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Hungary banks stable, asset quality to worsen

Hungary's banking sector has weathered the crisis and has sufficient capital buffers, but its asset quality is set to deteriorate further due to a weak domestic economy, Iryna Ivaschenko, the IMF's resident representative in Hungary, said in an interview with Dow Jones Newswires on Thursday.

Hungary forecasts its gross domestic product (GDP) to fall 6.7% this year and to fall a further 0.9% in 2010.

The IMF projects that the amount of non-performing loans, which stood at a “still moderate” 4.8% of overall loans at the end of June, “will peak and at least double in the first quarter of 2010,” Ivaschenko said.

“That will affect the banks' capital adequacy ratio and reduce their buffers but that will be a normal process,” she added.

The banking sector's average capital adequacy ratio increased in the first half and was 12.3% at the end of June, well above the regulatory minimum of 8%.

“The comforting fact is that the stress tests that have been conducted by the central bank show that capital buffers would be adequate.” “Banks have used their higher profits to build cushions; they canceled dividends - they behaved responsibly,” Ivaschenko said.

Hungarian banks were very profitable in the first half of this year and the key indicators of that were that the return on equity and return on assets were just marginally below the levels seen in the same period of 2008, the IMF representative said. That's because banks managed to preserve their interest margins and also proved to be quite successful in cost compression despite higher provisioning, she added.

The country's strict fiscal policy will enable it to bring interest rates down further, which would make forint-denominated loans more attractive compared with foreign currency-based loans, added Iryna Ivaschenko.

The funding and liquidity situation of Hungarian retail banks has improved substantially since last October - and also since the strains of March 2009 when the forint hit a record low against the euro - due to support from parent banks, an improvement in global sentiment and a stronger forint, which partly benefited from the government's fiscal efforts, Ivaschenko said.

Some banks were even able to repay some of the outstanding credit they had received from their parent bank, she added.

“The parent banks so far have behaved responsibly with their subsidiaries, in line with the (May) agreement,” Ivaschenko said. “They retained funding levels to their subsidiaries and we also agreed in May that they will preserve the good financial standing of their subsidiaries, too, going forward. We will follow up on that (with them) fairly soon,” she added.

With the exception of Hungary's largest commercial bank OTP Bank, and mortgage group FHB, Hungarian retail banks are owned by a foreign parent, most of them based in the EU.

“The technical assistance team (of the IMF) analyzed the institutional setup of supervision in July as to how it fared during the crisis, regarding efficiency, speed of reaction and transparency. There were weaknesses in every aspect except for transparency,” Ivaschenko said.

“The technical team concluded that the current supervisory system needs strengthening; it needs to be more responsive and forward-looking, the (financial market authority) PSZÁF needs to have more operational independence and regulatory powers. The macro-prudential considerations should be made prominent,” she added. (MTI-ECONEWS)