Based on the liquidity stress test, the liquidity of the banking sector is adequate; the liquidity surplus is sufficient to ensure that even in the event of a severe shock all credit institutions remain capable of exercising their intermediary function. The banking sector’s reliance on foreign funds has been decreasing gradually and the loan-to-deposit ratio has dropped to around 110 per cent at the system level.


The financial system’s ability to support economic growth has been improving; however, for the time being, this favourable trend can be mainly attributed to the central bank’s measures. Both the central bank’s series of interest rate cuts, which affect the entire national economy, and the Funding for Growth Scheme (FGS) aimed at supporting SMEs have played a dominant role in the improvement in corporate lending. So far, HUF 701 billion has been disbursed under the FGS. It is a particularly favourable development in terms of real economic growth that 63 per cent of the loans disbursed under Pillar 1 were new loans, with nearly two thirds of the loans financing investment projects. Owing to the capped 2.5 per cent interest margin of FGS loans, the interest burden on companies has eased significantly both for new loans and refinanced loans. According to expert forecast, as a result of the MNB’s measures, the steady contraction in total corporate loans in the past few years is expected to come to a halt in 2014; moreover, the SME sector will see a turnaround in lending as early as at the end of 2013.


However, for a sustained recovery in corporate lending a significant easing of credit conditions is required on the supply side. Over the medium term, the subdued lending activity of large banks may be offset by the increase of credit availability of small and medium-sized banks and cooperative credit institutions. This, however, will require the strengthening of the capital adequacy and funding capacity of these credit institutions.


The foreign currency debt of households poses a particularly significant risk to financial stability. Despite a considerable contraction in foreign currency mortgage loans, the outstanding portfolio still remains substantial, amounting to HUF 3,500 billion linked to 500 thousand contracts. Debtors spend a significant portion, 25 per cent of their disposable income on debt servicing. At the same time, due to the lack of a natural hedge, households face severe exchange rate risks, and managing this exposure is in the interest of all stakeholders. In the case of households the problem could be solved by eliminating the exchange rate risk; meanwhile, however, the need to mitigate debtors’ exchange rate risk and debt-service burdens may warrant the extension of transparent pricing (lending rates linked to benchmark rates) to the outstanding mortgage loan portfolio. As regards this sector, resolving the problem of foreign currency debtors may well bring forward the rebound in household lending.


Although the deterioration in the household portfolio is expected to decelerate over the next few years leading to a decline in the ratio of non-performing loans, besides performing foreign currency debtors, the problems of those with non-performing foreign currency and forint loans should be also addressed. The portfolio of non-performing mortgage loans amounts to HUF 900 billion, affecting around 120 thousands households, while non-bank intermediaries also have significant outstanding amount of non-performing loans. The expeditious introduction of the private bankruptcy could lend support to the complex management of the problem of excessively indebted households.


Improving growth prospects have a positive impact on the income position of the corporate sector, reducing the bankruptcy risk of individual participants. As a result, the non-performing corporate loans ratio is expected to stop deteriorating further, while the cost of provisioning may fall behind the level recorded in previous years.
The outlook for the domestic banking sector is marked by persistently weak profitability, which may prompt some banks to revise their market strategies. This may lead to market consolidation. During the consolidation smaller banks and cooperative credit institutions could boost their market share significantly over the short run while, over the long run, the entry of new participants cannot be ruled out either.

Report on Financial Stability (November 2013)


7 November 2013

Financial Stability Council