MNB Stresses Importance of 'Conservative' Dividend Policy to Support Future Lending
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The National Bank of Hungary (MNB) said lenders' "remarkably high" profitability was not sustainable in the medium term and pointed to the importance of "conservative" dividend policies to ensure future lending capacity in a report published on Tuesday, according to a report by state news wire MTI.
In its biannual Financial Stability Report, the central bank and financial market regulator noted that the banking sector's first-half after-tax profit had reached an "outstanding" HUF 675 bln and pointed to the "significant contribution" to earnings of interest income from the MNB as well as the base effect of impairment on exposure in Russia and Ukraine.
As the base rate falls parallel with disinflation and an improving risk environment, net interest income is expected to decline and improved efficiency and deeper credit penetration could again become the main sources of profitability in the banking sector, the central bank added.
"From the standpoint of the future development of banks' capital adequacy and lending capacity, it is extremely important for institutions' dividend payment policy – in view of the expected decrease in profitability – to remain conservative and for this year's exceptionally high profit to largely serve the expansion of bank reserves," MNB said.
Commenting on that dividend policy at a press conference, MNB department head Balint Dancsik said a "significant expansion" of lending was still necessary in Hungary for the country to reach regional credit penetration levels, especially in light of the increase in nominal GDP. He added that lenders' profitability would decline from 2024 in tandem with a fall in interest revenue.
Dancsik also pointed to a possible increase in demand for refinancing by SMEs as state-guaranteed credit programs wind down.
The report shows the Hungarian banking system is "stable" and its resilience to shocks is "strong".
The sector's capital adequacy would ensure its stability even in the case of a "severe stress scenario", Mr Dancsik said. In spite of a decline in stock of deposits, liquidity reserves of the sector remain "ample", he added.
The report identifies SME and mortgage loans subject to interest rate caps, project loans financing commercial real estate, and state-subsidized loans linked to having children as potential sources of increased credit risks, but says the materialization of those risks is "not currently visible".
Dancsik said around 77,000 of some 300,000 mortgage contracts under the interest rate cap were "vulnerable", meaning installments would climb over 50% or by HUF 50,000 a month when the caps were phased out.
He said around 41% of borrowers with state-subsidised prenatal baby support loans, linked to a commitment to have children, had not yet had their first child. But he noted that close to 80% of the first borrowers to take out the credit in July 2019 had become parents. Dancsik added that prenatal baby support loan borrowers were mostly higher earners and that the loans were backed by state guarantees, further mitigating risk.
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