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Banks blame less ability to lend for tighter loan conditions

Banks cited a new factor, reduced ability to lend, among reasons for the further tightening of loan conditions in the quartely lending survey of the National Bank of Hungary (NBH).

The survey, carried out in April and published on Thursday, also found that 18% of outstanding commercial real estate loans had been restructured by the end of 2011 Q1, and the banks expect the rate to jump to 30% by the end of 2011.

Banks tightened credit conditions for the corporate sector in Q1, and they expect to tighten them further in the two quarters ahead. The only exception where more banks plan to ease than tighten is lending to SMEs, although such plans aired earlier has not materialised, the bank noted. The tightening in Q1 was in conditions other than price.

Except for one quarter, business loan conditions has got tighter steadily since 2007 and no turnaround is expected before the end of 2011, the survey shows.

Banks' current capital position is adequate, but they are not sure about how they could increase activity, leading NBH analyst Daniel Homolya said.

Banks cited that tightened and more costly access to external foreign currency funding beside weak ability to accumulate and attract capital stemming from low profitability as the main factors contributing to tightening.

Some big banks plan to reduce loan supply while the majority would increase lending activity, but without easing current tight lending conditions. This suggest a turnaround could happen if the economic pickup raises the number of good potential borrowers.

Banks' corporate loan stock fell by HUF 120 billion in Q1 after a HUF 100 billion decline in Q4 2010, NBH analyst Gergely Fabian noted, citing exchange-rate adjusted NBH figures.

Within the retail segment, credit conditions on housing loans remained broadly unchanged, and banks did not expect any major shift over the next six months. In contrast, net 18% of banks reported that they had tightened conditions on consumer credit in Q1, while a net 7% expected to ease conditions over the next six months. Similar to the corporate segment, banks say they are willing to increase the availability of retail credit, but without easing credit conditions.

On the whole banks now expect an increase of retail lending to start not before the second half of 2012. The retail lending stock dropped HUF 100 billion in Q1 as it did in Q4 last year, exchange-rate adjusted figures show.

The survey paid special attention to loan restructuring, noting again that relatively loose write-off rules on restructuring could lead to the building up of hidden risks.

High scale restructuring applies to the commercial real estate segment too, where 18% of a total loan stock of about HUF 2,000 billion, including some HUF 600 billion in property purchase related loans, had undergone restructuring by the end of Q1, one percentage more than at the end of 2010. Although non-performing loans make up only 7% of the stock, banks expect the restructured ratio to rise to 30% by year-end as banks rather actively restructure their loans or provide bridging loans than realise losses. The property market is still very depressed and loans are typically big, the NBH experts noted, warning of the risk of "evergreening" - sustaining of non-viable loans in the segment.

The ratio of restructured loans of outstanding mortgage loans have increased by around one percentage point from the end of Q4 to 10.4% by the end of Q1. However, it is too early to draw firm conclusions about the success of restructuring, given that grace periods on about two-thirds of restructured mortgage loans with reduced debt servicing burden have not yet expired.