Budapest, 28 November 2023 – The Hungarian banking system remains stable and its resilience to shocks is strong. Profitability is remarkably high, with interest income on central bank deposits as a significant contributing factor. Deposits by households and non-bank financial institutions in the banking system declined, although the liquidity reserves of the sector remain ample. The loan-to-deposit ratio has risen from the levels seen in recent years, but is still at low levels. In line with international developments, both corporate and household lending have decelerated, but remained in positive territory. Credit dynamics may bottom out this year in both segments. The ratio of non-performing loans is low. The rate stagnated in the corporate segment and declined in the case of household loans and thus overall, portfolio quality is good.
The uncertain demand environment, high inflation and slowing economic growth have led to a decline in lending in Europe. In parallel with this, central banks’ restrictive monetary policies have significantly boosted banks’ profitability through net interest income, which is being at least partially absorbed by budgetary or central bank measures in an increasing number of countries. With the continuation of disinflation, and thus with the expected normalisation of the interest rate environment, the current high profitability is expected to decrease, while the correction of overvaluation in the real estate market has also emerged as a risk, in addition to the fragile growth prospects.
Transactions in the domestic housing market have declined significantly, mainly due to the unfavourable macroeconomic factors driving demand and the decrease in home purchases realised with credit. As a result, house prices fell slightly in year-on-year terms in 2023 Q2. Housing market overvaluation eased, but remains high. In the commercial real estate market, vacancy rates for both Budapest office and industrial-logistics properties increased in 2023 H1, but still cannot be considered high from a historical perspective. From a financial stability perspective, rising commercial real estate market risks are mitigated by credit institutions’ moderate exposure in project loans.
In conjunction with low retail deposit rates and the competition-bolstering effect of the government’s measures to enhance sovereign bond demand, the deposits of households and non-bank financial institutions have continued to contract in the banking system. The loan-to-deposit ratio has increased mainly due to deposit outflows, but the risks incurred are offset by the significant liquidity surplus at the sector level.
The capital adequacy of the banking system is adequate. Based on the results of the solvency stress test, even in the event of a severe stress event, there would still be only a negligible capital shortage at the sector level, and accordingly the liquidity and capital position of the banking system is still not a constraint on lending.
Despite the impact of the extra profit tax and other government measures, profitability remains remarkably high, with interest income from the central bank as a significant contributing factor. However, this high level of profitability is not sustainable over the medium term, and thus efficiency gains and deepening credit penetration may become the main sources of profitability again. From the standpoint of the future development of banks' capital adequacy and lending capacity, it is important for institutions’ dividend payment policy to remain conservative, and for this year's profit to largely serve the expansion of bank reserves. The non-performing loan ratio in the corporate segment has not changed substantially: in the case of household loans, it fell in 2023 H1 due to a technical effect following the end of the moratorium. Looking ahead, some segments of the loan portfolio can be identified where credit risks may increase. Examples include SME and mortgage loans subject to interest rate caps, project loans financing commercial real estate and state-subsidised loans, if the related child-bearing conditions are not met.
In line with international trends, the annual growth rates of both corporate and household loans outstanding decelerated. Annual credit dynamics are forecast to bottom out this year in both segments. In addition to the decline in market loans, the fall in subsidised loans also played a role in the decrease in new housing loans. The decline in subsidised loans suggests that demand in the credit market is also being strongly shaped by factors other than the interest rate environment aimed at curbing inflation, such as economic uncertainty, falling real wages and deteriorating consumer confidence.
https://www.mnb.hu/en/publications/reports/financial-stability-report