Shocks to Hungary banks to hamper corporate lending, growth - MNB

The external and internal shocks affecting the Hungarian banking system could significantly reduce banks' capital reserves, and could prompt them to further cut lending, especially business lending. This could hamper placing the economy on a growth path, the National Bank of Hungary (MNB) said in its fresh Financial Stability Report published on Wednesday.

Under a stress scenario, assuming the deepening of the eurozone crisis and a higher, 30% early repayment rate under the recently launched FX mortgage early repayment scheme, the Hungarian banking system would require almost HUF 200bn in additional capital, the report said.

Under the macro-economic scenario projected in the MNB's September report and an expected 20% early repayment ratio, the Hungarian banking system will not require additional capital, although some banks may get near to depleting capital reserves.

"The corporate lending market could dry out", said Márton Nagy, MNB director in charge of financial stability.

The European debt crisis affects Hungarian banks adversely as they greatly rely on external financing. The main domestic risk factors include the rapid deterioration of portfolio quality and the impact of the recently launched early repayment scheme that allows retail borrowers to fully repay FX mortgages at preferential exchange rates.

The ratio of non-performing loans that are over 90 days past due rose to 16% among business loans and to almost 13% among retail loans due to the unfavorable macro-economic environment, the weakening of the forint and the rise in the expenses of foreign finance, raising lending losses for banks.

The large foreign currency indebtedness of Hungary's population is an acute problem, the report noted.

While the early repayment scheme will reduce the debt service burden and exchange rate exposure of those borrowers who partake in the program, it generates additional FX demand on the market, thereby raising the forint-term debt and debt service of the debtors who cannot avail with the scheme.

The MNB is ready to temper the resulting pressure on the forint through offering the banking system the necessary foreign exchange from its international reserves, the report said, referring the MNB's recently launched euro sale tenders.

But the early repayment still amounts to a debt relief that -- depending on the rate of participants and the actual exchange rate -- causes serious losses to the Hungarian banking system.

As it stands the Hungarian banks, although they have sufficient liquidity and funding to expand lending, would still be unable to support growth without receiving additional capital, and therefore would more and more rely on the commitment of their foreign parent banks, the MNB report said.

The European debt crisis raises the chance, however, that the foreign parent banks will be unable to provide their Hungarian units with the necessary additional capital, and would rather force them to an even more pronounced lending-side adjustment, the report warned.