Budapest, 29 November 2017 — The overall shock-absorbing capacity of the Hungarian banking sector can be considered strong, both in terms of liquidity and capital adequacy, furthermore, favourable profitability helps to keep it sustainable. The domestic economic environment of the banking sector has been characterised by broad-based expansion, and growth continued in both lending and the real estate market. In this report, special attention is devoted to the extent of households’ financial vulnerability, and we also discuss the vulnerability-mitigating characteristics of the certified consumer-friendly housing loans. The gap between spreads on fixed and variable-rate loans is considered significant in an international comparison. Risks arising from variable rate mortgages might be mitigated with incentives for interest rate fixation. Banks’ profitability can be treated satisfactory over the long term, while it can mainly be ensured by boosting lending activity and increasing cost efficiency for the future. As a regulator, the MNB is committed to supporting digital innovation, which contributes to increasing cost efficiency and competitiveness in the banking sector.
Since the May Financial Stability Report, the international macro environment has been characterised by continued economic growth, both in developed and emerging countries. Previously identified risks related to the global economy eased, but have not disappeared completely. Banks in some European countries still face legacy issues from the crisis, which resulted in sluggish lending activity. The low global interest rate environment is leading to price increases for real assets (including real estate) and, in conjunction with a further rise in indebtedness, this may end up in intensifying risks in vulnerable countries. Concerning Hungary, however, it can be established that the domestic banking sector’s resilience to external shocks remained strong.
The domestic economic environment of the banking sector has been characterised by broad-based expansion in 2017. Growth continued in both corporate and household lending, and in addition to the SME segment, overall corporate lending also reached the 5-10 per cent growth band supporting sustainable economic growth. Thus, following the phase-out of the Funding for Growth Scheme in early 2017, corporate lending continued to increase, and SME financing was ensured by market-based lending. Looking ahead, rising demand and continuously easing credit standards can be expected, and hence we anticipate similar growth dynamics in corporate lending.
New disbursement of household loans continued to rise in 2017 as well, which was accompanied by a slight easing of credit conditions, predominantly for loans for housing purposes. Developments in the domestic housing market continue to be determined by robust demand, which may be mitigated by a rising supply of new homes in the near future. Examining the changes in real estate prices from an equilibrium perspective, it can be stated that – at the national level – average housing prices remain well below the level justified by current economic fundamentals, while housing prices in the capital do not deviate markedly from the equilibrium, according to our estimations.
In this report, special attention is devoted to the extent of households’ financial vulnerability, and at the same time households’ financial literacy is also assessed. In relation to this subject, we examine borrowers’ decisions regarding their choice between fixed-rate and variable-rate products, and also discuss the vulnerability-mitigating characteristics of the certified consumer-friendly housing loans in particular. The previously observed gap between spreads on fixed and variable-rate loans persists, which can be considered significant in an international comparison. Looking ahead, certified consumer-friendly housing loans are intended to address this issue through new lending, while in relation to risks arising in the existing stock of loans, incentives for refinancing with interest rate fixation might be taken into consideration.
The credit institutions sector was characterised by extremely high profitability in 2017 H1 again, although this is still attributable to unsustainable, one-off items. In assessing banks’ profitability, the current extraordinary interest rate environment must be taken into account: compared to risk-free returns or the inflation rate, the current profitability can be seen as satisfactory and its level is similar to what was seen in the months immediately preceding the crisis. Based on the long-term evaluation of profitability, for the sector as a whole it can be stated that since the crisis banks have mainly attempted to compensate for the decline in net interest income by reducing operating expenses. With regard to the largest banks, however, it can be seen on the one hand that there was relatively less adjustment in these expenses, and on the other hand that the level of income actually increased in proportion to their assets, compared to the pre-crisis levels.
Over the medium and long term, the profitability of the banking sector can mainly be ensured by boosting lending activity, expanding the range of services and increasing cost efficiency; the latter can be achieved by intensifying the utilisation of digital technologies. As a regulator, the MNB is committed to supporting digital innovation: a regulatory framework which is designed for the characteristics of the domestic market can contribute to the spread of FinTech innovations, and thus help increase competitiveness and cost efficiency in the banking sector.
The portfolio cleaning of non-performing loans from banks’ balance sheets continued in 2017 and so far this has not resulted in any significant losses for the Hungarian banking sector. Thanks to this portfolio cleaning, the shock resilience of the sector has improved significantly. The initial capital adequacy of institutions is solid, and loan loss provisions would not increase significantly even in a stress scenario. Thus, most of the banks would remain profitable even in the scenario assumed in the stress test. The cleaning of balance sheets will help to improve banks’ lending activity over the long term, while the social implications of debt settlement should be followed with increased attention.