.
Source: MNB.
11
Due to the FGS, corporate loans outstanding have increased
substantially for the first time since the onset of the financial crisis
Quarterly net changes of loans outstanding and annual growth rate
500
HUF Bn
per cent
25
400
20
300
15
200
10
100
5
0
0
-5
-200
-10
-300
-15
-400
-20
-500
-25
2008 Q1
Q2
Q3
Q4
2009 Q1
Q2
Q3
Q4
2010 Q1
Q2
Q3
Q4
2011 Q1
Q2
Q3
Q4
2012 Q1
Q2
Q3
Q4
2013 Q1
Q2
Q3
-100
Corporates - net flow
SME - net flow
Corporates - annual growth rate (right-hand scale)
SME - growth rate (right-hand scale)
Source: MNB.
12
Given the success of the FGS, the Monetary Council decided to
continue the programme
Comparison of the first and second phases of the Funding for Growth Scheme
Refinancing interest rate
Maximum spread
Time window
Allocated sum
Form of allocation
Estimated effect on GDP
FGS - first phase
FGS - second phase
0 percent
0 per cent
2.5 percentage point
2.5 percentage point
4 months
15 months
June 2013 - September
October 2013 - December
2013
2014
425 billions (I. pillar)
325 billions (II. pillar)
"in accordance with rules
of card dealing"
0.2-0.5 per cent
Initially 500 billions, can be
extended to the maximum
of 2,000 billions HUF
"first come first serve"
In the first period: 0.2-0.4
per cent
Source: MNB.
13
The contraction in corporate lending will stop, while rebound is
already expected in SME lending this year
Forecast for lending to non-financial
corporate segment
2
Forecast for lending to SMEs
per cent
per cent
2
10
per cent
per cent
10
Actual
Source: MNB.
Forecast - June
Forecast - Sept
Actual
Forecast - June
Forecast - Sept
Source: MNB.
14
Q4
Q3
Q2
2015 Q1
Q4
Q3
Q2
-8
2014 Q1
-8
Q4
-8
Q3
-8
Q2
-6
2013 Q1
-6
Q4
-7
Q3
-7
Q2
-4
2012 Q1
-4
Q4
-6
Q3
-6
Q2
-2
-5
2011 Q1
-2
-5
Q4
0
-4
Q3
0
-4
Q2
-3
2015 Q1
-3
Q4
2
Q3
2
Q2
-2
2014 Q1
-2
Q4
4
Q3
4
Q2
-1
2013 Q1
-1
Q4
6
Q3
6
Q2
0
2012 Q1
0
Q4
8
Q3
8
Q2
1
2011 Q1
1
Sustained recovery in lending requires further easing of large banks’
credit conditions, however part of the market may be taken over by
small- and medium size banks and credit cooperatives
• The lending capacity of the small- and medium size banks amounts to
HUF 450 bn, which is 7 and 12 per cent of total corporate loans and SME
loans outstanding, respectively.
• Given that liquidity constraints are binding here, the FGS means additional
buffer.
• The lending capacity of credit cooperatives amounts to HUF 450 bn,
which is 6 and 10 per cent of total corporate loans and SME loans
outstanding, respectively.
• Given that capital constraints are binding here, the planned capital injection may
improve markedly the lending capacity.
15
Portfolio quality
The corporate NPL-ratio of the banking sector is expected to peak
Ratio of non-performing loans and cost of provisioning in the corporate segment
5
per cent
per cent
25
0
2015 Q2
0
2014 Q2
5
2013 Q2
1
2012 Q2
10
2011 Q2
2
2010 Q2
15
2009 Q2
3
2008 Q2
20
2007 Q2
4
Loan loss provisioning
Loan loss provisioning - forecast
Non-performing loan ratio (right-hand scale)
Source: MNB.
17
Due to one off effects the household NPL-ratio of the banking
sector has risen substantially
Share of non-performing household loans of the banking sector by contracts
20
per cent
per cent
20
4
4
2
2
0
0
30-90 days delinquency
Q2
6
2013 Q1
6
Q4
8
Q3
8
Q2
10
2012 Q1
10
Q4
12
Q3
12
Q2
14
2011 Q1
14
Q4
16
Q3
16
Q2
18
2010 Q1
18
90+ days delinquency ratio
Source: MNB.
18
Indebtedness in foreign currency concerns large part of
households, thus a solution is in the interests of all parties
Household loans of the banking sector and branches broken down by currencies
and products
Totat
loans
Home
Housing loans
Mortgage
equity
Total
Subsidized
Market
loans
Other
loans
Total
Amount
(HUF bn)
6,633
5,377
3,298
882
2,416
2,079
1,256
5,687
1,030
673
243
431
357
4,605
2,789
1,878
1,485
882
604
393
911
4,822
584
450
243
208
134
4,237
(HUF bn)
Contracts
3,844
3,498
1,812
0
1,812
1,686
345
(thousand)
865
446
223
0
223
222
368
Contracts
(thousand)
HUF
Amount
(HUF bn)
Contracts
(thousand)
FX
Amount
Source: MNB.
19
In the rise of debt servicing burdens, besides the appreciation of the
CHF, the increase of lending rates exceeding the rise in risk premia play a
dominant role as well
Average estimated cost of foreign funds and the
average interest margin on outstanding of Swiss
franc mortgage loans
per cent
per cent
10
9
8
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
Jan-07
Mar
May
Jul
Sep
Nov
Jan-08
Mar
May
Jul
Sep
Nov
Jan-09
Mar
May
Jul
Sep
Nov
Jan-10
Mar
May
Jul
Sep
Nov
Jan-11
Mar
May
Jul
Sep
Nov
Jan-12
Mar
May
Jul
Sep
Nov
Jan-13
Mar
May
Jul
9
Estimated cost of foreign funds
Interest margin on outstanding loans
APR of outstanding loans
Source: MNB.
260
260
240
240
220
220
200
200
180
180
160
160
140
140
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
10
HUF/CHF exchange rate
Source: MNB.
20
The debt servicing burden has reached critical levels in the case of
low income households
Debt service burden of households by
denomination in proportion of disposable
income
per cent
per cent
2003 Q1
Q3
2004 Q1
Q3
2005 Q1
Q3
2006 Q1
Q3
2007 Q1
Q3
2008 Q1
Q3
2009 Q1
Q3
2010 Q1
Q3
2011 Q1
Q3
2012 Q1
Q3
2013 Q1
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
Principal payments - FX
Principal payments - HUF
Source: MNB.
Interest payments - FX
Interest payments - HUF
Payment-to-income ratio of indebted
households by income deciles
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
45
per cent
per cent
45
40
40
35
35
30
30
25
25
20
20
15
15
10
10
5
5
0
0
1
2
3
4
5
6
Payment to income (obligation)
7
8
9
10
Mean
Payment to income (paid)
Source: GfK, MNB.
21
The participation rate in the exchange rate cap scheme is below
our expectations, thus default risk remains elevated
Utilisation of the exchange rate cap
1,400
HUF Bn
per cent
Reasons for not entering the exchange
rate cap scheme
70
1,200
60
1,000
50
800
40
600
30
400
20
200
10
Not eligible
(14 per cent)
Increase in
payment after
scheme
(30 per cent)
Waiting for a
more
favourable
programme
(25 per cent)
Stock within the exchange rate cap scheme
Jun
May
Apr
Mar
Feb
Jan-13
Dec
Nov
Oct
Sep
Aug
Jul
0
Jun-12
0
Short
remaining
maturity
(2 per cent)
Did not know
about the
scheme
(3 per cent)
Percentage of eligible loans (right-hand scale)
Source: MNB.
Low
confidence in
banks
(20 per cent)
Do not need it
(6 per cent)
Source: GfK, MNB.
22
In the case of non-performing loans, increased activity of the NET
(National Asset Management Agency) and the expeditious introduction
of the private bankruptcy may be the solutions
Non-performing household loans of the banking sector broken
down by currencies and products
FX
HUF
Total
Total
outstanding
NPL
(HUF Bn)
NPL
(Thousand
contracts)
NPL ratio
(per cent)
NPL
(HUF Bn)
NPL
(Thousand
contracts)
NPL ratio
(per cent)
NPL
(HUF Bn)
NPL
(Thousand
contracts)
NPL ratio
(per cent)
Mortgage
loans
Housing
loans
407
Home equity
loans
493
Other
loans
1,092
900
192
747
120
17.7
18.0
12.9
26.7
16.6
328
191
113
77
138
593
42
12.8
10.9
7.9
24.0
16.9
764
709
293
416
54
154
79
21.2
21.8
627
552
75
17.0
27.2
15.9
Source: MNB.
23
An improvement is expected in the household segment over the
forecast horizon
Ratio of non-performing loans and cost of provisioning in the household segment
7
per cent
per cent
21
6
18
5
15
4
12
3
9
2
6
1
3
0
0
2007
Q2
2008
Q2
2009
Q2
2010
Q2
2011
Q2
2012
Q2
2013
Q2
2014
Q2
2015
Q2
Loan loss provisioning
Loan losses related to the early repayment scheme
Loan loss provisioning - forecast
Non-performing loan ratio (right-hand scale)
Source: MNB.
24
Profitability
The profitability of the Hungarian banking sector remains severely
low in international comparison
Profit after tax ROE in international
comparison
Pre-tax profit/loss of the banking
sector and branches
350
HUF Bn
HUF Bn
350
30
per cent
per cent
30
25
25
250
250
20
20
150
150 15
15
10
10
5
5
0
0
-5
-5
50
50
-50
-50
2009
Source: MNB.
2010
2011
2012
2013
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
-250 -10
Mar
-250
Feb
-150
Jan
-150
Hungary
-10
-15
-15
2007
2008
2009
2010
2011
2012
Note: The chart depicts the 46–60, 20–80 percentile value of the
member states' banking systems together with the Hungarian
banking systems' ROE.
Source: ECB CBD.
26
The persistently subdued profitability may lead to the exit of some
major foreign-owned banks
Relationship between the invested capital of selected groups of institutions and the
present equity capital and dividends disbursed
6,000
EUR million
EUR million
6,000
4,500
4,500
3,000
3,000
1,500
1,500
0
0
-1,500
-1,500
-3,000
-3,000
-4,500
-4,500
-6,000
-6,000
Foreign owned large Small and medium
banks
sized banks
Invested capital (reverse scale)
Dividend
Cooperatives
Own capital
"Profit"
Note: between 1997 and June 2013, amounts calculated not at present value. Invested capital means the initial equity capital and
the capital increases carried out in the period under review.
Source: MNB.
27
The consolidation may be slowed down by the high ratio of parent
bank funding
Role of foreign and parent funding in the banking sector
45
EUR Bn
per cent
90
80
35
70
30
60
25
50
20
40
15
30
10
20
5
10
0
0
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Mar-08
Jun
Sep
Dec
Mar-09
Jun
Sep
Dec
Mar-10
Jun
Sep
Dec
Mar-11
Jun
Sep
Dec
Mar-12
Jun
Sep
Dec
Mar-13
Jun
40
Foreign - long
Foeign - short
Parent bank funds/foreign funds - banking system (RHS)
Parent bank funds/foreign funds - banks with foreign ownership (RHS)
Source: MNB.
28
Stress test results
The liquidity stress test indicates strong resilience, but only in HUF
Liquidity Stress Index and banks’ liquidity surplus or deficit relative to the
regulatory level in the stress scenario
2,000
HUF Bn
per cent
75
1,600
60
1,200
45
800
30
400
15
0
0
-15
-800
-30
-1,200
-45
-1,600
-60
-2,000
-75
-2,400
-90
Jan-09
Mar
May
Jul
Sep
Nov
Jan-10
Mar
May
Jul
Sep
Nov
Jan-11
Mar
May
Jul
Sep
Nov
Jan-12
Mar
May
Jul
Sep
Nov
Jan-13
Mar
May
-400
Liquidity need to meet the regulatory requirement
Liquidity buffer above the regulatory requirement
Liquidity Stress Index (right-hand scale)
Note: The LSI is the sum of normalised liquidity deficits relative to the 10 per cent regulatory limit, weighted by the balance sheet
total. The higher the value of the index, the higher the liquidity risk in the stress scenario.
Source: MNB.
30
Increasing, but still manageable capital need in the stress scenario
Stress test result with the 8 per cent regulatory capital adequacy ratio
Baseline scenario
Stress scenario
End of
End of
End of
End of
first year second year first year second year
Capital need of banks (HUF Bn)
0
1
33
116
Capital buffer of banks above
8 percent CAR (HUF Bn)
1,386
1,594
1,104
1,108
Total capital buffer (HUF Bn)
1,386
1,593
1,071
992
Source: MNB.
31
There has been only a slight change in the Solvency Stress Index
since our last Report
Solvency Stress Index, capital buffer and need along the stress scenario
1,200
per cent
HUF Bn
40
900
30
600
20
300
10
0
0
-10
2005 Q1
Q2
Q3
Q4
2006 Q1
Q2
Q3
Q4
2007 Q1
Q2
Q3
Q4
2008 Q1
Q2
Q3
Q4
2009 Q1
Q2
Q3
Q4
2010 Q1
Q2
Q3
Q4
2011 Q1
Q2
Q3
Q4
2012 Q1
Q2
Q3
Q4
2013 Q1
Q2
-300
Capital buffer above the regulatory requirement
Capital need to meet regulatory requirement
Solvency Stress Index (right-hand scale)
Source: MNB.
32
Thank you for your attention!