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Moodyʼs keeps positive outlook on Hungaryʼs banking sector

Moodyʼs Investors Service has maintained its outlook on Hungaryʼs banking system at positive due to its expectation that the countryʼs improving economy will bolster banksʼ loan quality and support moderate profitability, while capital buffers remain stable.

Moodyʼs summarized its findings in a report entitled "Banking System Outlook - Hungary; Buoyant economy and improving loan performance drive our positive outlook." An uptick in the leading economic indicators which the agency tracks, including industrial production, building permits and consumer confidence, suggests that loan performance is likely to improve going forward, according to a press release sent to the Budapest Business Journal.

The credit rating agency expects sector-wide non-performing loans (NPLs) to fall to around 9% of total loans by the end of 2018, from 14.7% at the end of 2016, driven mainly by sales and write-offs of problematic loans.

Despite the positive outlook, Moodyʼs says profitability will likely decline to more moderate levels over the next 12-18 months, after soaring in 2016 due to one-off gains, including a sizeable reversal of loan-loss reserves and a reduced bank levy. In the absence of similar one-off gains this year, the impact of higher provisioning, low interest rates and modest credit growth will weigh on profits, the agency adds.

Hungarian banks used bumper profits last year to replenish their capital levels, and Moodyʼs now expects capital buffers at the nationʼs banks will remain largely stable as profitability returns to more moderate levels and risk-weighted assets grow modestly.

Banks in Hungary are predominantly deposit-funded, Moodyʼs notes, and balance-sheet deleveraging has considerably reduced their reliance on volatile and costly market funding. Gross loans stood at 78% of deposits in March 2017, down from more than 100% in 2014. This ratio will likely stabilize as lending growth gradually recovers and deposits grow in line with loans, says the credit rating agency.

"Rising wages and house prices, as well as government stimulus, will spur loan growth. However, demand for large corporate loans will remain modest," concluded Armen Dallakyan, Vice President and Senior Analyst at Moodyʼs.