The Hungarian financial system can
make only a limited contribution to
the economic recovery
Report on Financial Stability
November 2010
Main messages
The strong Swiss franc, bank levy and the upholding of moratorium on
foreclosures and evictions have had a negative effect on banks’ income-generating
capacity.
Due to the loss of regional competitive advantage, the Hungarian banking sector
might experience disadvantages in banking-groups’ funding allocation
All this adds to the risk that credit supply and, consequently, financial
system’s contribution to economic growth might decline further.
BUT
The recent deterioration in the operational environment of the Hungarian
banking sector does not endanger financial stability, due to the adequate capital
position of domestic banks and the financial strength of their foreign owners.
Main messages along the baseline scenario
• Following the economic growth, outstanding loans to corporations and
households may increase next year, however downside risks may delay the turningpoint
• Portfolio quality has been deteriorating due to the weak performance of project
financing in corporate segment, while in household segment due to the passthrough of the strong Swiss franc
• The loan-loss coverage ratio of non-performing mortgage loans appears to be low
• Ratio of non-performing loans may slightly exceed 15 per cent next year for both
corporations and households at the end of 2011, the cost of provisioning as a
percentage of total outstanding loans may peak at around 3 per cent
• The banking sector’s profitability is deteriorating sharply due to high provisions
for loan losses and bank levy, it is low not only in regional comparison but also
compared to the performance of parent banks
• At the systemic level, banks capital position is adequate, the banking sector’s need
for capital injection is minimal along the baseline scenario
• Reliance on external refinancing remains high, while the shortening in maturities
emerges as an additional vulnerability
Corporate lending contracted, Q3 may suggest a
proximity to the turning point
(Net quarterly credit flow of corporate loans by the domestic banking sector and other financial
intermediaries )
500
bn HUF
bn HUF
500
400
400
300
300
200
200
100
100
0
0
-100
-200
-200
-300
-300
2003 Q1
Q2
Q3
Q4
2004 Q1
Q2
Q3
Q4
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
-100
Short term
Long term
Provided by other, non-bank financial intermidiaries
Total domestic credits
Source: MNB.
Non-price credit conditions are not tightened further,
however in the last four years credit supply constraints were
strengthened
16
per cent
Interest rates and spreads
per cent
Credit conditions
4
100
per cent
12
3
Tightening
80
60
40
8
2
20
0
0
Jan-08
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2009.jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2010.jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
0
Interest rate HUF-denominated loans
Interest rate EUR-denominated loans
Smoothed spread on HUF loans (right-hand scale)
Smoothed spread on EUR loans (right-hand scale)
-20
-40
2002 H2
2003 H1
H2
2004 H1
H2
2005 H1
H2
2006 H1
H2
2007 H1
H2
2008 H1
H2
2009 Q1
Q2
Q3
Q4
2010 Q1
Q2
Q3-Q4 (exp.)
1
Easing
4
Net percentage balance respondence
tightening/easing credit conditions
Source: MNB.
In a regional comparison, Hungary experienced the
largest contraction in corporate lending by banks
GDP-growth
per cent
per cent
4
2
2
0
0
Corporate lending
per cent
per cent
6
4
4
2
2
0
0
-2
-2
-4
-4
Czech Republic
Poland
Hungary
Q2
2010 Q1
Q4
Q3
Q2
2009 Q1
2008 Q1
Q2
2010 Q1
Q4
Q3
Q2
-8
2009 Q1
-8
Q4
-6
Q3
-6
Q2
-4
2008 Q1
-4
Q4
-2
Q3
-2
6
Q2
4
Slovakia
Source: Eurostat, national central banks.
Note: Quarter-on-quarter percentage changes of real GDP; seasonally adjusted
data. New loan volumes to non-financial corporations as a percentage of quarterly
nominal GDP.
Net credit flow to households has been declining
(Net quarterly credit flow of corporate loans by the domestic banking sector and other
financial intermediaries )
500
bn HUF
bn HUF
500
400
400
300
300
200
200
100
100
0
0
Bank loans - HUF
Bank loans - FX
Loans from non-bank financial intermediaries
Q3
Q2
2010 Q1
Q4
Q3
Q2
2009 Q1
Q4
Q3
Q2
2008 Q1
Q4
Q3
Q2
2007 Q1
Q4
Q3
Q2
2006 Q1
Q4
Q3
Q2
-300
2005 Q1
-300
Q4
-200
Q3
-200
Q2
-100
2004 Q1
-100
Total (seasonally adj.)
Source: MNB.
Foreign currency lending has virtually disappeared,
although due to exchange rate effect the outstanding
amount of FX-denominated loans peaked
bn HUF
New contracts
per cent
200
100
80
150
60
100
40
50
20
0
Jan-2008
March
May
July
Sept
Nov
Jan-2009
March
May
July
Sept
Nov
Jan-2010
March
May
July
Sept
0
Mortgage - HUF
Other - HUF
Mortgage - FX
Other - FX
Proportion of HUF loans (right-hand scale)
Proportion of HUF mortgage loans (right-hand scale)
10 000
bn HUF
Total loans
per cent
100
9 000
90
8 000
80
7 000
70
6 000
60
5 000
50
4 000
40
3 000
30
2 000
20
1 000
10
0
0
2004 Q1
Q3
2005 Q1
Q2
2006 Q1
Q1
2007 Q1
Q4
2008 Q1
Q3
2009 Q1
Q2
2010 Q1
Q3
250
HUF
FX
Proportion of HUF loans (right-hand scale)
Source: MNB.
The decline in banks’ household lending is also the
largest in regional comparison
Consumption
per cent
per cent
3 4
2
2
1
1
per cent
4
3
3
2
2
1
1
0
0
0
Czech Republic
Poland
Hungary
Q2
2010 Q1
Q4
Q3
Q2
2009 Q1
Q4
Q3
Q2
-1
2008 Q1
Q2
2010 Q1
Q4
Q3
Q2
2009 Q1
Q4
-3 -1
Q3
-3
Q2
-2
2008 Q1
-2
Q4
-1
2007 Q3
-1
Q4
0
Consumer lending
per cent
2007 Q3
3
Slovakia
Source: Eurostat, national central banks.
Note: Quarter-on-quarter percentage changes in consumption; seasonally adjusted
data. Consumer loans from banks to households as a percentage of quarterly
nominal GDP.
Demand for loans may increase next year, but there are
marked downside risks regarding the turning point
(Forecast for domestic lending (net flows adjusted for exchange rate effects))
500
bn HUF
bn HUF
500
Forecast
400
400
300
300
200
200
100
100
0
0
-100
-200
-200
-300
-300
2003 Q1
Q2
Q3
Q4
2004 Q1
Q2
Q3
Q4
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
-100
Domestic household loans
Domestic corporate loans
Source: MNB.
Rising NPL ratio in the corporate segment, rising loan
losses at project financing
Non-performing loans
14
per cent
per cent
14 4.5
per cent
Cost of provisioning
per cent
4.5
4.0
4.0
3.5
3.5
3.0
8
10 3.0
2.5
8 2.0
6
6
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.0
12
10
4
2
2
0
0
2007Q1
2007Q2
2007Q3
2007Q4
2008Q1
2008Q2
2008Q3
2008Q4
2009Q1
2009Q2
2009Q3
2009Q4
2010Q1
2010Q2
2010Q3
4
30-90 days delinquency ratio
90+ days delinquency ratio
2.5
2.0
2007Q1
Q2
Q3
Q4
2008Q1
Q2
Q3
Q4
2009Q1
Q2
Q3
Q4
2010Q1
Q2
Q3
12
Cost of provisioning to total outstanding amount - 12month moving average
Cost of provisioning to total outstanding amount for
project loans- 12-month moving average
Cost of provisioning to total outstanding amount for
other corporate loans- 12-month moving average
Source: MNB.
Debt servicing burdens increased significantly for
households having Swiss franc denominated mortgage
loans
Initial exchange rate
Initial APR
135-145
145-155
155-165
165-175
175-185
185-195
195-205
205-215
Total
5,4-5,8
5,8-6,2
6,2-6,6
66,4%
62,1%
57,9%
55,3%
51,3%
47,4%
45,6%
41,8%
38,2%
37,1%
33,5%
30,1%
29,4%
26,1%
22,8%
22,6%
19,4%
16,4%
16,5%
13,5%
10,6%
10,9%
8,1%
5,3%
44,0%
41,5%
43,8%
6,6-7
53,9%
43,7%
34,7%
26,8%
19,7%
13,4%
7,8%
2,6%
7-7,4
7,4-7,8
7,8-8,2
8,2-8,6
50,1%
46,4%
42,9%
39,4%
40,1%
36,7%
33,3%
30,1%
31,3%
28,1%
25,0%
22,0%
23,6%
20,6%
17,6%
14,8%
16,8%
13,9%
11,1%
8,4%
10,6%
7,9%
5,3%
2,7%
5,1%
2,5%
0,0%
-2,4%
0,1%
-2,4%
-4,8%
-7,0%
36,3%
32,5%
21,8%
28,8%
-1,1%
Total
46,5%
42,8%
36,4%
27,1%
18,9%
8,6%
0,7%
4,8%
35,6%
Source: MNB.
High debt service burden, but the new personal income tax
system could help
(Debt-service-burden to income ratio by households having loan)
45
per cent
per cent
45
40
40
35
35
30
30
25
25
20
20
15
15
10
10
5
5
0
0
Maximum HUF HUF 100 000150 000
100 000
HUF 150 000200 000
HUF 200 000300 000
Relative frequiency (2010)
Debt servicing burden to households' income (2010)
Debt servicing burden to households' income (full sample)
above HUF
300 000
2007
2010
Distribution of Creditstock (2010)
Debt servicing burden to households' income (2007)
Note: The income position of 43 per cent of the respondents with bank loan would improve, for 39 per cent of them would
worsen, while for 18 per cent of them it would remain unchanged. Hence, on average high income respondents have larger debts,
and they will be better off with the tax amendments. Since 50 per cent of the bank loan portfolio is concentrated in wealthy
households, the amendments to the taxation system will have a positive effect on portfolio quality on the whole. .
Source: GfK.
Rising NPL ratio in each product segment of household
lending
(90+ delinquency ratio for certain retail product types)
22
Per cent
Per cent
22
10
10
8
8
6
6
4
4
2
2
0
0
2010Q3
12
2010Q2
12
2010Q1
14
2009Q4
14
2009Q3
16
2009Q2
16
2009Q1
18
2008Q4
18
2008Q3
20
2008Q2
20
Source: MNB.
Rising NPL and LTV ratios lead to increasing
cost of provisioning
85
per cent
Loan-to-value ratio
per cent
Cost of provisioning
per cent
85
3.5
55
0.5
50
50
0.0
Average LTV - FX housing loans
Average LTV - HUF housing loans
Average LTV - total housing loans
Q3
55
Q2
1.0
2010Q1
60
Q4
60
Q3
1.5
Q2
65
2009Q1
65
Q4
2.0
Q3
70
Q2
70
2008Q1
2.5
Q4
75
Q3
75
Q2
3.0
2007Q1
80
2005Q1
Q2
Q3
Q4
2006Q1
Q2
Q3
Q4
2007Q1
Q2
Q3
Q4
2008Q1
Q2
Q3
Q4
2009Q1
Q2
Q3
Q4
2010Q1
Q2
Q3
80
Cost of provisioning to total outstanding amount - 12month moving average
Source: MNB.
The loan-loss coverage ratio of non-performing mortgage
loans is low
70
per cent
Corporate and household loans
per cent
70 30
per cent
Household mortgage loans
per cent
30
60 20
20
50
50 10
10
40
40
30
30 -10
-10
20
20 -20
-20
Coverage ratio of household loans
Coverage ratio of corporate loans
0
0
Jun - 09
Jul - 09
Aug - 09
Sep - 09
Oct - 09
Nov - 09
Dec - 09
Jan - 10
Feb - 10
Mar - 10
Apr - 10
May - 10
Jun - 10
Jul - 10
Aug - 10
Sep - 10
2007Q1
Q2
Q3
Q4
2008Q1
Q2
Q3
Q4
2009Q1
Q2
Q3
Q4
2010Q1
Q2
Q3
60
Coverage ratio of mortgage loans
LTV of non-performing mortgage loan minus 100 per cent
Source: MNB.
Decreasing residential property prices may
increase expected loss on mortgage loans
(FHB House Price Index)
per cent
per cent
10 Q2
09 Q4
09 Q2
08 Q4
08 Q2
07 Q4
85
07 Q2
85
06 Q4
105
06 Q2
105
05 Q4
125
05 Q2
125
04 Q4
145
04 Q2
145
03 Q4
165
03 Q2
165
02 Q4
185
02 Q2
185
01 Q4
205
01 Q2
205
00 Q4
225
00 Q2
225
Real house price (2000 = 100 per cent)
Source: FHB.
Cost of provisoning may reach its peak in the
baseline scenario at the end of this year
(Projected cost of provisioning in the baseline scenario by sectors)
4.5
per cent
per cent
4.5
Forecast
4.0
3.5
4.0
Non-financial corporations - baseline scenario
3.5
Households - baseline scenario
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
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Source: MNB.
Decreasing profitability, increasing asymmetry
350
ROE and its weighted relative deviation
per cent
per cent
300
35 45
30
T
The dispersion of ROE
per cent
(weighted by total asset
40
35
250
25
200
20 25
150
15 20
100
10
30
15
10
ROE weighted relative deviation among banks
ROE (right-hand scale)
Dec-2009
Jun-2010
Sep-2010
Source: MNB.
>30 %
25-30 %
20-25 %
15-20 %
10-15 %
5-10 %
0
0-5 %
-
-5-0 %
-
5
<-5 %
5
Dec 2006
Mar 2007
Jun 2007
Sep 2007
Dec 2007
Mar 2008
Jun 2008
Sep 2008
Dec 2008
Mar 2009
Jun 2009
Sep 2009
Dec 2009
Mar 2010
Jun 2010
Sep 2010
50
Adequate capital position along the baseline scenario
50
11
30
40
10
20
30
9
10
20
8
0
CAR weighted relative deviation among banks
CAR (right hand scale)
Dec-2009
Jun-2010
>13 %
40
12-13 %
12
11-12 %
60
10-11 %
50
9.5-10 %
13
9-9.5 %
70
8.5-9 %
60
The dispersion of CAR
(weighted by total assets)
per cent
8-8.5 %
14
Dec-2006
Feb-2007
Apr-2007
Jun-2007
Aug-2007
Oct-2007
Dec-2007
Apr-2008
Jun-2008
Aug-2008
Oct-2008
Dec-2008
Feb-2009
Apr-2009
Jun-2009
Aug-2009
Oct-2009
Dec-2009
Feb-2010
Apr-2010
Jun-2010
Aug-2010
80
CAR and its weighted relative deviation
per cent
per cent
Sep-2010
Source: MNB.
There is a slowdown in loan-to-deposit ratio adjustment
180
Loan-to-deposit ratio of the Hungarian banking sector
%
Loan-to-deposit ratios in international
comparison (September 2010)
Eurozone
%
250
CEE
EU member states
160
150
150
100
140
50
130
0
Eurozone
IT
FR
NL
AT
DE
BE
CEE
LV
EE
LT
SI
HU
BG
RO
PL
SK
CZ
200
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
170
Source: MNB.
The reliance of the domestic banking sector on external
funding remains high
40
External liabilities/Total assets (per cent)
35
Hungary
30
Romania
25
20
Poland
15
10
Czec
Republic
Slovakia
5
25
30
35
40
45
50
55
60
65
70
Short-term external liabilities/External liabilities(per cent)
Note: The chart indicates the share of short-term external liabilities by original maturity. The size
of the bubbles indicates the ratio of short-term external liabilities to total assets (June 2010).
Source: IMF, World Bank, ECB, websites of the central banks.
Shortening maturity of external funds is a risk factor
Short-term foreign funds of the domestic credit institutions
(according to original and remaining maturity)
bn EUR
%
22
44
Term premia derived from the euro interest
rate swap yield curve
basispoint
250
40
18
36
200
16
32
14
28
150
12
24
10
20
8
16
6
12
4
8
2
4
0
0
100
50
0
-50
-100
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
2006 Q4
2007 Q1
Q2
Q3
Q4
2008 Q1
Q2
Q3
Q4
2009 Q1
Q2
Q3
Q4
2010 Q1
Q2
20
Short-term external funds of branches (original maturity)
Short-term external funds of banks (original maturity)
1×3
1×5
1×10
Short-term external funds (remaining maturity)
The ratio of short-term external funds to external funds
(original maturity, right hand scale)
Source: MNB.
Risks surrounding economic growth and lending
• Exchange rate of CHF
•
•
Strong CHF endanger domestic economic growth as well (solvency -RWA,
liquidity effect, repayment ability of customers)
Regulatory risks
• The upholding of bank levy has a negative effect on Hungarian banks’
competitiveness (weakened income-generating capacity – issues regarding
banking-group funding allocation , higher interest rates on loans in case of passthrough)
• Foreclosure and eviction moratorium („moral hazard” - ↑ PD, uncertainties
about collaterals - ↑ LGD, impairing mortgage covered bond market)
•
External economic outlook remains fragile
• Increase in sovereign risks
• Sizeable government debt issuance, raising fears about potential crowding out of
the private sector
Low profitability not only in regional comparison but also
compared to the performance of parent banks
Group-level parent bank and domestic ROE
and ROA ratios (per cent)
ROE and ROA ratios in the region (per cent)
20
12
CZ
15
PL
HU SK BG
RO
10
HU - estimated ratios at
the end of the year
5
Raiffeisen
10
0
-5
8
BayernLB
-15
ROE
ROE
-10
-20
-25
6
EE
-30
Erste
HU
4
Intesa
Sanpaolo
-35
-40
LV
-45
HU - estimated ratios
at the end of the year
2
LT
-50
0
-55
-5
-4
-3
-2
ROA
-1
0
1
2
0.0
0.2
0.4
ROA
0.6
0.8
Source: MNB.
Without easing of credit supply constraints there will be no
sustained credit growth
(Forecast for domestic lending (net flows adjusted for exchange rate effects))
500
bn HUF
bn HUF
500
Forecast
400
400
300
300
200
200
100
100
0
Risks
0
-100
-200
-200
-300
2003 Q1
Q2
Q3
Q4
2004 Q1
Q2
Q3
Q4
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
-300
-100
Domestic household loans
Domestic corporate loans
Source: MNB.
Due to high capital buffer strong shock-absorbing
capacity
• Comparison of previous and current stress scenarios:
April 2010
2010
2011
GDP
-2.2
-1.0
Private sector employment
-2.3
-3.1
CPI
5.0
3.5
EUR/HUF exchange rate
315
315
CHF/HUF exchange rate
213
213
Change in CDS premium
200
200
Additional capital need (HUF Bn)
48
November 2010
2010
2011
0.8
-0.5
-0.3
-0.5
4.7
4.8
319
319
234
234
200
200
41
• In the stress scenario, the ratio of household NPLs will increase in 2011
• Along the stress scenario, the additional need for capital injection (~HUF 40
billion) is manageable , however capital buffer decrease significantly
• Additional capital need indicated in April was also HUF 40-50 billion, since then
the Swiss franc has became stronger, bank levy has been introduced, but capital
adequacy has became higher
• Baseline scenario does not, but stress scenario imply need for balance sheet
adjustment of the banking system
In the stress scenario the cost of provisioning may start
to decrease only in 2012
(Projected cost of provisioning in the baseline and stress scenarios by sectors)
4.5
per cent
per cent
4.5
Forecast
4.0
3.5
3.0
4.0
Non-financial corporations - baseline scenario
Non-financial corporations - stress scenario
Households - baseline scenario
Households - stress scenario
3.5
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
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Source: MNB.
The capital adequacy of the banking sector is adequate
in both the baseline and the stress scenarios, but...
(The aggregate capital adequacy ratio of the banking system in the baseline and stress scenarios)
15
per cent
per cent
Forecast
15
14
14
13
13
12
12
11
11
10
10
9
9
8
8
7
7
6
6
5
5
Dec-06
Dec-07
Dec-08
CAR - baseline scenario
Dec-09
Dec-10
Dec-11
CAR - stress scenario
Source: MNB.
… along the stress scenario manageable capital
need could emerge at individual level
(Capital buffer and additional capital need in the baseline and stress scenarios)
1 200
bn HUF
bn HUF
1 200
1 100
1 100
1 000
1 000
900
900
800
800
700
700
600
600
500
500
400
400
300
300
200
200
100
100
0
0
-100
-100
-200
-200
2 010
2 011
With 8 per cent capital requirements
2 010
2 011
With 9 per cent capital requirements
Positive capital buffers - baseline scenario
Positive capital buffers - stress scenario
Capital need - baseline scenario
Capital need - stress scenario
Source: MNB.
Main messages
The strong Swiss franc, bank levy and the upholding of moratorium on
foreclosures and evictions have had a negative effect on banks’ income-generating
capacity.
Due to the loss of regional competitive advantage, the Hungarian banking sector
might experience disadvantages in banking-groups’ funding allocation
All this adds to the risk that credit supply and, consequently, financial
system’s contribution to economic growth might decline further.
BUT
The recent deterioration in the operational environment of the Hungarian
banking sector does not endanger financial stability, due to the adequate capital
position of domestic banks and the financial strength of their foreign owners.