Budapest, 28 May 2024 – The Hungarian banking system remains stable, and its shock resilience is strong. The outstanding profitability in 2023 was due to the high interest rate environment and certain one-off items. Banking system profits will decline in 2024, as credit risks are expected to rise in conjunction with the normalisation of monetary conditions. In line with global trends, risks related to domestic commercial real estate lending deserve special attention, but at the same time, the systemic risk capital buffer reactivated by the MNB in a precautionary manner limits the build-up of such risks. The household credit market has started to recover, while the corporate credit market is characterised by a wait-and-see approach, mainly in the investment loan segment. The share of non-performing loans stagnated in the corporate segment, but fell significantly in the case of household loans. The NPL ratio in both segments is historically low, and thus overall portfolio quality is adequate.
The domestic banking system remained stable in an environment impacted by numerous challenges in the past period, and its shock resilience is strong. The credit institutions sector achieved historically high profitability in 2023. The nearly 24-per cent return on equity was, however, due in part to the high interest rate environment during the period and specific one-off items (reversals of impairment losses on Russian and Ukrainian exposures, revaluations of prenatal baby support loans and Home Purchase Subsidy loans, and an increase in dividend income from subsidiaries), which pose downside risks for the future.
Credit risks are likely to increase in several segments of the loan portfolio. The future of the interest rate cap on household mortgage loans is still uncertain. Its removal may cause a significant increase in repayment instalments for a small group of borrowers only. Non-compliance with the child-related conditions for family subsidies under subsidised loan schemes can also be identified as a risk. One quarter of borrowers who took out a prenatal baby support loan in the second half of 2019 did not have a child by June 2023; therefore, the credit risk monitoring of these clients deserves increased attention.
In line with global trends, risks related to domestic commercial real estate lending also deserve particular attention. In 2023, within the portfolio of project loans secured by commercial real estate, there was a high proportion of collateral with increasing value (based on banks’ valuations), reflecting a trend that ran counter to market trends; consequently, it is important for credit institutions to closely monitor the evolution of the value of collateralised real estate. Risks to the banking system are mitigated by the sector’s low exposure to commercial real estate compared to 2008 and the continued good quality of the portfolio. The systemic risk buffer, which was reactivated by the MNB on a precautionary basis, also limits the build-up of such risks.
The liquidity of the banking system has continued to rise from a high base, with the operational liquidity buffer equivalent to 72 per cent of deposits in February 2024. The loan-to-deposit ratio, which was increasing due to the outflow of corporate and household deposits seen in the first half of last year, decreased again to below 75 per cent by the end of the year, already reflecting support from the expansion of household deposits in the fourth quarter.
The annual growth rate of the loan portfolio of the household sector may have reached its lowest point at a level of 3 per cent in 2023, while the corporate sector rate may have bottomed out at 2 per cent in early 2024. The value of new contracts in the corporate sector stagnated in 2023, while that in the household sector declined in year-on-year terms during the period, but the latter segment has been recovering in the fourth quarter. Banks’ lending activity has been in line with the cyclical position of the economy. In 2024, banks expect demand to pick up in both credit segments, thanks to rising consumer confidence from disinflationary developments and an improving growth outlook. Credit dynamics in both sectors may remain in the single-digit range in 2024.
The quality of the loan portfolios remained good. The NPL ratio of the corporate loan portfolio stagnated at a historically low level of 3.8 per cent. The share of non-performing loans in the household sector has fallen by almost one half since the lift of the payment moratorium, dropping to 2.4 per cent by end-February 2024. This was supported by the reclassification of contracts previously participating in the moratorium to the performing category and by active bank portfolio cleaning. The capital position is adequate, and banks have sufficient free capital even taking into account the buffer requirements in 2024.
Based on the results of the stress test, the domestic credit institution sector would meet the regulatory requirements for liquidity and capital adequacy even in the event of a serious shock. The lending capacity of the banking system, and thus its role in supporting economic growth, would remain adequate even after a severe shock with a very low probability.