Budapest, 23 November 2015 - The vulnerability of the Hungarian financial system declined considerably in the past period. Settlements of mortgage loans and the conversion into forints carried out in two steps was able to manage the most important systemic risk stemming from households’ foreign currency loans. The central bank self-financing programme also significantly reduced the country’s external vulnerability. The Funding for Growth scheme effectively stabilised lending to non-financial corporates, however, market based lending remained remarkably subdued. The dynamics of corporate lending, however, is still fall behind from the 6-7 per cent year on year increase, which is considered to be supportive to sustainable economic growth. Over the next two years, restoring market-based corporate lending and resolving the non-performing portfolio will be the largest challenge for the banking sector. The central bank initiates the Growth Supporting Programme (GSP) as a targeted incentive for corporate lending; as a result in 2016, the programme may achieve a 5-10 per cent increase in total corporate and SME lending, in particular.
In recent years, Magyar Nemzeti Bank has achieved the stabilisation of corporate lending through the Funding for Growth Scheme (FGS). However, market-based lending has not picked up considerably. For this purpose, the MNB addresses an important role to the instruments to be introduced as of 2016, providing positive incentives for lending. With the cooperation of the banking sector, the risk of a creditless recovery can be mitigated, and a sound expansion in market-based lending may result in a more dynamic convergence. In addtion, an increase in sustainable economic growth would also improve the market environment of the banking system. Shock absorbing capacity of the domestic banking sector is solid, the capital and liquidity position is currently adequate. The conversion of the remaining foreign currency household loans and the selffinancing program lowered the vulnerability of banks and through that the vulnerability of the whole economy as well. However, the banking system still remains contractionary, i.e. it has a negative contribution to economic growth. Against this background, basically three main challenges shall be addressed in the financial system.
1. Although the FGS successfully counterbalanced the fall in corporate loans outstanding, marketbased lending has not recovered yet. Corporate lending is characterised by a dual trend: while lending to the SME sector increased as a result of the Funding for Growth Scheme, a major decline was observed in outstanding loans to large corporations in 2015, which is partly attributable to certain one-off effects. As a result, corporate loans outstanding in the financial intermediary system declined by a total 3.4 per cent year on year. The banking sector continues to be characterised by cautiousness and low risk appetite, hindering the recovery of market-based corporate lending. Therefore, there is a risk of a creditless recovery, which would suggest a lower future growth potential than what is necessary for a converging country. On a longer term, corporate lending is well below the 6–7 per cent expansion that supports sustainable economic growth. The underlying trends in corporate lending are fragile, both on the demand and supply sides. In order to reduce these risks, funds with favourable conditions will remain available for SMEs in a more targeted form and lower volume in 2016, during the phase-out stage of the FGS. Furthermore, additional targeted measures to stimulate market-based corporate lending in the bridging period of the next one and a half to two years will be taken. As a result of the aforementioned measures through the product development of banks, nonfianncial corporates may have access to finance in forints with long-term maturity and an interest rate fixation. The instruments of the GSP may potentially result in a HUF 250-400 billion increase in corporate loans outstanding, thus total corporate, and SME lending in particular, is expected to grow by 5-10 per cent in 2016. Therefore, GSP may contribute to GDP growth by an additional 0.5-1 percentage points.
2. The share of non-performing loans in household mortgage and commercial real estate portfolios is still high As a result of the conversion into forints and the settlement of households loans, the risk of new defaults in the existing portfolio declined considerably. In the case of new loans, the debt cap rules mitigate this risk. However, the high ratio of distressed household mortgage loans continues to be a significant risk in the financial system. Adjustment of the personal bankruptcy conditions and the expansion of National Asset Management Agency for mortgage loans may help mitigate this risk by facilitating the resolution of the non-performing portfolio. In addition to these government measures,however, further incentives may be needed in order to facilitate market solutions carrying out the distressed mortgage portfolio. According to a deep analysis, the primary source of distress is not the lack of the necessary income, but the relative overindebtedness in the case of a markable share of the concerning portolio. Thus, resolving the mortgage portfolio may be achieved by the set of existing instruments, i.e. through sustainable restructurings. However, a more intense cooperation between debtors and creditors is necessary in order to faciltiate the resolution, for which removing the administrative obstacles is necessary. In relation to the quality of the corporate portfolio, nonperforming project loans continue to be the problem; the activities of MARK may help to resolve this problem. Several important steps have been taken already, and as a result, a debt manager functioning on a market basis and setting a European precedent may soon commence operations.
3. The profitability of the banking sector may return to positive territory this year, but still remains low by international standards. While the aggregate effect of recent regulatory measures is almost neutral over the medium term, banks’ profitability outlook should improve over the next two years on the whole, due to the lower provisioning requirements for loan losses. Despite this, the banking sector’s profitability may still remain low in international comparison. As a result of the weak capital accumulation capacity, profitability, which is permanently below the expected return on equity, has a negative impact on the growth potential of the banking sector and thus on the ability to adequately support sustainable economic growth. There is room for further improvement in profitability by improving cost efficiency. Cost savings by the banking sector can be increased not only at the level of individual banks, but also through mergers of institutions by the exploitation of synergies, thus making the sector more profitable. However, this is a lengthy process and poses challenges for the players concerned.
Resolution of the large portfolios of non-performing loans and an increase in cost efficiency are both needed for the restoration of structural profitability, after which it may become possible to ensure the role of the domestic financial system in supporting sustainable economic growth over the long term as well.