Report on Financial Stability
May 2013
21 May 2013
Financial stability heat map
November 2012
May 2013
May 2013
November 2012
Procyclicality
Shock-absorbing capacity
Source: MNB.
2
Overall assessment I. – Banking sector remains strongly
pro-cyclical
• Credit conditions: The banking system is still barely supporting the economy.
 Owing to the low willingness to lend, the banking system is strongly pro-cyclical in
corporate lending, which impedes access to credit particularly for SMEs reliant on
bank funding.
• Resilience to shocks: The increase in capital need under stress is manageable due to
the proven commitment of parent banks.
 LIQUIDITY: Liquidity risks remain low, based on stress test results as well. At the
same time, most of the liquidity reserves denominated in HUF; therefore, in a
protracted stress situation the smooth functioning of the FX swap market is
indispensable.
 CAPITAL: Capital position has improved on aggregate level. However, given the
worse initial capital position at some banks, the solvency stress test indicates
higher capital need. Taking into account the parent bank commitment this amount
can be considered manageable.
3
Overall assessment II. – Key risk and mitigation measures
Key risks:
Risk mitigation measures:
1. Protracted euro-area sovereign debt crisis
1. Maintaining prudent fiscal policy and supporting sustainable economic growth in Hungary remain a priority
to mitigate the impact of potential adverse shocks from the euro area.
2.
3.
Vulnerabilities of the domestic economy
2.1.
Credit supply constraints
companies, particularly on SMEs
on
2.1. The first pillar of the Funding for Growth Scheme (FGS) may improve access to credit with favourable
interest conditions for SMEs.
2.2.
Exchange rate exposure
companies without natural hedging
of
2.2. The second pillar of the Funding for Growth Scheme is aimed at converting foreign currency loans of
SMEs into forint loans.
2.3.
Reliance on external funding, of
which a high share is short-term financing
2.3. The third pillar of the Funding for Growth Scheme will reduce the country’s external debt and extend its
maturity.
Deterioration in portfolio quality
3.1.
High share of non-performing
loans in the domestic banking sector
3.1. The planned introduction of the personal bankruptcy process could help the management of nonperforming loans, while at the same time allowing over-indebted customers to start with a ‘clean
sheet’.
3.2.
3.2.1. Increasing participation in the exchange rate cap scheme could slow the deterioration in household
portfolio quality.
3.2.2. The first and second pillars of the FGS may contribute to an improvement in SME loan portfolio
quality.
Risk of surge in new defaults
4. Lack of competition
mortgage lending
among
banks
in
4.1. Expedient to cut the regulatory maximum of the early repayment fee to 1–1.5 per cent in the case of
refinancing from another bank.
4.2. In agreement with the proposal of the Hungarian Competition Authority, the possibility of bank switching
in the case of government subsidies should be examined.
4.3. It may be justified to reduce the maximum amount of notary fees, which are charged not by competing
and not even by public bodies, as such fees represent a significant disincentive in the case of refinancing.
4.4. Most mortgage loans are tied to other products (predominantly current accounts); therefore, the
switching of current accounts should be facilitated.
4.5. The entry of participants should be promoted which would help households to seek the most favourable
offers.
4
Credit conditions
5
The banking sector does not support the real economy
Financial Conditions Index (FCI) and real GDP growth
6
per cent
per cent
6
4
2
2
0
0
-2
-2
-4
-4
-6
-6
-8
-8
-10
-10
2006 I.
II.
III.
IV.
2007 I.
II.
III.
IV.
2008 I.
II.
III.
IV.
2009 I.
II.
III.
IV.
2010 I.
II.
III.
IV.
2011 I.
II.
III.
IV.
2012 I.
II.
III.
IV.
4
FCI - banking system
FCI - aggregate
Real GDP
Note: The annual growth in the FCI shows the contribution of the financial intermediary system (banking sector) to the
annual growth rate of real GDP.
Source: MNB.
6
Domestic corporate lending has been steadily
contracting since the onset of the crisis
Net quarterly change in domestic loans to corporate sector
500
HUF Bn
per cent
25
400
20
300
15
200
10
100
5
0
0
-5
-200
-10
-300
-15
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
-100
Long-term bank loans
Long-term nonbank loans
Annual growth rate (right-hand scale)
Short-term bank loans
Short-term nonbank loans
Source: MNB.
7
Both demand and supply factors contributed to the
contraction in corporate lending
Decomposition of the cumulative decline in corporate lending into supply and
demand effects (relative to 2008 Q3)
5
percentage
point
percentage
point
5
Demand effect
Q4
Q3
Q2
2012 Q1
Q4
Q3
-25
Q2
-25
2011 Q1
-20
Q4
-20
Q3
-15
Q2
-15
2010 Q1
-10
Q4
-10
Q3
-5
Q2
-5
2009 Q1
0
2008 Q4
0
Supply effect
Source: MNB.
8
The monetary easing cycle has a positive impact on price
conditions in corporate lending…
Interest rate of corporate loans and the MNB policy rate
14
per cent
per cent
14
12
10
10
8
8
6
6
4
4
2
2
0
0
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
12
HUF - new lending
HUF - outstanding
EUR - new lending
EUR - outstanding
MNB policy rate
(monthly average)
Source: MNB.
9
…hence corporate credit forecast was modified upwards
Credit forecast to NFCs along different scenarios
per cent
per cent
Q4
Q3
Q2
2013 Q1
Q4
Q3
Q2
-12
2012 Q1
-12
Q4
-10
Q3
-10
Q2
-8
2011 Q1
-8
Q4
-6
Q3
-6
Q2
-4
2010 Q1
-4
Actual
Baseline scenario (with FGS)
Inflation Report - March 2013
Baseline scenario excluding rate cuts (with FGS)
Source: MNB estimation.
10
As opposed to corporate lending, demand factors
remain the key driver in household lending
Net quarterly change in domestic loans to household sector
HUF Bn
per cent
40
32
24
16
8
0
-8
-16
-24
-32
-40
-48
-56
-64
-72
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
500
400
300
200
100
0
-100
-200
-300
-400
-500
-600
-700
-800
-900
Bank loans - HUF
Nonbank loans - HUF
Annual growth rate (right-hand scale)
Bank loans - FX
Nonbank loans - FX
Source: MNB.
11
The trend of plummeting new lending continued last year
New loan volumes of credit institutions to household sector
HUF Bn
HUF Bn
600
550
500
450
400
350
300
250
200
150
100
50
0
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
600
550
500
450
400
350
300
250
200
150
100
50
0
Mortgage loans
Other loans
Refinancing for early repayments
Source: MNB.
12
Resilience to shocks
13
In the low level of the System-Wide Financial Stress
Index (SWFSI), benign market conditions are reflected
System-Wide Financial Stress Index (SWFSI)
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
-0.1
-0.2
-0.3
-0.4
Jan-07
Mar-07
Jun-07
Sep-07
Nov-07
Feb-08
May-08
Jul-08
Oct-08
Jan-09
Apr-09
Jun-09
Sep-09
Dec-09
Feb-10
May-10
Aug-10
Oct-10
Jan-11
Apr-11
Jun-11
Sep-11
Dec-11
Mar-12
May-12
Aug-12
Nov-12
Jan-13
Apr-13
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
-0.1
-0.2
-0.3
-0.4
SWFSI
Correlation contribution
Note: Higher level denotes higher stress.
Source: MNB.
14
The stress scenario of liquidity stress test
Item
Assets
Degree (per Currencies
Default on interbank
assets
Exchange rate shock on
swaps
Depreciation of assets
eligible at the central
cent)
affected
20
HUF
15
FX
10
HUF
Item
Withdrawals in
household deposits
Withdrawals in
corporate deposits
Liabilities
Degree (per Currencies
cent)
affected
10
HUF/FX
15
HUF/FX
bank
Note: The liquidity stress test is 30-day forward looking.
Source: MNB.
15
The Liquidity Stress Index (LSI) indicates low level of
liquidity risk
Liquidity Stess Index, liquidity surplus and need of banks
relative to the regulatory minimum
1,500
HUF Bn
per cent
75
1,000
50
500
25
0
0
-25
-1,000
-50
-1,500
-75
-2,000
-100
-2,500
-125
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
-500
Liquidity need to meet the regulatory requirement
Liquidity buffer above the regulatory requirement
Liquidity Stress Index (right-hand scale)
Note: The ratio is the liquidity need to 10 percent of balance sheet total weighted by balance sheet total.
Higher ratio denotes higher liquidity risk along the stress scenario.
Source: MNB.
16
The scenarios of the solvency stress test
• Over the 8 quarter forecast horizon beginning end-2012, the shock hits in 2013 Q2.
• Our baseline scenario is the forecast of the Report on Inflation 2013 Q1.
• Our stress scenario relative to our baseline scenario:
 4.3 percentage points lower GDP growth;
 15 per cent deprecation of HUF;
 300 basis points risk premium shock;
 10 per cent drop in house prices.
• Along the stress scenario we accounted for additional loan loss provisioning on
outstanding non-performing loans as in a markedly deteriorating economic environment
their recovery rate falls.
• As regards the exchange rate cap scheme, we assumed 50 per cent participation ratio
both along the baseline and the stress scenario.
• The postponement of halving the bank levy and the pass-through of the entire financial
transaction tax are taken into account.
17
The impact of key risks on the banking sector
profitability in the stress test on 2-year forecast horizon
Main components of losses of banking
system in eight quarter horizon (HUF
Bn)
Loan losses on corporate and household
portfolio
Loan losses on new non-performing corporate
loans
Loan losses on new non-performing household
loans
Additional loan losses on the already non-
Baseline scenario
Stress scenario
498
875
264
382
234
368
125
performing loans
Loan losses on local government portfolio
10
23
-63
60
Exchange rate risk of open position
Interest rate risk
Bank levy
234
234
Interest cost of the exchange rate cap scheme
28
45
Source: MNB.
18
In the baseline scenario no additional capital is needed,
however along the stress scenario several banks need
capital injection
Baseline scenario
Stress scenario
End of
first year
End of
second year
End of
first year
End of
second year
Capital need of banks (HUF Bn)
0
0
6
62
Capital buffer of banks above
8 percent CAR (HUF Bn)
1,331
1,518
969
889
Total capital buffer (HUF Bn)
1,331
1,518
963
827
Source: MNB.
19
The Solvency Stress Index (SSI) shows an increasing, but
still manageable capital need
Stress test index, capital buffer and need in stress scenario
at the end of 8 quarter horizon
HUF Bn
1,200
per cent
40
900
30
600
20
300
10
0
0
-300
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
-10
Capital buffer above the regulatory requirement
Capital need to meet regulatory requirement
Solvency Stress Index (right-hand scale)
Note: The indicator is the sum of normalised capital shortages relative to the 8 per cent level, weighted by the
capital requirement. The higher the value of the index, the higher the solvency risk in the stress scenario.
Source: MNB.
20
Key risks and mitigation measures
21
Key risks
1. Protracted euro-area sovereign debt crisis.
2. Despite the recovery from the technical recession the vulnerabilities of the
domestic economy are still present.
•
Credit supply constraints on companies, particularly on SMEs
•
Exchange rate exposure of companies without natural hedging
•
Reliance on external funding, of which a high share is short-term financing
3. The banking sector is heavily burdened by the high share of non-performing,
which will rise further based on our forecasts.
4. Lack of competition among banks is causing welfare losses and real economic
costs.
22
Risks in the external environment
• Protracted euro-area sovereign debt crisis.
 Several „peripheral countries” are compelled to implement stricter fiscal
consolidation.
 In some of the core countries, meaningful austerity measures will be implemented
as well.
 Significant deterioration in the economic outlook of the euro area, while investor
sentiment might remain volatile.
• Owing to high funding costs and deteriorating portfolio quality the profitability
outlook of European banks is weak.
• Worsening economic outlook weighs on banks’ balance-sheet.
• In several peripheral countries banking systems need substantial capital
injections.
23
Credit supply constraints hit the SME sector more
severely
Change in new lending to corporations and its decomposition by corporate size
Volume of new lendings
Change from 2007 to 2011 (per cent)
(HUF Bn)
Micro
Small
Medium
Large
Total
corporate
sector
2007
2011
Total
1,730
1,120
1,160
1,460
828
999
785
1,250
-
5,740
3,862
- 29.5
52.2
10.8
32.4
14.4
Demand
effect
- 61.7
28.5
- 4.7
- 49.3
- 14.3
Supply effect
9.5
- 39.3
- 27.7
34.9
- 15.2
Source: CCIS, MNB estimation.
24
Exchange rate exposure of SMEs without natural hedge
poses a significant risk
Distribution of exchange rate depreciation of individual contracts (by end-2012)
per cent
per cent
4.5
4.5
4.0
4.0
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
-8
0
8
16
24
32
40
48
56
64
72
Exchange rate movement (%)
Frequency of exchange rate depreciation
Source: CCIS, MNB estimation.
25
The first two pillars of the MNB Funding for Growth Scheme
(FGS) are aimed at reversing contraction in lending and
reducing exchange rate exposure of SMEs
Growth rate of domestic loans to corporate sector
Corporate sector total
SME segment
per cent
per cent
per cent
per cent
6
6
4
4
4
4
2
2
2
2
0
0
0
0
-2
-2
-2
-2
-4
-4
-4
-4
-6
-6
-6
-6
-8
-8
-8
-8
6
6
-10
-12
-12 -12
-12
Actual
Baseline scenario
March 2013
Optimistic scenario
2010 Q1
Q2
Q3
Q4
2011 Q1
Q2
Q3
Q4
2012 Q1
Q2
Q3
Q4
2013 Q1
Q2
Q3
Q4
2014 Q1
Q2
Q3
Q4
2015 Q1
-10 -10
2010 Q1
Q2
Q3
Q4
2011 Q1
Q2
Q3
Q4
2012 Q1
Q2
Q3
Q4
2013 Q1
Q2
Q3
Q4
2014 Q1
Q2
Q3
Q4
2015 Q1
-10
Actual
March 2013
Source: MNB.
Baseline scenario
Optimistic scenario
26
The third pillar of the FGS accelerates the decrease in
short-term external funds without any deleveraging
Foreign funds of the banking system and the loan-to-deposit ratio
40
per cent
EUR Bn
180
160
30
140
25
120
20
100
15
80
10
60
5
40
0
20
Jun-10
Aug
Oct
Dec
Feb-11
Apr
Jun
Aug
Oct
Dec
Feb-12
Apr
Jun
Aug
Oct
Dec
Feb-13
Apr
Jun
Aug
Oct
Dec
Feb-14
Apr
Jun
Aug
Oct
Dec
35
Foreign funds
Baseline scenario
Gross loan-to-deposit ratio (right-hand scale)
Net loan-to-deposit ratio (right-hand scale)
Source: MNB.
27
The third pillar of the FGS is aimed at rationalising the
debt structure and reducing the costs of MNB
• The reduction of short term external funds translates into lower level of foreign
exchange reserves and MNB bills outstanding
• Without higher vulnerability
• The effects of MNB swaps on the banking system balance sheet:
Change in the banking system's stylized balance sheet
Liquid HUF assets
Equity
External assets
External debt
Loans
Deposits
• Changes in the consolidated balance sheet of the general government, in case the
reduction of short term external funds is achieved with the cooperation of the
Debt Management Agency
Change in the consolidated stylized balance sheet of
the general government
MNB FX reserves
Other assets
MNB securities
Other central bank liabilities
FX securities
HUF securities
28
Banks remain reliant on external funding even in the case
of loan-to-deposit ratio decreasing under 100 per cent
Schematic balance sheet of the banking sector at a 100 per cent loan-to-deposit ratio
100
EUR Bn
EUR Bn
90
90
80
Government
bonds
Equity
70
MNB-bill
60
External
assets
External
liabilities
30
80
70
60
50
50
40
100
Loans to
private
sector
20
40
Deposits and
securities of
the private
sector
30
20
10
10
0
0
Assets
Liabilities
Source: MNB.
29
Managing deteriorating portfolio quaility remains a key
challenge
Ratio of non-performing loans and cost of provisioning
Corporate sector
6
Household sector
per cent
per cent
30
5
25
4
20
7
per cent
per cent
21
6
18
5
15
4
12
3
9
3
15
2
10
2
6
1
5
1
3
0
0
2007
2008
2009
2010
2011
2012
2013
Loan loss provisioning
Loan loss provisioning - forecast
Non-performing loan ratio (right-hand scale)
2014
0
0
2007
2008
2009
2010
2011
2012
2013
2014
Loan loss provisioning
Loan losses related to the early repayment scheme
Loan loss provisioning - forecast
Non-performing loan ratio (right-hand scale)
Source: MNB.
30
In the corporate segment the I. and II. pillars of the FGS,
while in the household portfolio the planned introduction
of personal bankruptcy may improve portfolio quality
The planned personal bankruptcy procedure
Monitoring the eligibility
criteria
The procedure
Not eligible
Eligible
ceases
Strive to come to an
agreement with the creditors
No agreement, or the debtor
fails to meet the agreement
Agreement
Permanent repayment
Fulfilment of the
procedure
agreement
The debtor fails to meet the
repayments
The
procedure
The debtor meets
the repayments
The debtor gets a "clean record"
ceases
Source: MNB.
31
Increasing participation in the exchange rate cap
scheme would have a benign effect on household
portfolio quaility
Participation in the exchange rate cap
1,350
HUF Bn
per cent
45
150
5
0
0
Feb
10
Jan-13
300
Dec
15
Nov
450
Oct
20
Sep
600
Aug
25
Jul
750
Jun
30
May
900
Apr
35
Mar
1,050
Feb
40
Jan-12
1,200
Outstanding amount
Percentage of eligible FX-denominated mortgage loans (right-hand scale)
Source: MNB.
32
Banks are striving for offsetting high costs through
raising net interest income
Net interest income to interest
bearing assets
Bn HUF
per cent
Net interest income to total assets
(June 2012 – consolidated data)
per cent
per cent
3.0
2.5
2.5
400
2.9
300
2.8
2.0
2.0
200
2.7
1.5
1.5
100
2.6
1.0
1.0
0
2.5
0.5
0.5
0.0
0.0
12-month rolling net interest income
Net interest income as a propotion of the gross interest-bearing assets
(right-hand scale)
Net interest income as a propotion of the net interest-bearing assets
(right-hand scale)
Source: ECB CBD, MNB.
Hungary
500
Romania
3.0
Bulgaria
3.0
Slovakia
3.1
Estonia
600
Czech Republic
3.5
Poland
3.5
Slovenia
3.2
Latvia
700
Lithuania
4.0
3.3
Austria
4.0
800
Italy
3.4
Belgium
900
Germany
4.5
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
3.5
1,000
33
4.5
Market failures in pricing should be managed by
enhancing competition
•
Expedient to cut the regulatory maximum of the early repayment fee to
1–1.5 per cent in the case of refinancing from another bank.
•
In agreement with the proposal of the Hungarian Competition Authority,
the possibility of bank switching in the case of government subsidies
should be examined.
•
It may be justified to reduce the maximum amount of notary fees,
which are charged not by competing and not even by public bodies, as
such fees represent a significant disincentive in the case of refinancing.
•
Most mortgage loans are tied to other products (predominantly current
accounts); therefore, the switching of current accounts should be
facilitated.
•
The entry of participants should be promoted which would help
households to seek the most favourable offers.
34
Thank you for the attention!
35