In 2014 H1, as forecast by the MNB, lending in Hungary continued to improve, primarily as a result of cuts in the central bank policy rate and, in the SME sector, the Funding for Growth Scheme. The extension and increase of the FGS credit facility additionally support lending in the SME sector. However, no significant improvement has been seen in market-based corporate lending. Overall, the banking system can still be considered as contractionary and is not sufficiently supportive of economic growth, which to a great degree can be traced back to the risks being carried in banks’ balance sheets. These risks primarily involve households’ FX loans and commercial real estate loans, which have burdened banks’ balance sheets since the outbreak of the crisis.
With regard to commercial real estate loans, the asset manager to be set up by the MNB may induce more dynamic portfolio cleaning, as a voluntary option for banks. Due to the subdued demand and significant oversupply in the commercial real estate segment and workout market, these exposures would weigh on banks’ balance sheets for many years. According to the decision of the Monetary Council, the MNB will provide HUF 300 billion in financing to the asset manager for the purchase of commercial real estate claims, and for foreclosed collaterals backing these claims. This will relieve much of the strain on banks, which may in turn decrease the pro-cyclicality of the banking system and thus increase the efficiency of monetary policy.
The risks related to households’ FX loans are handled by nullification of the exchange rate spread, settlement of the unfair interest rate and fee increases, the transition to a “fair banking system”, and conversion of foreign currency denominated mortgage loans into forints. These measures will have impact on all aspects of the banking sector’s operations. Settlement will lead to immediate losses this year, as well as decrease in interest revenues in the future. In contrast to these expenses, household indebtedness will decrease, and the return to fair interest margins will increase households’ repayment ability. Moreover, conversion to HUF will lead to predictable instalments. FX loans measures will lower banks’ HUF liquidity, but also reduce banks’ reliance on foreign funding. Finally, these measures strengthen competition among banks in retail HUF lending, as well as in HUF deposit collection activities.
The central bank is playing an active role in the settlement of households’ FX debt and the transition to a “fair banking system”, both in terms of macroprudential regulation and consumer protection. With regard to the former, it has elaborated the detailed methodology for settlement and the briefing of customers; with regard to the latter it will establish the objective criteria for increases in lending rates and interest margins. Furthermore, the MNB has launched foreign exchange tenders to mitigate the impacts of settlement and conversion on the forint spot market stemming from the need for hedging.
Over the short run, these measures weaken the banking system’s resilience and propensity to lend, but the banking system has adequate buffers to absorb the losses and remain stable. It must be taken into consideration that, due to these risks, the banking system has built up significant capital and liquidity buffers which can mitigate the impact of these losses on lending. The stability of the banking system will be further reinforced by the planned capital increases of HUF 350 billion by owners in 2014 H2, after capital injections totalling HUF 150 billion during the first six months. Based on the solvency stress test, which also considers the results of the Asset Quality Review, in an unfavourable macroeconomic scenario a manageable amount of HUF 90 billion additional capital is required from banks at which capital shortfalls appear, in order to meet the regulatory requirements.
Over the medium term, the measures to manage problem assets contribute to the clean-up of banks’ balance sheets and help to mitigate risks, which may accelerate consolidation in the sector. As a result of all of this, a stable, profitable banking system, which consist of fewer, but more competitive and cost efficient banks, and which supports sustainable growth may evolve in the years ahead.