Budapest, 4 December 2019 – The shock absorbing capacity of the Hungarian banking sector is still robust. According to our solvency stress test, the institutions of the domestic banking sector would meet the regulatory requirements concerning capital position even following a major negative macroeconomic shock. At the same time, the functioning of the banking sector remains under increasing pressure from both domestic and international developments, compelling the participants in the sector to innovate.

In the past period, government and central bank programmes played important roles both in the financing of the private sector and in the market of household savings. Simultaneously with that, as FinTech firms gain ground, competition in the market of financial services is also becoming increasingly intensive, and social expectations regarding the quality of services are also growing. Banks are exposed to these challenges in a low yield environment, which keeps their revenues under pressure, and makes them increase their efficiency by way of either digitalisation developments or mergers and acquisitions.

A number of domestic financial institutions are unprepared to fully meet the above challenges. However, the current favourable domestic economic environment and outstanding profitability provide a suitable environment for banks to be able to respond to the changing circumstances. But those financial institutions that continue to postpone adjustment (digital development projects, mobile banking, rationalisation of the branch network) will be unable to meet the profitability expected from them, and they may be forced out of the market over the medium term.

In the December 2019 Financial Stability Report, our main conclusions regarding the recent developments and risks in the banking sector are as follows.

In the past half year, the global macroeconomic environment was characterised by deepening trade and geopolitical tensions as well as increasing fears of recession in some regions. Reacting to the decline in inflation and the slowdown in growth, major central banks reduced their respective policy rates again, and also announced further expansive steps. Deterioration in the external environment has a negative impact on the growth prospects of the domestic economy, and thus it poses a risk to the domestic banking sector as well. The fundamentals of the domestic economy and the Hungarian banking sector have strengthened considerably since the outbreak of the 2008 crisis, and thus the domestic financial system has prepared itself for the risks stemming from the deterioration in the external environment.

The balance sheet total of the credit institutions sector increased further in 2019 H1, in which the dynamic rise in loans granted to the private sector (households and companies) played an important role. Credit institutions’ household loans outstanding rose by 13.8 per cent between September 2018 and September 2019, while corporate loans outstanding also grew significantly, i.e. by 15.4 per cent compared to the same period of the previous year. The expansion in loans outstanding took place in parallel with a strengthening in economic fundamentals, and at present it does not show any signs of overheating either in terms of volume or composition.

Amid favourable domestic economic activity, banks’ profitability is outstanding even in an international comparison, which, however, conceals certain structural problems of the sector. In H1, the reversal of the provisioning carried out during the years of the crisis played a declining but still considerable role in the high level of bank profitability. Some of the domestic banks need to take further efficiency-improving measures in order to ensure sustainable profitability. This is also corroborated by the results of the MNB Banking System Competitiveness Index, according to which the Hungarian banking sector is still considered to be a laggard among the European banking sectors in terms of the various dimensions of efficiency.

The most important risks presented in the previous Report still exist. The upswing in the housing market continued, especially in the capital, where housing prices appreciated by nearly 22.5 per cent between June 2018 and June 2019. According to our estimation, in Budapest the risk of overvaluation of housing prices remains. However, the impact of real estate market developments on the banking sector is limited by the fact that the stock of bank exposures sensitive to the changes in the real estate market is low as a percentage of the regulatory capital. The length of interest rate fixation is increasing within household mortgage loan disbursements, but the bulk of loans outstanding is still characterised by interest rates variable within a year, and thus they are considerably exposed to changes in the interest rate environment. The extension of the globally low interest rate environment reduces the interest rate risk of domestic debtors that have variable-rate loans, providing additional time for the loans outstanding to gradually shift towards fixed interest rates.

The operating environment of the domestic banking sector is significantly affected by the government and central bank programmes launched in 2019 H1. The prenatal baby support loan, which has been available since 1 July 2019, resulted in major loan outflows in the summer months. Due to the significant increase in lending dynamics and the fiscal risks existing because of the state guarantee, continuous monitoring of this portfolio is needed. As a result of its outstanding yield and favourable redemption conditions, the Hungarian Government Security Plus (MÁP+), which is available since 1 June 2019, causes gradual restructuring in the market of household savings. For the time being, government securities purchases from bank sight deposits have entailed only a moderate financing risk for banks. MÁP+ may restrain private investors’ demand in the market of residential properties, attenuating the rate of price appreciation in the housing market. In addition, by reducing interest in public property funds, MÁP+ may also have an impact on the financing and investor structure of the commercial real estate market.

The Bank’s programmes have contributed to the financing of companies in both qualitative and quantitative terms. On 1 January 2019, the MNB launched the Funding for Growth Scheme (FGS) fix. Under the Scheme, small and medium-sized enterprises can have access to long-term forint funding with predictable instalments. The uptake of the FGS fix exceeded HUF 300 billion by the end of September. In order to enhance liquidity in the corporate bond market, the Bank introduced the Bond Funding for Growth Scheme (BGS) on 1 July 2019. The total amount available under the Scheme, at HUF 300 billion, is expected to be fully utilised by early 2020.