MNB has published its Financial Stability Report, May 2020 – statement by the Financial Stability CouncilPrint
Budapest, 22 May 2020 – Leaving behind the legacy of the 2007-2008 crisis, the Hungarian banking system is prepared to face the challenges likely to result from the COVID-19 pandemic with healthy balance sheets and adequate capital and liquidity reserves. Based on our stress test exercise, most of the banks would require no capital replenishment even if a very severe economic path were to materialise. At the same time, the real economic impacts of the coronavirus will have a significant negative effect on the banking system and, consequently, the financing of economic agents.
The spread of the coronavirus presents an unexpected and novel shock for the world economy struggling with multiple vulnerabilities. The pandemic – which originated in China, a country deeply integrated into the global production chain – initially caused disruption in production chains leading to a supply-side shock. With the spread of the pandemic, the government restrictions introduced as precautionary measures drastically altered consumer behaviour, and demand collapsed in numerous sectors (in particular tourism, catering, leisure and commerce related enterprises). In order to offset the negative economic impacts, many countries took extremely large-scale fiscal and monetary measures. Global economic growth may drop significantly in 2020, while the scale and rate of a post-pandemic recovery will essentially depend on the effectiveness of the announced government schemes and the lending capacity of the financial system.
The Hungarian financial system is prepared to face the coronavirus-related negative impacts in a fortified state. The balance sheet of the Hungarian banking sector has improved tremendously in recent years. Liquidity reserves are abundant, while profitable operations and the macroprudential capital buffers built up in recent years have led to a robust capital position. Lending risks have been reduced thanks to a healthier loan portfolio structure and low-level indebtedness. The debt cap rules introduced in 2015 put an end to excessive indebtedness in retail lending. Thanks to the conversion of retail foreign exchange loans into HUF loans, the exchange rate vulnerability of the retail loan portfolio ceased to exist, and by the end of 2019 loans with an initial interest rate fixation of over one year accounted for more than 50 per cent of mortgage loans outstanding. The share of project loans has declined significantly within the corporate loan portfolio. Non-performing loans in both the household and corporate segments reached their pre-2008 rates. Consequently, supported by the government and central bank measures, Hungarian banks have successfully overcome the difficulties of the previous crisis and are prepared to weather the impacts of a shock similar to the present one.
About one-third of the banks’ loan portfolios can be considered vulnerable due to coronavirus-related effects. The credit institutions may face challenges due to loans in the sectors particularly affected by the pandemic situation. Debt servicing may be problematic for companies suffering from massive revenue losses. Adapting to the circumstances, the affected companies could start reducing workforce as a cost-cutting measure and therefore, along with increasing unemployment, debtors employed these sectors may also soon face repayment difficulties. Based on our estimation, the volume of the potentially problematic loan portfolio could reach one-third of the total stock.
The volume of new loans and growth of the existing portfolio may decline significantly as a result of the pandemic. Supply and demand for loans are expected to drop substantially in the coming months due to increased uncertainty. As regards companies, demand for investment loans may fall significantly, along with a potential rise in demand for short-term loans. On the other hand, the increasingly uncertain labour market situation and the decline in personal interactions may reduce demand for household loans. Banks’ risk appetite may decline in both segments as a result of the deteriorating economic outlook, also reducing the credit supply. However, due to the substantial bank reserves, the loan portfolios are not expected to contract permanently as was the case in the period between 2008 and 2014, even if a deeper economic downturn occurs.
The profitability of the banking system may drop significantly in 2020, but based on our stress test exercise the sector will be able to cope even with a major setback. Every issue of the Financial Stability Report presents how the banking system would cope with the impacts of a highly negative stress scenario. Taking into account the high-level uncertainty of the real economic and financial forecasts, the current report estimates the impacts of two stress scenarios. Based on our results, the pandemic will significantly influence the profitability of the banking system, but most of the Hungarian banks will require no capital replenishment even if a more severe stress path evolves.
In terms of stability, it is essential that the behaviour of the banking system not exacerbate the problems emerging in the real economy. Several measures by the government and the Magyar Nemzeti Bank aim to prevent procyclicality in the banking system, i.e. the mutually reinforcing negative interactions of the financial and business cycles. The main goal of these measures is to minimise the immediate pandemic-related stresses, to prevent lasting, long-term economic losses and to facilitate the fastest possible reopening of the affected sectors.
The first round of government measures was aimed at mitigating the immediate liquidity tensions. On 16 March 2020, the Magyar Nemzeti Bank announced a moratorium on loans disbursed under the Funding for Growth Scheme (FGS) and a proposed moratorium for other loans as well. On 18 March, the government decided to temporarily suspend corporate and household loan repayments until the end of 2020 in line with the MNB proposal. This measure significantly eases the liquidity tensions of indebted economic agents, helping to prevent disruptions in production chains and work processes in the economy as a result of large-scale corporate bankruptcies and layoffs. If fully utilised, the above measure could bring approximately HUF 3,600 billion worth relief for the households and companies in terms of loan repayment. The central bank supports the liquidity of the banking system by various means, fully ensuring the liquidity requirements of the individual banks in the coming months. The MNB will be able to flexibly manage the individual liquidity needs over the coming months by launching a collateralised lending facility with multiple maturities, extending the scope of acceptable collaterals with large enterprise loans and releasing the minimum reserve, among other things.
Restarting the economy will be supported by government and central bank lending schemes during the moratorium period as well. The Home Purchase Subsidy Scheme for Families and the Prenatal Baby Support loans could potentially support retail borrowing, while the FGS Go! programme announced by the MNB with a total volume of HUF 1,500 billion, and the loan and guarantee programmes of the Hungarian Development Bank and Eximbank could support the corporate segment. In addition, the central bank supports banks’ lending capacity by releasing the existing capital buffers, temporarily waving the capital conservation buffer, the systemic risk buffer (SyRB) requirements, capital buffer of other systemically important institutions (O-SII) and Pillar 2 (P2G) recommendations. The government’s loan programmes may help to maintain loan portfolio growth in the positive range, but due to the reduced volume of new loans growth will be markedly lower and is expected to be in the 6-10 per cent range for corporate loans and in the 5-8 per cent range for household loans in 2020, compared to the double-digit annual growth rates typical in 2019.