Report on Financial Stability
(November 2012)
5 November 2012
Financial stability heat map
November 2012
April 2012
April 2012
November 2012
Procyclicality
Shock-absorbing capacity
Source: MNB.
2
Summary I. – Credit contraction may persist longer
than anticipated
• Credit conditions: The banking system is supporting the economy to a limited extent
 Owing to the low willingness to lend, the banking system is strongly procyclical in
corporate lending.
• Resilience: The resilience of the Hungarian financial system has improved markedly
 LIQUIDITY: Despite the dynamic outflow of external funds, liquidity risks have
abated due to the appreciation of the forint, the drop in CDS spreads, decrease in
net FX swap exposure, and the longer maturities of swaps.
 CAPITAL: Capital injections by parent banks, steady deleveraging and the
apprecation of the forint resulted in higher capital adequacy ratio, despite
persistently high risk costs and fiscal burdens on the banking sector.
3
Summary II. – Credit contraction may persist longer
than anticipated
• Risks: Several external and domestic perils
1. The protracted sovereign debt crisis in the euro-area remains a key risk, despite
the improvement in investor sentiment.
2. The economic outlook of Hungary is deteriorating further.
3. Outflows of external funds may accelerate, while the reliance of the banking sector
on the FX swap market remains high.
4. The ratio of non-performing loans is high in the domestic banking sector and the
risk of insufficient loan loss coverage is rising.
5. Given the deteriorating portfolio quality and high tax burdens, banks’ profitability
may remain subdued, which may translate into further deterioration in already low
willingness to lend.
6. Banks partially offset rising loan losses by increasing interest rate margins, this,
however, is not a sustainable income structure over the longer term.
4
Credit conditions
5
The banking sector is not supporting economic growth
Financial Conditions Index (FCI), real GDP growth and the output
gap
6
per cent
per cent
6
4
2
2
0
0
-2
-2
-4
-4
-6
-6
-8
-8
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
4
Output gap
Real GDP
FCI
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. If the sign of the FCI is identical to that of the output gap, then the banking sector
behaves procyclically.
Source: MNB.
6
Tight credit conditions, particularly in corporate lending,
have been causing credit contraction for a long time
Net quarterly changes in corporate loans outstanding
500
per cent
HUF Bn
25
400
20
300
15
200
10
100
5
0
0
-5
-200
-10
-300
-15
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
Q3
Q4
-100
Forecast
Actual
Growth rate (RHS)
Source: MNB.
7
Credit supply constraints are driven primarily by low
willingness to lend
Changes in credit conditions of corporate loans and factors
contributing to changes
per cent
per cent
100
80
80
60
60
40
40
20
20
0
0
H2 exp.
Q2
2012 Q1
Q4
Q3
Q2
2011 Q1
Q4
Q3
Q2
2010 Q1
Q4
Q3
Q2
-20
2009 Q1
-20
2008 Q2-3
Easing
Tightening
100
Capital position (lending capacity)
Liquidity position (lending capacity)
Cyclical factors (willingness to lend)
Competition (willingness to lend)
Change in credit conditions
Source: MNB.
8
Despite tighter credit conditions, banks lend to corporations
with higher default risk as a result of deteriorating
economic conditions
Distribution of new loans according to probability of default
in the given years
14
per cent
per cent
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
0
1
2007
2
2011
3
4
5
6
7
8
Probability of default (per cent)
9
10
2011 (assuming an unchanged macroeconomic environment)
Source: CCIS, MNB estimate.
9
Banks adjusted in terms of quantities and maturities against
the deteriorating corporate credit quality
Maturity structure of newly issued corporate loans
1 600
HUF Bn
Month
30
Over 5 years maturity
Short-term
Q4
Q3
Q2
2011 Q1
Q4
14
Q3
0
Q2
16
2010 Q1
200
Q4
18
Q3
400
Q2
20
2009 Q1
600
Q4
22
Q3
800
Q2
24
2008 Q1
1 000
Q4
26
Q3
1 200
Q2
28
2007 Q1
1 400
1-5 years maturity
Average maturity (RHS)
Source: CCIS, MNB estimate.
10
In contrast to corporate lending, household lending is
driven predominantly by demand factors
Net quarterly changes in household loans outstanding
500
per cent
HUF Bn
35
400
28
300
21
200
14
100
7
0
0
-100
-7
-200
-14
HUF 552.6 Bn
HUF 468 Bn
-21
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
Q3
Q4
-300
Forecast
Effect of early repayments scheme
Growth rate (RHS)
Actual
Exchange rate fixation
Source: MNB.
11
The state interest rate subsidy scheme reduces the initial
interest costs markedly (to 8-9 per cent), which may boost
credit demand
New disbursements of credit institutions in the household
segment
HUF Bn
HUF Bn
16
15
14
13
12
11
10
9
8
7
6
5
4
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
600
550
500
450
400
350
300
250
200
150
100
50
0
Mortgage loans
Other loans
Refinancing for early repayments
Average APRC of mortgage loans (RHS)
Source: MNB.
12
Resilience
13
System-wide Financial stress Index (SWFSI) is on low
level
The System-wide Financial stress Index
1,0
1,0
0,9
0,9
0,8
0,8
0,7
0,7
0,6
0,6
0,5
0,5
0,4
0,4
0,3
0,3
0,2
0,2
0,1
0,1
0,0
2008
0,0
2009
2010
2011
2012
Note: Higher levels denote 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) has improved markedly
Liquidity Stess Index, liqudity surplus of banks above the
regulatory limit, and need along baseline scenario
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
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan-10
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan-11
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan-12
Feb
Mar
Apr
May
Jun
-500
Liquidity buffer above the regulatory requirement
Liquidity need to meet 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 is mean higher liquidity risk along baseline scenario.
Source: MNB.
16
The scenarios of the solvency stress test
• Over the 8 quarter forecast horizon beginning 2012 H2, the shock hits in 2012 Q4.
• Our baseline scenario is the forecast of the Report on Inflation 2012 Q2.
• 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 significantly deteriorating economic environment
their recovery rate falls.
• As regards the exchange rate cap scheme, we assumed 70 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
Main components of the losses of the banking sector in
the stress test over a two-year horizon
Main components of losses of banking
system in eight quarter horizon (HUF
Baseline scenarioBn) Stress scenario
Loan losses on corporate and household
portfolio
Loan losses on new non-performing corporate
loans
Loan losses on new non-performing household
loans
555
971
280
411
275
425
Additional loan losses on the already non-
135
performing loans
Loan losses on local government portfolio
11
24
Exchange rate risk of open position
-64
Interest rate risk
Bank levy
205
80
205
Interest cost of the exchange rate cap scheme
36
65
Source: MNB.
18
The Solvency Stress Index (SSI) shows one of the lowest
value since the onset of the crisis
Stress test index, capital buffer and need in stress scenario
at the end of 8 quarter horizon
1,200
HUF Bn
per cent
40
900
30
600
20
300
10
0
0
-10
2005 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
-300
Capital buffer above the regulatory requirement
Capital need to meet regulatory requirement
Solvency Stress Index (RHS)
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.
19
Foreign-owned banks have injected EUR 2.4 billion
capital since 2009
Profit after tax, dividend and capital raise of existing
foreign owned banks
400
HUF Bn
per cent
60
20
After tax profit
Capital injection
Jun-2012
-400
2011
25
2010
-300
2009
30
2008
-200
2007
35
2006
-100
2005
40
2004
0
2003
45
2002
100
2001
50
2000
200
1999
55
1998
300
Dividends (with opposite sign)
Dividend ratio (right-hand scale)
Source: MNB.
20
Risks
21
Risks in the external environment of the financial
intermediary system
• Protracted sovereign debt crisis in the euro area.
 Several periphery countries are compelled to implement stricter fiscal austerity
measures.
 In some of the core countries, major fiscal consolidation measures will be
implemented as well.
 Significant deterioration in the economic outlook of the euro area, while investor
sentiment might remain volatile .
• Weak earning capacity of European banks due to the high funding costs and deteriorating
portfolio quality.
• Worsening economic outlook weigh on banks’ balance-sheet.
• In several peripheral countries banking systems need substantial capital
injections.
• Steady, or even accelerating deleveraging by parent banks.
22
Deteriorating domestic economic outlook
Economic growth in international comparison
2.5
LV
GDP growth 2012 H1
(compared to end-2011, per cent)
2.0
SK
1.5
1.0
LT
EE
0.5
PL
RO
BG
0.0
Euro area
-0.5
CZ
-1.0
HU
-1.5
0
5
10
15
20
25
30
Cumulated GDP growth 2005-2011 (per cent)
35
Source: Eurostat.
23
The recently benign investor sentiment and expectations
over the EU/IMF negotiations reduced markedly the
Hungarian CDS premia
Decomposition of the Hungarian 5–year CDS spread
400
basis point
basis point
800
350
700
300
600
250
500
200
400
150
300
100
200
50
100
0
0
Oct-12
Sep-12
Aug-12
Jul-12
Jun-12
May-12
Apr-12
Mar-12
Feb-12
Jan-12
Dec-11
Nov-11
Oct-11
Sep-11
Aug-11
-100
Jul-11
-50
International component
Individual component
Hungarian sovereign CDS spread (right-hand scale)
Source: MNB.
24
The outflow of external funds continues to be strong,
significant drop in loan-to-deposit ratio
Estimated and actual change of foreign funds and loan-todeposit ratio
148
EUR Bn
per cent
38
36
140
34
136
32
132
30
128
28
124
26
120
24
116
22
112
20
Dec-09
Jan-10
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan-11
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan-12
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
144
Foreign funds - estimated band (RHS)
Foreign funds - actual (right-hand scale)
Loan-to-deposit ratio - actual
Loan-to-deposit - estimated
Source: MNB.
25
Given the still large FX swap exposure (open onbalance-sheet position), cap is necessary
On-balance-sheet open position of the banking system and the total assets
based market share of banks exceeding the 15 per cent limit
HUF Bn
per cent
15 percent limit
55
50
45
40
35
30
25
20
15
10
5
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
5,500
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Amount of excess
On-balance-sheet open FX position
On-balance-sheet open FX position/Total assets (RHS)
Total assets based market share of banks exceeding the 15 per cent limit (RHS)
Source: MNB.
26
The greatest challenge of the domestic financial
intermediary system is managing the deteriorating
portfolio quality
Ratio of non-performing loans and the cost of provisioning
Corporate
per cent
per cent
per cent
per cent
10
2
6
1
5
1
3
0
0
0
0
Loan loss provisioning
Loan loss provisioning - forecast
Non-performing loan ratio (RHS)
2014 Q2
2
2013 Q2
9
2012 Q2
3
2011 Q2
15
2010 Q2
3
2009 Q2
12
2008 Q2
4
2007 Q2
20
2014 Q2
4
2013 Q2
15
2012 Q2
5
2011 Q2
25
2010 Q2
5
2009 Q2
6
2008 Q2
30
2007 Q2
6
Household
Loan loss provisioning
Loan losses related to the early repayment scheme
Loan loss provisioning - forecast
Non-performing loan ratio (RHS)
Source: MNB.
27
18
High NPL ratio may persist amid sluggish portfolio
cleaning
Cleaning of non performing loans
80
per cent
HUF Bn
16
Q2
2012 Q1
0
Q4
0
Q3
2
Q2
10
2011 Q1
4
Q4
20
Q3
6
Q2
30
2010 Q1
8
Q4
40
Q3
10
Q2
50
2009 Q1
12
Q4
60
Q3
14
2008 Q2
70
Cleaned loans - households
Cleaned loans - corporate
Cleaning ratio - households (RHS)
Cleaning ratio - households (RHS)
Source: MNB.
28
In evaluating portfolio quality, in addition to the
dynamics, the level is also crucial
• Flow problem: new defaults weigh on profitability through loan loss provisioning.
(moderate risk)
• Stock problem:
1. High NPL ratio freeze banks’ balance-sheet (moderate risk)
• Reduces itself willingness to lend, particularly in the corporate segment.
• Refinance of non-performing loans erodes profitability.
• Deteriorates liquidity, increases maturity mismatch, diverts funds from
lending.
2. Not just the NPL ratio, but also loan loss coverage matters (high risk)
• The higher the NPL ratio, the higher the risk of collateral misvaluation.
3. Despite its flaws in terms of international comparability, analysts pay
particular attention to it in their risk perception over the banking sector in
the CEE region. (high risk)
29
Reducing NPL ratio is key
• Reduction of NPL ratio:
1. Through nominator:
• Portfolio cleaning and debtor rescue packages (by reviving loans from
defaults) reduce the nominator.
2. Through denominator:
• Rebound in lending increases the denominator.
• If the NPL ratio cannot be reduced, then the loan loss coverage should be raised:
a.
Higher loan loss coverage may boost portfolio cleaning or
b.
Otherwise would make the banking sector safer, though portfolio cleaning
would be more sluggish.
30
Loan loss coverage is low in regional comparison
NPL ratio and loan loss coverage in international comparison
Ratio of non performing loans to total loan
portfolio(%)
20
Montenegro (1)
Serbia (1)
Albania (1)
Lithuania (3)
Hungary (3)
15
Croatia (3)
Romania (2)
Moldova (3)
Bulgaria (1)
Ukraine (3)
Slovenia (2)
Latvia (2)
Bosnia and
Herzegovina (3)
10
Czech Republic
(2)
5
FYR Macedonia
(2)
Slovakia (2)
Poland (1)
Estonia (2)
0
20
40
60
80
Coverage ratio of non performing loans(%)
100
Note: (1)= 2011Q4, (2)= 2012Q1, (3)= 2012Q2.
Source: EBCI, MNB.
31
In the case of project loans and restructured foreign
currency denominated, insufficient coverage is
plausible
Coverage of non-performing loans
- corporate
800
HUF Bn
HUF Bn
Coverage of non-performing loans
- household
800
800
HUF Bn
HUF Bn
800
700
700
600
600
500
500
400
400
400
300
300
300
300
200
200
200
200
100
100
100
100
700
700
600
600
500
500
400
0
0
NFC
Project-finance
NPL
Value of collaterals
NFC
Project-finance
Restructured (performing)
Provisions
Outstanding amount
0
0
HUF
EUR
CHF
Non-performing mortgage
Value of collaterals
HUF
EUR
CHF
Restructured mortgage loans
passed due less than 90 days
Provisions
Outstanding amount
Source: MNB.
32
Banks are attempting to offset higher costs by
increasing interest margin
Banking sector ROE in
international comparison
per cent
per cent
per cent
per cent
1.0
1.0
-5
-5
0.5
0.5
0.0
0.0
Germany
Hungary
Poland
Romania
Italy
Bulgaria
Czech Republic
Austria
Croatia
Slovakia
Source: IMF GFSR, EKB CBD database, MNB.
Hungary
0
Romania
0
Bulgaria
1.5
Slovakia
1.5
Estonia
5
Czech Republic
5
Poland
2.0
Slovenia
2.0
Latvia
2.5
10
Lithuania
2.5
10
Austria
3.0
Italy
3.0
Belgium
15
Germany
15
2011
3.5
2010
3.5
2009
20
2008
20
2007
4.0
2006
4.0
2005
25
2004
25
2003
4.5
2002
30
2001
30
Net interest income to total assets
(Dec 2011 – consolidated data)
33
4.5
The interest margin remained high on the performing
portfolio
Interest margin (based on aggregated individual, non-consolidated data)
1000 Bn HUF
per cent
3,5
3,4
800
3,3
700
3,2
600
3,1
500
3,0
400
2,9
300
2,8
200
2,7
100
2,6
0
2,5
Jan-09
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan-10
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan-11
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan-12
Feb
Mar
Apr
May
Jun
900
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: MNB.
34
Credit contraction may persist longer than anticipated
•
The resilience of the banking sector and thus its lending capacity is strong.
•
Given the deteriorating portfolio quality and high tax burdens, banks’ earnings may
remain subdued, which may translate into further deterioration in low willingness to
lend.
•
The procyclical behaviour of banks concerns both new lending and loans outstanding.
•
No turnaround is expected in new lending, leading to further contraction in loans
outstanding.
•
Banks are attempting to offset rising losses by widening interest margin (pass-through of
costs to customers).
•
Financial intermediation is becoming more expensive, leading to unsustainable state, as
feedback loop may emerge: loan losses  interest margin  debt servicing burden 
consumption and investment  non-performing loans  interest margin  ….
35
Financial stability heat map
November 2012
April 2012
April 2012
November 2012
Procyclicality
Shock-absorbing capacity
Source: MNB.
36