Budapest, 19 May 2016 - The shock-resilience of the Hungarian banking sector is robust, its external vulnerability continued to decline along with the vulnerability of the whole economy, and the resulting positive effects have been appreciated considerably in the light of the increased global financial stability risks. Market-based corporate lending, where subdued activity has been the main problem since the crisis, is expected to improve significantly during 2016 due partly to the Growth Supporting Programme. At the same time, the considerable non-performing household and corporate loans exposure stuck in the balance sheets of banks continues to pose a primary risk. Managing NPLs is essential for the banking sector to become able to adequately support sustainable economic growth.

The shock-absorbing capacity of the Hungarian banking sector continues to be strong; its capital position remains robust even in case of severe financial and economic stress. Capital adequacy at banking sector level amounts to 20 per cent, while the liquidity situation remains adequate in spite of the decline in liquidity stemming from certain central bank measures. The liquidity reducing impact was adequately offset by the expansion in banks’ government securities holdings, which was stimulated by the MNB’s self-financing programme as well, and it also reduced the external vulnerability of the country through the increasing domestic financing of government debt. The vulnerability of the banking sector continued to decline in 2015 H2 as a result of the conversion of the remaining household FX loans into HUF and a decrease in short-term external liabilities. The further decline in the vulnerability of the banking sector and the country was particularly important in the light of the increased global financial stability risks.

Overall, market-based corporate lending did not recover in 2015 either, which is also attributable to high risk aversion of banks. Corporate loans outstanding excluding one-off items shrank by 2.1 per cent. However, the focus should be on SME lending, as it proves to be a more reliable indicator on trends in lending. SME sector plays a pivot role in terms of sustainable and inclusive growth, while large corporations can easily substitute domestic bank loans and given large loan sizes and subsequently high concentration, one-off cases can distort figures to a great extent. Outstanding loans to small and medium-sized enterprises further increased in 2015 H2, by 3.6 per cent year on year. The MNB launched its Growth Supporting Programme in early 2016, aiming at the restoration of market-based corporate lending. Based on banks’ SME lending commitments related to the programme, SME loans outstanding may increase by 5–10 per cent during 2016 and 2017, and thus market-based corporate lending is expected to recover.

The housing loan and real estate markets picked up markedly during 2015 H2, which has been reflected in the considerable surge in housing prices and market turnover, as well. At the same time, the market is rather segmented; the pick-up was driven by used homes in the capital. Considerable pick-up is seen on the demand side as a result of increasing employment, growing real incomes and a low interest rate environment. All this may result in a wide range surge in demand. This trend is expected to continue, given that housing prices in nominal terms only returned to their levels seen ten years ago. Demand may further be heated by investment purpose, as last year’s real estate market yields are attractive in the low interest rate environment. Looking at the supply side, however, the construction of new homes remains subdued both in historical and international comparisons, which may lead to market frictions and a tight real estate market. As of 2016, the extended family housing allowance and the VAT reduction may drive the demand towards new homes, facilitating at the same time the adjustment of supply as well. Currently the rise in housing prices and demand for housing loans is not excessive, while the central bank macroprudential safety net also ensures sound lending. Nonetheless due to market frictions and external impacts, MNB has to closely monitor the real estate market and lending for housing.

The most important challenge of the current period is managing the problem of non-performing mortgage loan debtors. The National Asset Management Agency (NAMA) is settling the debts and dwelling of a total 35 thousand non-performing debtors, who are in a more difficult social situation. Nevertheless, even after that, the situation of some 130,000 non-performing mortgage loan debtors, i.e. nearly one quarter of total debtors, will remain unsettled. In this segment there are significant restructuring reserves as two thirds of the debtors have declared income, while more than 40 per cent paid off their debts partially, but not sufficiently for being classified as performing. Non-performing debtors’ cooperation, observed to be low previously, is improving with the ceasing of the eviction moratorium, which is a key to successful search for a solution. In order to explore reserves in recovery, the MNB issued a recommendation for credit institutions, determining in detail the expected minimum framework of the cooperation between debtors and banks, focusing on sustainable solutions. The MNB continues to closely monitor the impact of its recommendation, and examines the necessity of applying further incentives.

In the case of corporate non-performing loans the resolution of a large bank reduced the banking sector exposure markedly; however substantial problematic commercial real estate exposure remained in the balance sheets of the banks with a restrained cleaning rate in the past years. Looking ahead, improving commercial property market and of distressed assets may support the cleaning of banks’ balance sheets. Incentives announced by MNB play a significant role in the pick-up of the market of impaired assets both on the demand and the supply side.

The profitability of the banking sector turned positive last year, and along with the decline in fiscal burdens, the growth in lending and increase in cost efficiency can result in a return on equity of 6-8 per cent in the banking sector for 2016 and 2017. In the longer term, despite the growing regulatory capital needs, RoE can rise to 10 per cent but the clean-up of distressed assets and systemic-wide consolidation for further improvement of cost-to-asset ratios are needed. This trend could be suitable for the banking sector to be able to adequately support sustainable economic growth over the long term.