The recent deterioration in the operational environment of the Hungarian banking sector does not endanger financial stability, due to the adequate capital and liquidity position of domestic banks and the financial strength of their foreign owners.

However, the strong Swiss franc has led to a sharp deterioration in portfolio quality. If retained for long, the moratorium on foreclosures and evictions may result in an increase in further loan losses to banks: borrowers may become less inclined to service their debts, and in addition, the value of property collateral backing mortgage loans may decline. The recession in the commercial real estate market has led to an increase in loan losses in the corporate segment.

Banks are only able to partially offset rising loan losses and the bank levy by raising interest rates and charging higher fees on loans. Consequently, the sector’s profitability is likely to fall to a low level in international comparison. Retained bank levy will expose the domestic banking sector’s profitability to a greater risk of falling behind other banking markets of the region in the long run. That in turn may create a competitive disadvantage for Hungarian banks in the allocation of funding and capital by parent banks.

Credit demand is expected to strengthen in the coming years, in line with accelerating economic growth. The persistence of tight credit supply constraints, however, may increase the risk that economic agents will have reduced access to funding, i.e. they will be unable to exploit their growth potential. Preserving the competitiveness of the domestic banking sector and its strong ability to attract capital is essential for an increase in credit availability and the economic recovery.

Report on Financial Stability (November 2010)