Report on Financial Stability
Vonnák Balázs
director
12th November 2014
1
Content
I.
Settlement of FX loans
II. The asset management agency
III. Vulnerability – results of the stresstest
IV. Lending developments
Magyar Nemzeti Bank
2
Dia címe
I. Settlement of FX loans
3
Settlement of the FX loan problem has a significant
impact on every aspect of financial intermediation
Profitability, capital
position
Settlement
Loan conversion to HUF
Fair banking system
Significant one-off
losses, decreasing
interest bearing assets
Moderating credit and
financing risks
Decreasing interest
margins
Lending
Short term
Competition
Medium term
Downward risks due to
loan losses
Moderating risks has a
positive effect
Reliance on
external debt
Liquidity
Healthy assets may contribute to
a banking system which
supports growth better
More intense
competition for FX
Worsening
loan conversion to liquidity position
HUF
Decreasing
reliance
Fair refinancing
conditions
intensify
competition in
household lending
Downward risks due to
loan losses
Source: MNB
4
Fx loan measures
What is the main point?
Who is affected?
Every credit to consumers which was disbursed after 1
May 2004 and was not terminated before 26 July
2009 (excluding state-subsidised loans, credit card
and current account )
Settlement
Decrease of outstanding debt, or reimbursement, and
resetting the interest rate to its fair level
Fair banking system
- Maturity shorter than 3 years: fixed interest rate and
spread
- Maturity longer than 3 years: interest and spread changes
along consecutive changes in the specific rates of
modifications
All new and currently outstanding loans
FX loan conversion to HUF
Conversion to HUF and defining the new pricing conditions
Currently outstanding FX mortgage loans
Source: MNB
5
What will change in case of a typical foreign
exchange debtor?
At the time of contracting
Currently
Settlement and interest
rates reset to the fair level
Outstanding debt
5,6 HUF million
(37 CHF thousand)
7,5 HUF million
(29,1 CHF thousand)
6 HUF million
(23,4 CHF thousand)
Interest rate
5,7 percent
(FX)
7,8 percent
(FX)
5,7 percent
(FX)
Spread (above the
reference rate)
3,4 percentage point
(CHF LIBOR)
7,8 percentage point
( CHF LIBOR)
5,7 percentage point
( CHF LIBOR)
Instalment
40 HUF thousand
78 HUF thousand
56 HUF thousand
In the future
Level of initial interest rates after
loan conversion to HUF is not
defined yet
Change in interest rates and
interest spreads will be possible in
predefined periods (at least every
3 years) along consecutive changes
in the specific rates of
modifications accepted by the
MNB.
Source: MNB
6
The impact of the settlement arising from nullification of the
exchange rate spread and unilateral contract modifications
on the profitability of the financial institutions
HUF billion
Estimated gross effect
Terminated
FX mortgage
contracts and
Total
loans
other loans
Forcast for
Estimated
annual loss
net effect
in interest
on income
income
Forcast for the
reduction in net
interest margin
(percentage point)
Forcast for the
reduction in ROE
(percentage point)
Banking sector
and branches
695
89
784
608
92.1
0.27
3.24
Total financial
intermediary
system
786
156
942
731
0
0
0
Magyar Nemzeti Bank
7
Source: MNB,CCIS
Substantial heterogeneity is expected in the
reduction of borrowers’ debt
35
per cent
per cent
30
25
30
25,2
27,9
26,9
24,8
22,7
25
19,4
20
20
15
10
35
13,1
15
12,1 12,9
10
7,8
5
3,5
2,3
5
0,8 0,6
0-5 per cent
5-10 per cent
10-15 per cent
15-20 per cent
20-25 per cent
25-30 per cent
0
>30 per cent
0
Decrease in outstanding principle
Based on outstanding debt
Based on number of contracts
Estimated distribution of debt reduction of performing CHF-denominated
mortgage loans following the settlement
Magyar Nemzeti Bank
8
Source: MNB
Expected details and effects of FX loan
conversion to HUF
• Only mortgage loans will be affected
• Official MNB exchange rate on 7th November (EUR: 309, CHF: 256,5) OR
average exchange rates since the decision of the Curia on June 16th –
whichever is lower;
• Banking clients have the right to terminate within 60 days if conditions
change according to the framework of the ”fair banking system”
• Household's open foreign currency position disappears
• External debt and currency swaps decrease as open foreign currency
position closes
• MNB provides the necessary foreign exchange liquidity
• Systemic HUF liquidity decreases
• Due to the FX loan conversion competition may arise in
• Pricing of HUF loans according to the framework of the ”fair banking
system”
• HUF funding, i.e. for HUF deposits
Magyar Nemzeti Bank
9
Households’ FX debt significantly decreases due
to the conversion into HUF
9 000
per cent
HUF Bn
55
50
7 000
45
6 000
40
5 000
35
4 000
30
3 000
25
2 000
20
1 000
15
0
10
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
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
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
8 000
Household HUF loans
Household FX loans
Household loans/GDP (RHS)
Households’ debt structure by currency and in percent of GDP
Magyar Nemzeti Bank
10
Source: MNB
Household's open foreign currency position
decreases
per cent
per cent
65
60
55
50
45
40
35
30
25
20
15
10
5
0
-5
-10
2000Q1
Q3
2001Q1
Q3
2002Q1
Q3
2003Q1
Q3
2004Q1
Q3
2005Q1
Q3
2006Q1
Q3
2007Q1
Q3
2008Q1
Q3
2009Q1
Q3
2010Q1
Q3
2011Q1
Q3
2012Q1
Q3
2013Q1
Q3
2014Q1
Q3
2015Q1
65
60
55
50
45
40
35
30
25
20
15
10
5
0
-5
-10
Household sector
Non-financial corporate sector
General government consolidated with MNB
Open FX position of the main sectors in the balance sheet as percentage of GDP
Magyar Nemzeti Bank
11
Source: MNB
The ”fair banking system” creates transparent pricing
for long term loans…
Possibility of unilateral interest-rate hikes
Earlier
Disbursement
Reference rate based product with flexible interest rate spread
(at the end of the periods: can be amended along consecutive changes in the specific rates of
modifications accepted by the MNB)
Disbursement
Fair banking
system
Right to terminate (free of
charge)
Fix interest rate through the Interest period (at least 3 years)
(at the end of the periods: can be amended along consecutive changes in the specific rates of
modifications accepted by the MNB)
Disbursement
Right to terminate (free of
charge)
Effects of the ”fair banking system” on the pricing of long term loans
Magyar Nemzeti Bank
12
Source: MNB
...and also for short term loans
Possibility of unilateral interest-rate hikes
Earlier
Disbursement
Reference-rate based product with fix interest rate spread
Disbursement
Fair banking
system
Fixed interest rate
Disbursement
Effects of the ”fair banking system” on the pricing of short term loans
Magyar Nemzeti Bank
13
Source: MNB
Banks with outstanding levels of liquidity and capital
buffer are expected to benefit the most from the
conversion
Deposit coverage ratio after the settlement
(per cent)
120
100
80
60
40
20
0
8
10
12
14
16
18
20
CAR after the settlement (per cent)
Estimated level of capital adequacy
and deposit coverage ratio after the settlement,
by banks – the bigger the bubble, the bigger the loss born
Magyar Nemzeti Bank
14
Source: MNB
Hungary is expected to be among the less
efficient countries in international comparison
80
per cent
per cent
80
Hungary
HU after settlement
Cost to income ratio (2013)
Malta
0
Czech Republic
0
Estonia
10
Latvia
10
Spain
20
Croatia
20
Poland
30
Bulgaria
30
Slovakia
40
Cyprus
40
Romania
50
Lithuania
50
Italy
60
Portugal
60
Slovenia
70
Greece
70
Cost to income ratio in international comparison
Magyar Nemzeti Bank
15
Source: MNB
II. The asset management
agency
16
Following a continuous decrease for almost two
years, the NPL-ratio increased in 2014
22
per cent
HUF Bn
1 300
1 200
20
1 100
18
1 000
16
900
14
800
12
700
10
600
8
500
400
6
300
4
200
100
0
0
2007Q1
Q2
Q3
Q4
2008Q1
Q4
Q3
Q2
2009Q1
Q2
Q3
Q4
2010Q1
Q2
Q3
Q4
2011Q1
Q2
Q3
Q4
2012Q1
Q2
Q3
Q4
2013Q1
Q2
Q3
Q4
2014Q1
Q2
2
31-90 days delinquency ratio
90+ days delinquency ratio
Loans with 90+ days delinquency (RHS)
Share of non-performing corporate loans of the banking sector
Source: MNB.
17
The deterioration of the corporate loan portfolio
can be clearly linked to real estate project loans
900
per cent
HUF Bn
33
Q2
6
2014Q1
0
Q4
9
Q3
100
Q2
12
2013Q1
200
Q4
15
Q3
300
Q2
18
2012Q1
400
Q4
21
Q3
500
Q2
24
2011Q1
600
Q4
27
Q3
700
Q2
30
2010Q1
800
NPL - project financing
NPL - other corporate loans
NPL ratio - project financing (right-hand scale)
NPL ratio - other corporate loans (right-hand scale)
Non-performing project and other corporate loans within the banking sector
Source: MNB.
18
The high NPL portfolio lowers the efficiency of the
lending channel
Exchange rate adjusted change in corporate loans
outstanding between December 2008 and June 2014 (per
cent)
10
Bank7
0
-10
Bank1
Bank6
-20
Bank8
Bank9
-30
Bank4
Bank5
-40
Bank2
-50
Bank3
-60
0
5
10
15
20
25
30
35
NPL ratio of corporate loans, June 2014 (per cent)
Change in loans outstanding and NPL ratio in the corporate segment
Source: Jones Lang LaSalle.
19
The asset manager proposed by the central bank
could efficiently remedy the distressed corporate
portfolio
Eligible counterparty
Eligible assets
Minimum value threshold for assets
Time of origination
Transfer price
Any solvent and liquid credit institution (both corporations and co-operatives) active in
the EU, which has commercial real estate exposure in Hungary or holds Hungarian
commercial real estate on its balance sheet.
Commercial real estate loan or foreclosed commercial property, where the bank provided
financing for property development for future sales or rentals, partly or totally, or where
the source of repayment is the cash-flow generated by the real estate property.
For commercial real estate loans min HUF 500 million.
For foreclosed real estate properties min HUF 200 million.
Will be determined later on.
The pricing technique remains to be determined, no conciliations have taken place with
the banks. The transfer price may be below book value.
MNB credit line up to HUF 300 billion, with a term of maximum 10 years.
Financing
Planned operating period of the Asset
10 years maximum
Management Agency
The main characteristics of the asset management agency initiated by the
Central Bank
Source: MNB.
20
III. Vulnerability – result of the
stress test
21
Ratio of non-performing FX mortgage loans are
still increasing
26
per cent
per cent
26
Q2
0
2014Q1
0
Q4
2
Q3
2
Q2
4
2013Q1
4
Q4
6
Q3
6
Q2
8
2012Q1
8
Q4
10
Q3
10
Q2
12
2011Q1
12
Q4
14
Q3
14
Q2
16
2010Q1
16
Q4
18
Q3
18
Q2
20
2009Q1
20
Q2
22
Q3
22
Q4
24
2008Q1
24
Household NPL ratio by products
Source: MNB.
22
The banking system’s resilience to shocks will
decline considerably after the settlement
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
Q3
Q4
2014 Q1
Q2
-300
Capital need to meet regulatory requirement
Capital buffer above the regulatory requirement
Solvency Stress Index (RHS)
Solvency Stress Index with FX mortgage loan conversion (RHS)
Capitalisation of the banking sector in stress
Source: MNB.
23
FX risk disappears from households’ loan portfolio
after FX conversion to HUF
1 100
HUF Bn
HUF Bn
1 000
1 100
1 000
+52 HUF Bn
900
900
800
800
700
700
600
600
500
500
400
400
300
300
200
200
100
100
0
0
+11 Huf Bn
-100
Now
-100
After the conversion
Capital need to meet regulatory requirement
Capital buffer above the regulatory requirement
Consolidated capital buffer and capital need along the stress scenario
Magyar Nemzeti Bank
24
Source: MNB.
IV. Lending developments
25
The FGS generated new demand for loans
Would has the client borrowed for the same purpose if there was
no FGS?
Magyar Nemzeti Bank
26
Source: MNB, Survey
It was primary spent on capacity extension
Investment loans by their purpose according to a corporate survey
Magyar Nemzeti Bank
27
Source: MNB, Survey
Corporate lending has improved significantly as a
result of the FGS
0
-100
-200
-300
-400
-500
-600
-700
-800
-900
-1 000
-1 100
-1 200
-1 300
per cent
per cent
0
-100
-200
-300
-400
-500
-600
-700
-800
-900
-1 000
-1 100
-1 200
-1 300
2012 Q1Q2 Q3 Q42013 Q1Q2 Q3 Q42014 Q1Q2 Q3 Q42015 Q1Q2 Q3 Q42016 Q1Q2 Q3
Fact
Forcast - 2012 Q4 (FGS is not given)
Forcast - 2013 Q3
Forcast - 2014 Q2
Forcast - 2014 Q3 (with new framework)
Forecast for corporate lending in different periods (cumulative transactions)
Source: MNB.
28
Market-based lending still has not recovered yet
1 400
HUF Bn
HUF Bn
1 400
1 200
1 200
1 000
1 000
800
800
600
600
400
400
200
200
0
0
-200
-400
-400
-600
-600
-800
-800
Jan-08
Apr
Jul
Oct
Jan-09
Apr
Jul
Oct
Jan-10
Apr
Jul
Oct
Jan-11
Apr
Jul
Oct
Jan-12
Apr
Jul
Oct
Jan-13
Apr
Jul
Oct
Jan-14
Apr
Jul
-200
Privately owned credit institutions without FGS new loans
Overall transactions
State owned banks and FGS new loans
12-month cumulative corporate loan transactions vis-à-vis the government and privatlyowned institutions
Source: MNB.
29
Corporate lending is expected to accelerate
further on the forecast horizon
2
per cent
per cent
2
Actual
Forecast - March 2014
Q3
Q2
2016 Q1
Q4
Q3
Q2
2015 Q1
Q4
-6
Q3
-6
Q2
-5
2014 Q1
-5
Q4
-4
Q3
-4
Q2
-3
2013 Q1
-3
Q4
-2
Q3
-2
Q2
-1
2012 Q1
-1
Q4
0
Q3
0
Q2
1
2011 Q1
1
Forecast - September 2014
Forecast for lending to non-financial corporations
(transaction-based, year-on-year data)
Source: MNB.
30
After a drop due to settlements, yoy growth rate
predicts slowing deleveraging of households
0
per cent
per cent
0
Actual
Forecast - March 2014
Q3
Q2
2016 Q1
Q4
Q3
Q2
2015 Q1
Q4
-16
Q3
-16
Q2
-14
2014 Q1
-14
Q4
-12
Q3
-12
Q2
-10
2013 Q1
-10
Q4
-8
Q3
-8
Q2
-6
2012 Q1
-6
Q4
-4
Q3
-4
Q2
-2
2011 Q1
-2
Forecast - September 2014
Forecast for lending to households
(transaction-based, year-on-year data)
Source: MNB.
31
Thank you for your attention!
32