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Risk-averse banks cause credit conditions to tighten

The liquidity position of Hungarian banks is adequate, but low inclination to take risk has caused a tightening of credit conditions, a quarterly survey of loan officers by the National Bank of Hungary shows.

The MNB's previous two surveys of loan officers indicated the four-year tightening cycle seemed to have ended, but the fresh survey, conducted in January, suggests otherwise. Companies found it harder to borrow as credit conditions tightened because of a decreasing inclination to take risk and the deteriorating profitability of the domestic banking sector.

An expected upturn of corporate lending failed to materialize and, after more or less stagnating in Q3, corporate loan stock fell at a faster rate, continuing a drop started in Q4 2008, MNB figures adjusted for exchange rate changes show. Exchange rate-adjusted figures reveal that domestic banks' retail loan stock declined for the fifth quarter in a row in Q4, and the decline gained momentum in the last quarter.

“Low inclination to take risk has been a major factor contributing to the tightening of credit conditions; hence, weak profitability has emerged as a new factor constraining credit supply,” the MNB said summing up the survey.

Including Hungarian branches of foreign banks, pre-tax profits of the domestic banking system fell by about HUF 220 billion to HUF 73 billion last year. The underlying profitability of banks did not change, however, as the sharp drop in profits was caused by the extraordinary banking tax, explaining about HUF 120 billion of the decline, and by a big one-off technical item, linked to an unnamed big bank, MNB director Márton Nagy told journalists on Thursday. Without these two items, banks' profits matched 2009 levels as a wider net interest rate margin and the consequent rise of net interest revenue offset higher write-offs and risk provisions stemming from a worsening-quality portfolio, he said.

Low profitability means that the domestic banking sector is constrained in its ability to raise capital, due to low due to low capital accumulation and difficulty attracting additional capital, the MNB said. Consequently, banks are only to a limited extent able to fund future economic growth by increasing credit availability, it added.

The survey also showed tightened credit conditions for home loans, particularly for riskier loans.

Constrained credit supply may cause a delay in the recovery in lending until the second half of 2011 in both the corporate and retail segments, the MNB said.

Banks' retail portfolio deteriorated only slightly in Q4, but the extension of grace periods for mortgage loans and the large amount of newly restructured mortgage loans “greatly contributed” to this fact, the MNB said.

The ratio of restructured loans in the whole retail mortgage loan portfolio rose 2 percentage points from the previous quarter to 9%.

The success of restructuring will soon be tested as grace periods end on about 25% of the restructured home loans soon, meaning an average 40% jump in installment payments, MNB researcher Gergely Fábián said.

The MNB now projects a turnaround in lending activity to happen only in the second half of 2011, with risks of further delay, Nagy said. The subdued lending activity primarily hurts SMEs as big companies can and do finance themselves from export cash flow.

The main factors behind a HUF 1,400 billion drop in the foreign financing of domestic banks last year, referred to by MNB governor Simor on Monday, were the withdrawal of excess liquidity built up after the crisis up to the beginning of 2010 on the one hand and a drop in lending activity on the other, the MNB researchers said.

Hungarian banks' capital position remained strong and their liquidity is appropriate, Nagy said. But low profitability, if it prevails, may prompt parents to redirect resources, he warned.

The sharply higher profits on assets of foreign banks' Hungarian branches reflect their special profile, as many of these branches focus on money market activities. Additionally, their portfolio quality is better as most of them service premium, export-oriented corporate clients, researcher Dániel Homolya said, answering a question by Econews.

Preliminary figures published by market regulator PSzÁF on Wednesday showed that the foreign bank branches generated 20% of the banking system's combined pre-tax profits last year while their market share in terms of total assets was just below 8%.