Report: Retail FX loan conversion reduces financial system vulnerability


The vulnerability of Hungaryʼs financial system has been "significantly reduced" in the recent period, thanks to the conversion of retail FX loans, the National Bank of Hungary said in its latest Financial Stability Report, released today.

"The ability of the domestic banking system to withstand shocks is sound, and its capital and liquidity positions are appropriate at present," the MNB said.

The MNB also noted a big reduction in the countryʼs external vulnerability due to efforts to draw banksʼ excess liquidity out of central bank instruments and into government securities.

The MNB said its Funding for Growth Scheme to support SME lending had "stabilized" the corporate lending market, but added that market-based lending had remained "extremely subdued".

The biggest challenge for the banking sector in the coming two years will be to restore market-based corporate lending and resolve the portfolio of non-performing loans, the MNB said. To meet the first challenge, the MNB recently launched the Growth Supporting Program (GSP), which gives banks incentives to boost corporate lending. The scheme could raise corporate loan portfolios 5-10% next year and lift GDP growth by 0.5-1 percentage points. Adjustments to personal bankruptcy conditions and an expansion of the National Asset Management Agency may help mitigate the risk presented by NPLs, but "further incentives may be needed in order to facilitate market solutions carrying out the distressed mortgage portfolio", the MNB said.

Hungaryʼs banking sector could finish this year back in the black, the MNB said, but added that profitability "still remains low by international standards". It said the aggregate effect of recent regulatory measures is "almost neutral" in the medium term, but profitability should improve over the next two years because of lower provisioning for loan losses. Improving cost efficiency, at individual banks as well as through mergers, could also make the banking system more profitable, the MNB said, although it acknowledged that exploiting synergies created through consolidation is "a lengthy process and poses challenges".

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