The Hungarian banking system is stable also in the second year of the pandemic

Budapest, 3 December 2021 – The Hungarian banking system is stable, and has considerable capital reserves, rendering it resilient to risks. A small proportion of debtors indicated that they were in need of a third phase of the payment moratorium, which significantly reduced future uncertainty about the impact of the program. No major risk can be identified in terms of the sector’s lending capacity, and thus a smooth return to market-based lending is ensured. In conjunction with the return of inflation, the rising yield environment results in credit and revaluation risks, but may also improve profitability for the banking sector over the medium term via higher interest margins., The banking system performed well during the crisis, but looking ahead, banks also need to adapt to the challenges of new entrants and continuous technological development.

The liquidity reserves of the banking sector continued to expand in the first half of 2021, but the central bank instruments contributing to this are being gradually phased out. In view of the longer maturities of central bank instruments and the continued government securities purchases, the ample liquidity of the banking sector may remain in place, despite the changed monetary policy stance. The rise in short-term yields closely followed the increase in the base rate, while long-term yields rose in parallel with inflation expectations. Taking into account the central bank’s liquidity and financing-related regulatory requirements, the financing situation of the banking sector is stable.

As a result of the subsidised credit programmes, the expansion of the corporate loan portfolio was outstanding in an international comparison as well. Government and central bank programmes were major contributors to new loan disbursements in the corporate segment, with subsidised credit programmes accounting for two thirds of the new volume in the first half of 2021. In the third quarter of 2021, corporate loan growth amounted to 9 per cent year-on-year. In the short run, depletion of the FGS Go! allocation and the latest wave of the pandemic may decelerate corporate loan dynamics, which may, however, increase again in early 2022. In parallel with the rise of market-based lending and the tightening of monetary conditions, corporate lending rates have increased, but banks expect credit demand to expand in all segments, despite the narrowing of the subsidised programmes.

Housing loan disbursement rose to a previously unseen level, but this expansion was not coupled with any major increase in financial stability risks. In the third quarter of 2021, household loans outstanding grew at a year-on-year rate of 16 per cent. The home creation subsidies may maintain the double-digit credit growth in the coming years as well. However, with high demand in the housing market stimulated by subsidies, market stability will only be sustainable if the supply of the housing market increases significantly. The impact of the rising interest rate environment on repayment instalments is mitigated by the gradual amortisation of outstanding variable-rate household loans and the increase in loans with longer interest rate periods.

The phasing out of the general payment moratorium is not causing a drastic surge in the non-performing loan portfolio. As of mid-2021, 21 per cent of corporate loans and 33 per cent of household loans were in payment moratorium, while 5 per cent of corporate loans outstanding and 23 per cent of the household segment were eligible for the moratorium extension until 30 June 2022. However, a significantly lower proportion of debtors are participating in the third phase of the moratorium, at 2 per cent of total loans in the corporate segment and 5 per cent in the household segment. In terms of portfolio quality, one positive sign is that the phasing out of the programmes did not result in any major rise in non-performing loans in the European countries that terminated the payment moratorium earlier. However, loan losses potentially materialising with a decline in fiscal and monetary support may jeopardise bank profitability in the medium term.

The after-tax profit of the credit institutions sector is outstanding in an international comparison. Based on non-consolidated data, the credit institutions sector’s profit after tax amounted to HUF 342 billion in the first half of 2021, with declining risk costs and rising net interest income as the main contributors. Recognition of impairment and provisioning may increase again in view of the extension of the moratorium, and the revaluation of securities recorded at fair value as well as the deterioration in portfolio quality represent further profitability risks. The consolidated capital adequacy ratio of the banking sector reached 19 per cent in the first half of 2021, and free capital above the regulatory requirement is at least 4 per cent for the majority of institutions.

Based on our stress test results, the shock-absorbing capacity of the Hungarian banking sector is robust, and almost all institutions would be able to comply with the regulatory requirements related to liquidity and capital position, even under a much more severe scenario than expected. Looking ahead, besides the challenges of new entrants, banks must also comply with the suspended and postponed regulatory expectations, but no major risk can be identified with regard to the sector’s lending capacity.