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Evergreening of loans is spreading in Hungary

Banks expect a substantial increase in restructured loans in 2011, continuing the evergreening process.

In commercial real estate lending, 18% of the portfolio was restructured in Q1 2011, which is one percentage point higher than in the previous quarter, according to the latest lending survey of the National Bank of Hungary (MNB). However, only 7% of the restructured portfolio is more than 90 days delinquent, the MNB notes.

In the mortgage loan segment, 10.4% of the banks’ portfolio was restructured in Q1, up from around 9% at the end of 2010. Reporting changes accounted for half of the increase, without these, the ratio of the restructured loan portfolio to the total would have been only 9.7%. Banks are required to report restructured loans based on delinquency categories as part of their regular reporting requirements as of 2011. Previously, only non-delinquent restructured loans had to be reported separately.

Home equity loans account for 60% of restructured mortgage loans, while the remaining 40% includes housing loans. Portfolio quality has not changed markedly since 2010 Q3, according to the survey. About 27% of restructured mortgage loans were more than 30 days delinquent, while 17% were more than 90 days overdue at the end of the period.

The mass wave of expiring grace periods, expected during the past six months, did not occur, the survey says. The MNB attributes this to the over 40% increase in restructured loans outstanding since 2010 Q3, which substantially reduced the proportions of delinquent loans within the restructured portfolio. In addition, in one out of three cases the expired grace period was extended. Given that currently two-thirds of the restructured mortgage loans are still within the grace period, it remains to be seen whether temporarily easing of debt servicing burden or the extension of grace periods mean a viable solution, the MNB notes.

The active restructuring policy of banks reflects the pressure to sustain their portfolio through repeated restructuring and swing-line loans, rather than realizing losses on a large scale. This is primarily due to the unfavorable real estate market conditions and higher loan amounts. In addition, lax provisioning rules on restructuring also encourage banks to keep loans alive, similarly to mortgage loans in the household sector. Although loan loss reserves are higher than in other segments, the further restructuring points to hidden risks, such as that of the “evergreening” of loans, namely the risk of sustaining non-viable loans.