MNB presses banks to boost lending, improve efficiency


The National Bank of Hungary (MNB), in a biannual report published Thursday, has urged banks to take advantage of balance sheet growth and a supportive economic environment to lend more and boost efficiency. While noting the strong shock-absorbing capacity of Hungaryʼs bank sector, the MNB also identifies a number of risks. 

In its Financial Stability Report, which is published twice a year in May and November, the MNB said Hungarian banksʼ profitability is "outstanding by international standards," but warned that an "unsustainable profit structure" foreshadows a decline in profits, according to a summary by state news agency MTI.

"The sectorʼs balance sheet growth and the supportive economic environment facilitate an organic, sustainable improvement in banksʼ profitability, via further expansion in lending and progress in efficiency," the MNB said.

The report acknowledged an increase in lendersʼ net interest income on the back of higher lending volume, as well as increasing interest rates, but said overall earnings had been hit by a decline in provision reversals. The net effect of provisions "appears to be reverting to its long-term average," it added.

While acknowledging the banking sectorʼs cost-to-asset ratio had declined, the MNB said the improvement has "only been gradual," and the rate at the end of 2017 "suggested low efficiency by international standards." The spread of digital solutions is "essential for the further improvement of efficiency," it added.

"Modernization of internal systems enhances the efficiency of institutions not only directly, but in parallel with promoting the new channels and improving customer experience, costs may also be reduced in the long run by the phase-out of obsolete processes," the central bank explained.

The MNB cited the results of a recent survey showing almost 27% of banks still use obsolete system components; that is, components that are no longer supported by the manufacturer. Replacing these components alone will not bring the sectorʼs cost-to-asset ratio to the EU average, it stressed; instead, it urged, "it will be necessary to replace obsolete system components and to integrate newer, more efficient IT systems into the operations of the organizations, as well as to develop and promote up-to-date services built on them."

Fundamentals strong, but risks present

While noting in its report that the shock-absorbing capacity of the local banking sector "is strong, both in terms of liquidity and capital adequacy," the MNB also identified a number of risks, some carry-overs from the crisis and some new.

The central bank said that liquid assets account for 32% of the banking sectorʼs balance sheet, showing an "abundance" of liquidity. The capital position of the sector "can still be deemed strong," in spite of a decline in the consolidated capital adequacy ratio to 17.2% at the end of June, from 18.4% at the end of December, it added.   

Among the risks the MNB identified in the report were those stemming from the external macroeconomic environment, such as an anticipated deceleration of growth and a moderate rise in stability risks. It noted tensions in emerging markets in the past half year resulting from capital outflows due to the normalization of monetary policy in developed countries, changes to investorsʼ risk appetite and the resurgence of political risks, but added that the impact of these tensions on the CEE region had been muted because of more favorable economic fundamentals.

The MNB said the risk of overvaluation on the local home market had "increased substantially," but added that the rise in prices did not produce a big increase in risky lending. The central bank closely monitors property market trends and regularly consults with market players, it added.

The central bank said the limited number of SMEs that have access to predictable, long-term financing poses a structural risk to the corporate lending portfolio, as does the high share of FX lending for commercial real estate projects.

A moderate decline in banking sector profits, due mainly to smaller releases of provisions, presents a risk to profitability, but applying digital solutions, fostered by a supportive regulatory environment, could mitigate this risk by improving efficiency, the MNB concluded.

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