Budapest, 25 May 2017 – The overall shock absorbing capacity of the Hungarian banking sector can be considered strong in terms of both liquidity and capital adequacy, and the sector can be characterised by solid profitability. In 2016, a complete turnaround in corporate lending has taken in place, while, looking ahead, further expansion can be expected after the Funding for Growth Scheme is phased out. A pick up in household lending is also noticeable, which is accompanied by an upturn on the housing market; these developments should be kept in an adequate channel, and a close attention should be payed to the potentially emerging risks. Thus, expansion in mortgage lending needs to be supplemented by a healthy price competition; this will be facilitated by the MNB proposal on certified “consumer-friendly” housing loans. The decline in interest income resulting from a greater price-competition can be counterbalanced by increased cost efficiency, thus an improvement in both competitiveness and stability can be ensured.
The global macroeconomic environment is characterised by diverging monetary policy challenges. On the one hand, the ongoing cycle of interest rate increases by the US Federal Reserve, which has resulted in contrarian expectations being priced in on the bond and stock markets, plays a prominent role in the risks identified in the global financial markets. On the other hand, the new economic policy details of the US Administration are relatively unclear at present, and thus any actual measures may result in a reassessment of risks as compared to current expectations. By contrast, in the euro area the low interest rate environment is expected to remain in place, while the European banking sector continues to be burdened by legacy issues from the crisis. As a result of this, its lending activity is still fragile. Looking ahead, in some European countries the rise in long-term yields may cause vulnerability in relation to their sovereign and private sector debts.
As far as the operating environment for the domestic banking sector is concerned, a significant improvement has been seen compared to the previous years. A complete turnaround has occurred in lending developments. Rising consumption and investment demand is generating steadily increasing credit demand in both the corporate and household sectors. In terms of net disbursements and repayments, domestic corporate lending grew by a total 4 per cent, expanding a rate not recorded since the crisis. The credit growth seen in the SME sector is in the 5–10 per cent band which is deemed sustainable by the MNB: an 8 per cent expansion was observed in the case of non-financial corporate SMEs, while the rate of growth including sole proprietors amounted to 12 per cent in 2016. Looking ahead, developments in corporate lending will be driven by rising credit demand, easing credit conditions, the low interest rate environment and continued support from the MLS; consequently, further growth in lending is expected after the Funding for Growth Scheme is phased out.
Within the three phases of the FGS, 78,000 credit and leasing contracts were originated with a volume of some HUF 2,800 billion, providing financing at favourable, predictable conditions for almost 40,000 SME clients. Since 2016, a total amount of HUF 685 billion was contracted by participating credit institutions for their SME clients during the third, final stage of the programme which ended on 31 March 2017. This means that 98 per cent of the available amount of HUF 700 billion was utilised. The programme successfully ended the previous annual downward trend of 5–7 per cent in SME lending and triggered a turnaround in lending, while at the same time contributing 2 percentage points to economic growth and boosting employment by a total of 20,000 persons between 2013 and 2016.
Signs of a sustained turnaround in household lending can also be identified, accompanied by the continuous easing of credit conditions. Nevertheless, the average interest rate spread on housing loans significantly exceeds those observed in the region, which is mainly attributable to inadequate competition. The pick-up in the housing market has been accompanied by a strong upturn in lending for housing. Based on our equilibrium estimations, the housing market cannot be considered overpriced, neither at the national level nor at the regional level. At present, macroprudential instruments are keeping the outflow of household credit in an adequate channel. However, with regard to the rapid appreciation of housing prices in Budapest, it is necessary to pay increased attention to ongoing developments.
The Hungarian banking sector was characterised by solid profitability and solvency in 2016. The sector closed the year with outstanding results, recording a historically high return on equity (16.9 per cent before taxes). This outstanding profit further increases the already robust capital buffers in the sector. At the same time, the positive results are tempered by the fact that the profit of the banking sector is mostly the result of unique and one-off, unsustainable items; excluding these items, the sector’s long-term profitability may be much lower than its current profitability. Nevertheless, taking into account the currently low interest rates in addition to the cyclically high non-performing portfolio, the current profitability of the sector can be considered satisfactory on the whole. In 2016, an extensive portfolio cleaning was carried out by banks in both the corporate and household non-performing portfolios; looking ahead, however, further steps are still needed for an appropriate treatment of the outstanding amount. Portfolio cleaning boosts banks’ long-term profitability, and despite the one-off loss in the short term, the current profitability is able to cover this.
In this issue of the Financial Stability Report, we conducted a detailed analysis of banks’ operational efficiency and issues related to loan pricing. The symptoms of “overbanking” observed in the European financial sector are also present in the Hungarian banking sector, and a comprehensive analysis of the sector’s efficiency points to insufficient market competition. This is mainly attributable to residential mortgage lending, and accordingly the MNB plans to introduce a recommendation for certified “consumer-friendly” housing loans, in order to improve competition and efficiency on the market. The decline in interest income resulting from a greater competition can be counterbalanced by increased operational efficiency, which can be facilitated according to an international comparison. Thus, increase in price competition and cost efficiency together could ensure an improvement in competitiveness and stability as well.