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Hungary financial sector stable, but risks loom, says regulator

Hungary's financial sector remains stable and profitable despite a difficult macroeconomic and market environment but profitability and stability are threatened by a number of risks, mainly ones "inherited" from acute phase of the global economic crisis, financial market regulator PSzÁF said in a biannual risk report published on Wednesday.

PSzÁF noted as a general risk the possible consequences of the sovereign debt problems on the economic and financial environment. Risks directly affecting the financial sector include the most recent decline in the scale of business, the deterioration of the quality of assets and weak profitability, it said.

The greatest challenge for Hungary is increasingly restarting accelerated, sustainable economic growth, PSzÁF said.

PSzÁF said the stock of non-performing loans (NPL) of Hungarian lenders is still growing, but at a slower pace, and the trend is expected to continue in the coming months. The proportion of restructured loans is growing in both the retail and corporate portfolios, and borrowers are expected to fall behind on payments again on a part of these loans, it added.

PSzÁF welcomed an agreement between the government and banks on an assistance package for borrowers with foreign currency-denominated home loans. This big step ahead could boost lending and make it more secure, it said.

Banks' average profitability remained extraordinarily low in 2010 and almost half of the sector was loss-making, PSzÁF said. The sector is expected to suffer too in 2011 because of the high ─ albeit falling ─ cost of lending risk and the bank levy, it added.

Banks’ lending stock has been on a continuous downturn since the spring of 2009 because of weak demand for loans, selective lending that curbed supply and the resulting decline in the benefit of economy of scale, according to the report. A failure of acceleration in lending activity presents risk in itself, PSzÁF warned, noting that the banking system's liquidity on the asset side is sufficient and its capital position is strong, but owners are still mainly interesting in replacing losses and not in undertaking risky expansions.

PSzÁF called the situation of Hungary's savings cooperatives "relatively positive" because of their high liquidity and low levels of foreign currency-based loans. Revenue from interest and commissions and fees has fallen, but cost efficiency has improved, it said.

Insurers' revenue from premiums rose at a pace under the rate of inflation in 2010, PSzÁF said. After enjoying high profitability, the sector more or less broke even because of payouts on claims for flood and storm damages as well as because of the extraordinary tax on financial sector companies, it added. The outlook for the sector's profitability this year remains poor because of weak demand, intense competition in the general insurance segment and a fall in revenue because of the restructuring of the private pension system, it said.

PSzÁF said a move by 97% of private pension fund members to the state pension pillar under a government initiative early in the year was expected to result in restructuring among market players. Funds left with enough members to continue operating will have to cut costs quickly, which could present a danger to direct cross-financing among the financial groups that operate the funds.