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Third of non-financialsʼ loans exposed to interest rate risk, says MNB

MNB

About HUF 2 trillion or a third of all outstanding loans of Hungarian companies were floating-rate forint loans, directly exposed to interest rate risk at the end of 2016, the National Bank of Hungary (MNB) said in its recently published biannual report on financial stability, Hungarian news agency MTI reported.

Apart from some expressly interest-sensitive sectors, the HUF 20 billion rise in interest expenses in case of a 1% increase in the forint interest rate does not amount to a significant stability risk, the MNB said. 

Overall, the MNB identified the property business, the energy sector and commercial accommodation as the sectors with the highest exposure to interest rate risk. Most of these risks are, however, present on the balance sheets of microbusinesses in the affected sectors, which make up a low 11% of value added on a national level, the MNB said.

About 78% of the Hungarian corporate sector, financing itself at least in part through borrowing from Hungarian banks, is exposed to some kind of interest rate risk, the MNB found in a detailed analysis of the financing structure of Hungarian businesses. 

About 6% of companies borrowing from local banks borrow exclusively in foreign currency, 86% exclusively in forints, and the remaining 8% take out both forint and FX loans. Some 85% of those borrowing at least in part in forints use floating-rate loans.

The MNB found that energy, trade, real estate, communications and accommodation are sectors with a relatively high loan exposure in proportion to total assets. And, except for communications, high loan exposure is coupled with relatively low profit reserves, which increases the risks a rise in interest expenses could generate.

Not surprisingly, microbusinesses have the lowest capacity to absorb rising interest rates, and the ratio of the rising interest burden to profit reserves is higher at companies active in investment-intensive fields.

Return on equity varies widely, between 7% and 22% among microbusinesses, and ROEs of microbusinesses are about 7% in the energy sector, 10% in the accommodation, and 11% in the property business, according to the report.

The exposure is also relatively high at big real estate companies, considering their 12% ROE and 3% interest expense to profit reserves. The risks are tempered, however, by the relatively high foreign ownership among mid-size and big companies, as well as the big growth potential in the accommodation and real estate sectors, the MNB said. Looking ahead, however, rising wage costs could add to the risks of vulnerable companies, the report added. 

Around 23% of Hungaryʼs 261,000 companies finance themselves through banks, according to the report. Of the 65,000 businesses that borrow in the SME segment, 87% rely in part on local bank loans and 31,000 of them hold loans taken out at fixed and low, capped interest rates under the recently phased-out Funding for Growth Scheme (FGS), in which the MNB provided banks free refinancing for such loans.

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