Budapest, 25 May 2022 – Hungarian banks were prepared when they faced a sharp increase in risks due to the war between Russia and Ukraine: capital and liquidity reserves ensure the institutions are resilient, even in the event of protracted geopolitical tensions. However, risks have increased in the uncertain environment. We expect the dynamics of private sector credit expansion to decelerate as a result of the negative effects of the war on the real economy and the tightening interest rate environment, in parallel with rising inflation. In certain sectors, the slowdown in the real economy and higher energy prices entail an increase in credit risks. Prices rose further in the housing market, and households are becoming more stretched financially in line with buoyant lending for housing.
The war that erupted between Russia and Ukraine at the end of February has significantly changed global economic prospects. The war and related sanctions are exacerbating existing inflation developments via the rise in commodity and energy prices, a situation that is also worsened by elevated supply difficulties. According to the guidance of the world’s leading central banks, monetary conditions need to be tightened in order to achieve central bank targets. The banking sector has significant liquidity reserves, which provide strong protection amid elevated risks. According to our stress test, the sector would meet the regulatory liquidity and capital requirements even in the case of a severe stress scenario.
Following the phase-out of the general moratorium, a slight deterioration was seen in the banking sector’s portfolio quality. After the general moratorium was phased out in October 2021, the non-performing loan ratio moved away from its historical low, but remains below five per cent. At the same time, loan loss coverage is high at the sector level, which limits the degree of potential further losses. Following the phase-out of the interest rate stop, significant increases in repayment instalments are expected for one quarter of variable-rate mortgage loans. However, in view of the advanced amortisation, the often imminent maturities and the low loan-to-value ratio on average, this is overall a manageable risk at the sector level. Besides the modest increase in the credit risk of outstanding loans, households are becoming more stretched financially in new lending as well: increases in contract amounts and longer original maturities of loans as well as higher debt-to-income ratios are being seen.
The private sector’s loan portfolio also expanded dynamically in 2021 H2, which is explained by buoyant demand, banks’ ample lending capacities and subsidised credit schemes. Household lending, which was at a historical high, received strong support from the home purchase subsidies and the FGS Green Home Programme as well. According to an April 2022 survey, banks expect a shift in the composition of demand for corporate loans: demand for working capital loans may increase, while demand for investment loans may decline. Due to the effects of the war between Russia and Ukraine on the real economy and the tangible rise in interest rates, we expect slower expansion in corporate loans outstanding, while deceleration is expected in household lending as well in 2022 H2.
The inadequate feed-through of central bank interest rate hikes into deposit rates may be coupled with an increase in funding risks in the medium term. The rise in the MNB base rate resulted in an increase in interest rate conditions for the credit and deposit markets, although the speed of the feed-through of interest rate hikes varies across markets. In the case of household deposits, the interest rate on new term deposits increased to a much smaller degree than the base rate, and it remains close to 0 per cent on demand deposits, which represents a considerable volume. Accordingly, in the current inflation environment the real value of household deposits is declining significantly. In the medium term, this may result in a shift in the structure of deposits, or in an extreme case, prompt depositors to turn towards alternative investment possibilities and service providers.
In the medium term, the overvaluation of residential properties is a risk which may result in an increase in credit risks. Stemming from the significant price appreciation in the housing market, the overvaluation of housing prices has risen to a historical high at the national level according to our estimation. Looking ahead, we expect a general decline in housing market demand as a result of the higher interest rates on market-based housing loans. Depending on these developments, the cyclical financial systemic risks related to the residential real estate market and lending may increase further. To mitigate this, the MNB may possibly, inter alia, raise the counter-cyclical capital buffer rate, thereby improving the resilience of the banking system.
https://www.mnb.hu/en/publications/reports/financial-stability-report