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The Hungarian banking system has entered the current complex and challenging period with a stable, strong capital position and substantial liquidity buffers. In a turbulent economic environment, credit risks have increased further, particularly in energy price sensitive portfolios.
The sector’s resilience to shocks is adequate and its liquidity and capital position are robust even in a much more severe crisis scenario than currently projected. In a rising interest rate environment and war-induced uncertainty, we expect a slowdown in credit growth dynamics in both the corporate and household segments, reports the Hungarian Central Bank (MNB).
Rising inflation, the European energy crisis, and deepening geopolitical tensions are the main drivers of international economic developments. The protraction of the war between Russia and Ukraine is having a significant impact on the performance and financial stability of the European Union economy. Extremely high energy prices are reducing household disposable income and imposing a heavy cost burden on businesses. The increase in inflation risks has led many central banks to tighten their asset purchase programs and interest rate conditions. Banks in Europe need to prepare for a combination of challenges, with the European Systemic Risk Board (ESRB) issuing a warning.
The deteriorating economic environment is also negatively affecting the domestic economy and poses a material risk to portfolio quality. The non-performing loan ratio has moved slightly away from its historical low, standing at 4.2 percent in the residential segment and 3.9 percent in the corporate sector at the end of the half-year. The highly vulnerable loan portfolio represents a manageable level of risk for the banking system.
Government measures will significantly reduce the profitability of the banking system this year and next. In the first half of 2022, the credit sector achieved a net profit after tax of HUF 200 billion (540 million euros) on an unconsolidated basis, which means that the return on equity fell from 10 to 7 percent. The decline in profitability and the contraction of capital replacement opportunities could lead to a reduction in lending capacity in the medium term.
The resilience of the Hungarian banking system is strong, with substantial capital and liquidity buffers coming into the current period of complex challenges. Although banks’ liquidity buffers have tightened slightly, they still have ample reserves. The banking sector would still be able to meet regulatory requirements in the event of a significant liquidity shock. The consolidated capital adequacy ratio of the banking system declined to 18.5% by the end of the semester, reflecting a strong resilience to shocks, as even in the most severe and protracted stress scenario, only a temporary, manageable capital shortfall would arise at the sector level.
Household and corporate borrowing from financial institutions is expected to moderate. Private sector credit growth has been dynamic in the first half of 2022. Looking ahead, higher interest rates and operating costs, as well as increased uncertainty, will lead to a decline in investment loan demand. There has been a significant increase in foreign currency loan issuance in the corporate loan market, but most of these borrowers have foreign currency exposure. Retail credit issuance slowed in the third quarter after a strong first half of the year. The rising interest rate environment and higher house prices are expected to lead to a decline in demand for housing loans. In the next half of the year, the vast majority of banks plan to tighten conditions on both retail and corporate loans, and we expect a correspondingly substantial decline in the annual growth rate of outstanding loans.
via MNB, Featured image: Pixabay