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Significant uncertainty in corporate lending

The vast majority of companies participating in the survey expect that corporate lending conditions are likely to remain strict in the foreseeable future, while almost half of the banks believe that the sector will begin to relax their lending criteria already from 2011, according to the KPMG survey, in which banking and corporate executives were asked about the effects of the economic crisis on corporate lending.

68% of the corporates believe there is a second wave of the crisis ahead of us. Banks are more optimistic regarding this question, as only 44% of them expect further negative developments.

According to Andrea Sartori, partner responsible for restructuring services at KPMG in Hungary, this is in line with what the advisory firm is seeing at their clients. “There is a significant uncertainty prevailing among corporate executives regarding expectations for the future. Companies are compelled to incorporate such uncertainties during the preparation of their monthly/quarterly financial forecasts, which were previously only considered in the long term planning process.”

However, differences between the opinions of corporates and banks are not limited to the general development of the crisis.  The vast majority of corporates expect that corporate lending conditions are going to remain strict – i.e. tightening collateral requirements and monitoring – for the foreseeable future. On the other hand, nearly half of the banks contend that the sector will begin to relax their lending criteria already from 2011. According to Zsolt Palotai, KPMG Senior Manager, this reflects not only cautious optimism, but also the expectation of strengthening competition among the banks.

Furthermore, banks expect corporate lending to increase slightly across the whole banking sector next year, driven by short term forint loans. However, banking executives are more optimistic about the prospects for their own bank than for the sector as a whole: they typically forecast better performance for their own bank than for the other institutions, both in terms of the growth of their loan portfolio and its overall quality.

Banks and corporates agreed that for companies experiencing financial difficulties, the least preferred measures are the sale of outstanding debt to a third party or the initiation of a liquidation process.

Banks – even more considerably than corporates – prefer to see the rescheduling of debt service, if this is also accompanied by an increase in collateral. Corporates see the development and implementation of a restructuring plan as a better option than the rescheduling of debts.

“KPMG has seen that in most cases it is better to develop and communicate a restructuring strategy as soon as possible rather than automatically reschedule the loans. Rescheduling may buy the company some time but does little to address the underlying causes of the company’s difficulties, resulting in a further deterioration of the company’s market position.” commented Zsolt Palotai.

Corporates are not receptive to the appointment of a bank supervisor to companies with financial difficulties. Out of the three worst measures, this ranks only slightly better than the selling of the debt to third parties or the liquidation of the company. Zsolt Palotai thinks that this is due to the unclear legal framework governing this area and the negative experiences some companies have had with bank supervisors.

In terms of quality of the banks’ credit portfolio and risk of further deterioration, the building and construction industry was believed to be the most risky followed by and the real estate sector. The financial sector was ranked on 3rd place, due to the perceived risks attached to leasing companies are considered to be main risk factors.

According to the KPMG survey, most of the banks rely on their internal resources when managing financial difficulties of debtors. Only one in five banks stated that they regularly use external advisors or experts. However, the respondents believe that the importance of external advisors and experts will grow in the future. (press release)