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Fitch warns of CHF-, JPY-denominated lending risk in Hungary

Fitch Ratings said in a report published Tuesday that foreign currency lending in Hungary in Swiss francs and Japanese yen remains an important additional risk to the Hungarian banking sector’s financial stability, even though full-cycle credit costs of foreign currency loans are hard to estimate, given the still adequate credit environment and overall favorable movements in foreign currency.

“The asset quality of retail loan portfolios at Hungarian banks has not deteriorated materially to date. However, this needs to be seen in the light of a banking sector that, like in other CEE countries, has not yet been subject to a full economic cycle, irrespective of the economic slowdown since 2007,” says Michael Steinbarth, Director in Fitch’s Financial Institutions team. “In addition, the HUF weakening has only been temporary so far and is not sufficiently long to pose serious asset quality problems for the banks.”

Favorable forint exchange rates have left borrowers and lenders with a perspective of limited downside risks, Fitch said. While the National Bank of Hungary has reacted to inflationary pressures stemming from a softer Forint to date, it may prove risky to rely on the central bank to continue hiking rates if the Forint weakens further. In addition, the re-emergence of global inflationary pressures is also likely to pose another additional risk factor as potential global interest rates hikes could affect the asset quality of foreign currency loans extended by Hungarian banks.

Foreign currency loans, which have lower rates than Forint-denominated loans, have grown continuously over the past four to five years. At the end of 2007, about 90% of new retail lending was in foreign currency, in particular in Swiss francs. Retail loans in foreign currency totaled around. Fitch noted that retail borrowers are especially exposed to foreign currency risk as they cannot hedge their risk as companies can. Fitch said that at present, the banking sector is sufficiently capitalized and can withstand some external shocks. However, this could change if there were to be multiple shocks, including a prolonged weakening of the forint and a sharp correction of real estate prices. (MTI-Econews)