Budapest, 24 November 2022 – The Hungarian banking sector is stable, entered the current complex, challenging period with significant capital position and liquidity reserves. Credit risks have risen further in the turbulent economic environment, especially in portfolios sensitive to energy prices. The shock resiliency of the sector is adequate, its liquidity and capital position is robust even in the case of a crisis much more severe than the current forecasts. We expect a decline in credit expansion in both the corporate sector and the household sector, due to the rising interest rate environment and uncertainty caused by the war.

International economic developments and prospects are most significantly affected by the rising inflation, the European energy crisis and deepening geopolitical tensions. The prolonged war between Russia and Ukraine has a major impact on economic production and financial stability of the EU economy in particular. The extremely high energy prices reduce households’ disposable income and burden companies with serious cost increases. In view of the inflation risks, many central banks tightened their asset purchase programmes and interest rate conditions. European banks must prepare for the simultaneous management of a number of challenges, in relation to which the European Systemic Risk Board (ESRB) issued a warning.

The deteriorating economic environment negatively affects the Hungarian economy as well, and poses a considerable risk to portfolio quality. The ratio of non-performing loans moved from its historical low to reach 4.2 per cent in the household segment and 3.9 per cent in the corporate segment at the end of 2022 H1. The highly vulnerable loan portfolio poses a manageable risk to the banking sector. According to our estimations, as a result of the developments observed until the autumn of 2022, the median probability of default for SMEs with loans may have increased from 2.9 per cent to 4.7 per cent. The NPL ratio of the mortgage loans of the credit institution sector may rise by 2 percentage points by the end of 2023 as a result of the increase in utility costs, but with adjustments to energy consumption, this increase may be smaller.

State actions significantly erode the banking sector’s profitability this and the next year. In 2022 H1, the credit institution sector achieved an after-tax profit of HUF 200 billion according to individual, i.e. non-consolidated data, thus return on equity fell from 10 per cent to 7 per cent. Falling profitability and the narrowing of funding opportunities may lead to the deterioration in lending capacities over the medium term.

The Hungarian banking sector is highly resilient and had significant capital and liquidity buffers when it entered the complex, challenging period. Although banks’ liquidity buffers fell slightly, ample reserves are still available. The sector would meet the regulatory requirements even in the case of a severe liquidity shock. The banking sector’s consolidated capital adequacy ratio dropped slightly, to 18.5 per cent by the end of 2022 H1, which indicates strong shock resilience, since there would only be a temporary and manageable capital shortfall even in the more severe, protracted stress scenario at the sector level.

Lending to the household and corporate sector from financial institutions is expected to decrease. Private sector loans outstanding expanded dynamically in 2022 H1. Looking ahead the higher interest rate levels and operating costs as well as the increased uncertainty will result in weaker demand for investment loans. The issuance of foreign currency loans grew significantly in the corporate sector, but most of these borrowers also have foreign currency income. Following an outstanding 2022 H1, household loan disbursement already decelerated in the third quarter. Due to the increasing interest rate environment and higher house prices demand for housing loans is expected to wane. The vast majority of banks plan to tighten the terms of both household and corporate loans in the next half year. Accordingly, we expect the annual growth rate of the existing loan portfolio to fall substantially.