Budapest, 30 November 2020 – The Hungarian banking system is characterised by strong resilience to shocks, even in the challenging economic environment caused by COVID-19. Owing to the regulatory measures taken in recent years and in the spring, as well as the profitable operation before the pandemic, banks have an adequate capital buffer and significant liquidity reserves. According to the MNB’s stress test, most banks would meet the regulatory requirements for liquidity and capital position even in the event of a much worse crisis scenario than what is expected.

The international environment has been characterised by a persistent, high level of uncertainty since the global spread of the coronavirus pandemic. Uncertain prospects may prompt households to curb their demand and corporates to postpone their investments and rationalise their business models. The forced adjustment by economic actors not only slows down the economic recovery, it also poses a risk to debt servicing via its negative impact on the labour market, production and profitability. Various fiscal and central bank measures have dampened the consequences of the first wave, but the second wave and the protracted recovery might require additional economic support measures to be introduced, which may be challenging in some countries due to increased debt levels and the declining leeway for monetary policy action.

As a result of the MNB’s measures, the liquidity reserves of the Hungarian banking system increased substantially. The central bank eased the financial market tensions that arose at the beginning of the coronavirus crisis by expanding its monetary toolbox, amongst other things. Bank funding opportunities have not narrowed and the financing environment is favourable: short-term yields are around the level of one-week central bank deposit rate, in line with the monetary policy stance, while long-term yields are historically low, despite the pandemic. Thanks to the MNB's long-term covered loans, asset purchase programmes and the FGS Go! scheme, the banking system’s operational liquidity buffer increased steadily and substantially The distribution of the liquidity buffer built up since March at individual institutions is also favourable. Based on the liquidity stress test, the vast majority of banks have sufficient liquidity buffers to meet the regulatory requirements, even in the event of a severe liquidity stress.

Release of macroprudential capital buffers increased the lending capacity of the banking sector. The sector’s free capital buffer was also increased by central bank and international measures: the MNB temporarily waived the capital conservation buffer (CCoB), the systemic risk buffer (SyRB) and the other systemically important institution buffer (O-SII), as well as the compliance with the Pillar II Guidance (P2G), while the total risk exposure amount declined due to international easing. According to the results of the solvency stress test, only a small part of the sector can be considered vulnerable, even in a severe stress scenario. In order to meet all of the currently valid capital adequacy requirements, banks would need to increase capital by a manageable amount of about HUF 86 billion. Thus, despite the deterioration in the external environment, the banking system’s capital position has improved over the past six months and is characterised by strong resilience, even to a longer-than-expected economic recovery, which will help maintain banks' lending capacity.

Central bank and government loan programmes and guarantee schemes support the expansion of lending. Following the outbreak of COVID-19, in addition to clients, banks have also become more cautious in the credit market and tightened lending conditions for both household and corporate loans. However, in terms of the recovery it is important to maintain banks’ willingness to lend and that economic actors continue to have access to adequate financing sources, which can be facilitated by state involvement in the credit market. In the retail segment, support for the credit market is being provided by the state-supported prenatal baby support loan and the Home Purchase Subsidy scheme, while in the corporate segment, the central bank’s FGS Go! programme and the loan and guarantee programmes of state-owned banks and guarantee institutions serve this purpose. Thanks to these factors and the portfolio-supporting effect of the payment moratorium, the annual growth rate of loans outstanding reached 8 per cent in the corporate and 17 per cent in the household segment in 2020 Q2. We expect annual corporate lending dynamics to be above 4 per cent in 2021, while household dynamics should be above 5 per cent, and double-digit growth in both segments may also return within two years. A significant extension of state guarantee schemes supporting risk sharing could also facilitate banks’ willingness to lend and thus to increase the outstanding corporate loan portfolio in the coming period.

The payment moratorium plays a key role in maintaining portfolio quality, but does not prevent an increase in credit risk. Due to portfolio cleaning activity, the ratio of non-performing loans continued to decline in 2020, while new payment defaults are temporarily prevented by the introduction of payment moratorium. Meanwhile, however, as the coronavirus crisis has worsened, the proportion of loans with significantly elevated credit risk has risen substantially. 15–20 per cent of credit institutions’ corporate loan portfolio is related to high-risk companies which participate in the moratorium. 5–10 per cent of household borrowers can be considered vulnerable based on their income situation, changes in labour market status and participation in the moratorium. The government will extend the payment moratorium in a targeted manner from January 2021, helping debtors who have become vulnerable to manage their liquidity position, and thus no significant rise in the proportion of overdue loans is expected in the first six months of 2021. However, due to the protracted economic recovery, there is a risk that the temporary liquidity problem will transform into permanent insolvency for some clients, and that even clients not making use of the moratorium may also face repayment difficulties, which may lead to a significant deterioration in portfolio quality in the medium term. The recovery of companies encountering financial difficulties could be facilitated by a legal framework that supports reorganisation.

Risks inherent in the real estate markets may create a permanently uncertain market environment. The large increase in housing prices in previous years was not associated with overheating in the credit market, in terms of the distribution of loan-to-value ratios and the ratio of home purchases from loans. There has been some adjustment in housing prices in Budapest this year, but outside of Budapest housing prices have continued to increase. Deteriorating fundamentals entail downside risks in the medium term, but this may be dampened by the recently announced homebuilding measures. In the commercial real estate market, the hotel segment has been hit hardest by the coronavirus crisis due to the slump in international tourism, which in addition is accompanied by intense development activity, and thus there is a risk of oversupply in the hotel market. In light of changing demand and the completions planned for coming years, significant risks may also arise in the office market. However, the risks from the real estate market are mitigated by the fact that the banking system's exposure to the real estate market is low as a percentage of the regulatory capital.

Poor profitability may pose major challenge to banks. Despite the increase in risk costs, in the first six month of 2020 the banking system recorded positive after-tax profit, which was much lower than in previous years however. The previously observed, gradual decline in profitability ratios has accelerated this year, due to the negative economic effects of the pandemic. The deterioration in profitability is mainly due to increased impairment and provisioning. In the second half of the year, a further decline in banks' profitability is expected, as the forward-looking risk costs of institutions may increase and the profit effect of the payment moratorium is not yet reflected in the income statement of all institutions. The depressed interest income in the low interest rate environment and the increasing need for impairment due to the deterioration of asset quality may put sustained pressure on the profitability of banks, which are already struggling with structural problems.