Budapest, 23 May 2019 – The shock-absorbing capacity of the Hungarian banking system continues to be robust. Banks’ capital adequacy ratios indicate strong solvency, while the liquidity coverage ratio is also well above the regulatory requirements. Based on the results of our methodologically developed solvency stress test, the institutions in the Hungarian banking sector would be able to meet the regulatory requirements even in the case of a severely adverse macroeconomic scenario.

In 2018, Hungarian banks continued to expand their balance sheet, especially their outstanding loans vis-a-vis the private sector. Corporate loans outstanding of credit institutions rose by 14 per cent during the year, while their household loans increased by over 7 per cent. The favourable economic environment and the wide range of regulatory instruments ensure that credit growth is occurring in a balanced and sustainable way.

In order to foster the mitigation of households’ interest rate risk, the MNB issued a recommendation to financial institutions. Furthermore, it launched the Bond Funding for Growth Scheme to support deepening of the bond market. Due to the relatively high share of variable-rate loans, debtors in both the household and the corporate segment are sensitive to interest rate fluctuations. In the case of household loans, there is only a limited room for manoeuvre in reducing interest rate risk on a market basis on account of the high costs of refinancing, the inappropriate financial awareness of borrowers and the large share of those debtors who are not creditworthy. Therefore, the MNB issued a recommendation to financial institutions, pursuant to which they specifically target the most affected customers who have variable-rate mortgage loans, by making an offer to transition to a fixed-rate scheme with an amendment to the contract. In the corporate loan segment, the share of fixed-rate loans increased again for longer maturities, thanks to the Funding for Growth Scheme Fix. The further improvement in the corporate sector’s resilience to crises as well as the opportunities for diversifying funds may be fostered by the Bond Funding for Growth Scheme, the central bank’s programme aimed at deepening the bond market, in the coming years.

The Report gives a detailed account of the following major risks and developments influencing the Hungarian banking system.

The uncertainty of the international macroeconomic environment has not decreased. In early 2019, a slowdown in global economic growth was observed, affecting growth forecasts as well as the expected development of inflation and interest rate changes. Major central banks typically postponed interest rate hikes in the face of the changing economic environment, and therefore the low interest rate environment is now expected to be more persistent than previously forecasted. The downward shift in market expectations regarding developed country interest rates has also reduced the risk of capital flight from developing countries, yet the risks entailed by the low interest rate environment (over-indebtedness, asset price bubbles, less room for central bank stimulus) have become more pronounced. The greatest external risk faced by the Hungarian economy is the substantial slowdown of the economic growth in the euro area, specifically Germany, but the Hungarian economy is more resilient to shocks than before due to its strengthening fundamentals.

The risk of overheating on the Budapest housing market has increased. Property prices in the capital continued to increase during the year, achieving a 22.9 per cent annual growth rate by the end of 2018. Compared to the trough in the current housing market cycle at the end of 2013, housing prices have soared by 153 per cent in five years. The effect exerted by the potential overvaluation of the housing market on the banking system is mitigated by the fact that the price increases were not coupled with a considerable rise in the share of risky loans with a high loan-to-value ratio (LTV). The proportion of mortgage loans with an LTV of over 70 per cent relative to banks’ own funds is at a fraction of the pre-crisis levels, both in terms of outstanding loans and new contracts. This suggests that a potential housing market shock would be less likely to create a negative, self-reinforcing spiral between the banking system and the housing market.

The geographically heterogeneous pick-up in the property market helps only some of the delinquent debtors. While house prices in the capital have skyrocketed in recent years, the property market has hardly recovered in certain parts of the country. Delinquent mortgage debtors in these areas are in an especially difficult situation, since selling their property does not typically offer them a way out of the default status. This problem may be alleviated by the “rural HPS” (Home Purchase Subsidy Scheme for Families) programme announced by the Government to support the property market in areas suffering from population loss. Although the issue of overdue loans is nowadays concentrated on the balance sheets of workout companies, which poses a limited risk to banks, the Report continues to focus on this in view of the social aspects of the phenomenon.

The banking system’s profits have dwindled compared to the extreme levels seen last year on account of the reversal of impairment losses. Releasing write-downs has significantly boosted profits in recent years, but this process seems to have lost momentum by the end of 2018. The write-back of earlier reserves concealed the fact that banks’ structural profits (which can be maintained in the long run) are considerably lower than in the past two years. Improving cost effectiveness is still considered to be crucial to boost sustainable profitability, and it may be greatly facilitated by cost-cutting measures (e.g. digitalisation, consolidation), as well as the expansion of credit.