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Financial sector's portfolio quality slips but system stays stable in Q2

The deteriorating quality of assets of financial companies remained the largest risk of the Hungarian financial sector, the financial-market regulator PSzÁF said in its Q2 risk assessment report, noting that the sector remained on the whole stable with no short-term risk endangering its operations.

Profitability has deteriorated, however, and liquidity risks increased compared to the beginning of the year. Solvency problems pose a regulation challenge, as well as the tax policy affecting the sector - namely the bank levy imposed - and the future of the private pension funds, the report noted.

Banks' client loan volumes dropped further as did client deposits which made up 39.2% of all liabilities at the end of June, 2.1 percentage points less than at the end of March. As a result banks increasingly rely on wholesale funding the share of which rose 0.8% in three months to 39.7%. The share of foreign finance also rose by 0.5 percentage points from the end of March to 31.3%. Two-thirds of all foreign finance came from parent banks, and their share in total liabilities rose to above 20%. Short-tem funding by parent banks increased in the past three quarters but 69% of their overall funding to Hungarian units is still long-term finance.

In the year to June 2010 12 banks and 7 bank branches or two-fifth of the sector produced losses, and the share of loss-making banks' assets rose from 5.3% to 23% of the total. Average 12-month ROE fell to 7.7% although the interest margin still rose in H1. PSzÁF expects average profitability to drop for the full year.

The bank levy could cut the after-tax profit of the sector by HUF 170 billion, PSzÁF calculated based on no change in pre-tax profits from 2009. The extraordinary tax poses no stability risks, and it will only moderate affect capital positions within one year. It could soak up almost half of capital buffers in excess of the regulatory minimum if levied in unchanged from over three years, the regulator warned.

The percentage of non-performing retail loans - those on which (re)payments are over 90 days past due - was 9.2% of the total stock at the end of June 2010, rising sharply from just 3.8% at the end of 2008 when the crisis started, and was rising further from 8.3% at the end of March this year.

The increase in the number of late loans slowed but the stock rose at a quicker rate in Q2, the report noted. Based on the number of loans, 23.2% of all loans were more than 90 days overdue at the end of June. The ratio was up from 22.3% three months earlier and from 17.1% at the end of 2008.

The percentage of retail loans over 90 days past due rose to 10.7% from 10.1% in the period. Within retail loans, non-performing mortgage loans made up 8.0% of the total stock at the end of June, up from 7.3% at the end of March.

Banks's portfolio quality was better than the average, with the June-end ratio of non-performing loans at 7.4%, and the bad loan ratio remained higher: 8.8% in the case of forint loans than the 6.4% ratio for foreign-currency denominated loans, PSzÁF data reveal.

The percentage of banks' retail loans over 90 days past due at the end of June was 8.1%, including a 9.4% ratio for forint loans and a 7.4% ratio of foreign-currency-denominated retail loans.

1.6% of all retail loans or 4.3% of all loan stock was re-negotiated or restructured at the end of June, the figures showed. The ratio rose 1.3% and 3.9%, respectively, at the end of March.

A total of 72% of banks' total retail loan stock and 62% of their total corporate loan stock was denominated in foreign currency at the end of H1 2010. Non-euro loans made up 97% the foreign currency retail loans, and the bulk of them was denominated in Swiss francs. The majority of foreign-currency denominated business loans was denominated in euro, with Swiss franc denomination making up well below one-third of the stock. (MTI – Econews)