Budapest, 27 November 2024 – The Hungarian banking system’s stability and shock resilience are bolstered by outstandingly high profitability, ample liquidity, adequate capitalisation and the high quality of the loan portfolios. Return on equity was supported both by volatile and one-off items; profitability calculated with these items filtered out may have peaked at the end of 2023. In line with global trends, risks related to domestic commercial real estate lending continue to deserve special attention. The credit market is characterised by dual trends: lending to households picked up significantly, while corporate credit growth decelerated further during the year, owing to subdued credit demand in the uncertain macroeconomic environment. The lending capacity of the banking system is abundant, and no credit supply constraints can be identified. The sector would remain stable even in a less favourable economic environment than expected.
The domestic banking sector reported a historically high after-tax profit of HUF 934 billion in 2024 H1, partly supported by volatile and one-off items. The sharp decline in credit institutions’ net interest income from the central bank was accompanied by an increase in interest income from other sectors. The banking sector's return on equity (RoE) amounted to 26 per cent at the end of 2024 H1, while RoE excluding volatile and one-off items may have peaked at the end of 2023. For 2024 as a whole, we expect filtered profitability to remain high, albeit with a downward trend.
The banking system’s liquidity and funding position has remained robust, with the operational liquidity buffer exceeding HUF 20,000 billion at the end of October, equivalent to 70 per cent of private sector deposits. The sector’s consolidated capital adequacy ratio remained close to its historical peak of around 20 per cent at the end of June, with nearly HUF 2,000 billion of free capital. Based on the stress test results, the domestic credit institution sector would meet regulatory requirements on liquidity and capital adequacy even in the event of a severe shock; in other words, the sector would remain stable even in a worse-than-expected environment. The share of non-performing loans in both the corporate and household segments is historically low, stagnating at 3.8 per cent in the former and falling to 2.3 per cent in the latter in 2024 H1. The quality of the corporate loan portfolio may be at risk from the depreciation observed in the commercial real estate market through bank collateral values. The resulting risks are mitigated by the fact that the commercial real estate market may have already reached its cyclical trough.
Lending processes in Hungary are still characterised by dual trends. In line with regional trends, the annual growth rate of corporate credit in the credit institution sector continued to slow in 2024 H1, reaching 3.7 per cent in the total corporate sector and 0.7 per cent in the SME segment. Subdued corporate lending is primarily due to insufficient demand factors, while supply conditions have a stimulating effect. The annual growth of the corporate loan portfolio is expected to be around 3 per cent in 2024, in light of the tighter supply of subsidised loan schemes, the lack of an upturn in investment loan demand and the high portfolio of liquid assets.
The household credit market picked up in 2024 H1, as loans outstanding grew by 6 per cent, surpassing the regional average. Household credit may expand by 9 per cent this year, thanks to improving macroeconomic fundamentals, restructured family subsidies and lower long-term yields. The significant upturn in housing loans in the six months under review also had an impact on housing market activity: the year-on-year number of sales rose by one third, including a significant increase in the share of housing buyers with a mortgage. Voluntary pension savings, as well as interest and maturities on government bonds, may generate substantial capital flows for the housing market in 2025, further stimulating demand.
Newly disbursed, market-priced housing loans were concluded at an interest rate spread of around 0 percentage point during the period under review. Such a low margin is unsustainable from the perspective of bank profitability, and if pricing at the cost of funds becomes a persistent practice, it will pose a financial stability risk as margins fail to cover credit risk costs and operating costs.
Thanks to abundant liquidity, a high level of free capital even amid increasing and changing capital requirements and outstanding profitability, the Hungarian banking system has significant lending capacity, as confirmed by the Financial Conditions Index, which shows that the sector’s lending capacity is historically high and its willingness to lend is at around the equilibrium level.
https://www.mnb.hu/kiadvanyok/jelentesek/penzugyi-stabilitasi-jelentes