The results of stress tests suggest the banking sector’s liquidity is adequate, and the decline in the sector’s loan-to-deposit ratio to around 110% indicates lower reliance on foreign funds, according to the report.
The sector’s overall capital adequacy ratio of 16.6% is “excellent,” but stress tests indicate increasing capital shortages at some individual banks, the report said. These shortages remain manageable due to parent banks’ continue commitment, it added.
Hungarian banks’ outstanding stock of corporate loans is likely to stop declining in the coming years as they use the 0% financing from the Funding for Growth Scheme for outlays. But a sustained recovery in lending will require further easing of credit conditions on the supply side, the report said.
As large banks continue to deleverage, some of their business may be taken over by small- and medium-sized banks as well as savings cooperatives, but this will require improving the capital position and funding capacity at these market players, the report said. The MNB puts the lending potential of the segment around HUF 800 billion, but lending could be boosted by another HUF 400 billion as the result of a planned capital injection by the government in savings cooperatives, it added.
In an analysis of the retail segment, the report said households’ level of foreign currency-denominated debt remained “extremely high,” in spite of government measures to reduce the stock, and was “one of the most important financial stability risks.” Managing exchange rate risk and reducing the burden on debtors is in the interest of the government, forex-based loan borrowers and lenders but “may involve significant costs,” requiring consideration of the potential adverse effects on the banking system, it said.
The report said an exchange rate cap scheme earlier introduced by the government could only partially address the problem of forex lending stock. Although more than half of eligible borrowers have joined the scheme, an MNB survey shows 94% of FX borrowers could need outside help to continue making their repayments. The survey showed half of borrowers who did not join the scheme explained their decision citing a lack of confidence in banks or higher debt servicing costs after the scheme winds up. One-quarter said they hoped the government would introduce an even more advantageous program.
The report’s authors said further measures to assist forex loan borrowers could involve regulating lending rates, noting that banks had unilaterally raised their lending rates by two percentage points, on average, during the crisis, adding about 20% to borrowers debt-servicing costs. They also said speeding up the procedure for managing non-performing loans was “indispensable.”
They suggested boosting the activity of the National Asset Management Agency, a body established to buy the homes of troubled borrowers and allow them to continue dwelling there as renters, and urged the introduction of personal or family bankruptcy “as soon as possible.”
In a review of banking profits, the report said the sector’s profitability could “remain subdued over the longer term” because of the lower base rate, the bank levy and a decline in lending. A “persistently low level of profitability” as well as “lower predictability” could prompt some banking sector players to revise their strategies and start a consolidation on the market, it said, adding that smaller lenders could benefit from such a consolidation.
