Budapest, 31 May 2018 — The overall shock absorbing capacity of the Hungarian banking sector can be considered strong, both in terms of liquidity and capital adequacy. The indebtedness of both the corporate sector and the household sector can be deemed cyclically low in the current favourable environment, and the domestic banking sector has significant capacity to increase its lending activity. The continuous improvement in banks’ profitability enhances their resilience, but – over the longer term – this profitability needs to be underpinned with increased business activity and cost efficiency. The MNB is continuously monitoring domestic and international financial developments and uses its toolkit to identify and manage any emerging risks. The financial system is characterised by the following current developments and challenges.
The economic outlook has continued to improve since the publication of the November Financial Stability Report. The improving global macro environment is coupled with a gradual increase in inflation expectations, which is also reflected in the recent changes in yield curves. The repricing of yield expectations reflects different monetary policy challenges in the United States and Europe. The rise in US yields in early 2018 resulted in sharp declines on money and capital markets, while forward-looking indicators point to mounting uncertainty on the markets. In 2017, the risks in the European banking sector eased considerably, but did not disappear completely. One favourable development is that the ratio non-performing loans at European banks declined significantly in the recent period, although the market is still pricing in an adverse business outlook for many institutions. Nevertheless, it can be established that the domestic banking sector’s resilience to external shocks remained robust.
Special attention is devoted in the Report to developments in the sustainability of corporate and household lending. We found that the extent of indebtedness in both sectors as a proportion of GDP is much lower than the average of the regional peers from a cyclical point of view, and significant capacity is available for an expansion of lending in the current environment. This could occur via two channels: firstly, by the credit cycle catching up, i.e. closure of the credit gap, and secondly, through the trend of financial deepening.
Corporate lending started to increase several years ago. In 2017, SME lending expanded at a rate of 12 per cent, and lending to the corporate sector as a whole also reached double-digit growth in annual terms. In the Report, developments in lending are assessed in terms of various corporate features (sector, ownership, access to cross-border financing). Based on our findings, we expect further, balanced growth in lending to occur in several key sectors. In addition, the Report focuses on the quality features of post-FGS SME lending, which has been characterised by a decline in investment loans with long interest rate fixation and their replacement with shorter-term loans.
Broad-based growth was once again recorded in household lending in 2017, which was reflected in the segments of both housing and consumer loans. The expansion was primarily attributable to stronger demand, but banks also eased their credit conditions. Within new housing loans, the ratio of loans with longer-term rate fixation is increasing, and within that the share of certified consumer-friendly housing loans is also expanding. Stronger competition is also reflected by the growing ratio of institutions applying lower spreads and the widening range of customers involved in lending. In the Report, developments in interest rates on housing loans and in risk-taking are discussed in detail, with particular attention to the short-term results of certified consumer-friendly housing loans.
The Hungarian housing market is a special topic in the Report. The upturn on the housing market continued in 2017, basically due to stronger demand. Nevertheless, the market cannot be considered overheated, and according to our condition indicators, housing prices are at the level justified by the fundamentals. The supply side is also assessed with the help of a survey conducted with real estate developers active in the residential property development market; according to the respondents, frictions due to capacity constraints are apparent in this area.
Continued improvement in banks’ portfolio quality is one of the key pillars of the improving resilience of the Hungarian banking sector. 2017 was characterised by consolidation and cleaning of the non-performing portfolio, with the NPL ratio falling to almost 7 per cent and 10 per cent in the corporate and household segments, respectively. Nevertheless, in the case of households, banks’ portfolio cleaning still does not represent a complete solution to the problem, and thus we pay special attention to the features of the debt management sector. At the same time, both the liquidity and capital positions of the domestic banking sector are strong, and banks preserve their shock absorbing capacity even in the presumed stress scenarios.
Over the short run, institutions can ensure a sustainable level of bank profitability by expanding lending activity, improving operational efficiency and implementing digitalisation solutions. In this context, the Report also focuses on the presentation of the current challenges of cyber security and bank digitalisation as well as on the MNB’s active role in incentivising innovation through the operation of the Innovation Hub.