The capital and liquidity position of the banking system is stable, lending capacities are at a high level

Budapest, 25 May 2023- The Hungarian banking system remains stable in the face of recent international bank crises, inflation risks and the uncertainty caused by the prolonged Russian-Ukrainian war. Lending to the private sector has increased, while overall demand has weakened in line with regional trends last year. Banks' lending capacities are at a high level, and their capital and liquidity position is stable even assuming a potential stress scenario. Signs of a real estate market turnaround are perceptible, which will also be gradually reflected in real estate valuations. Nevertheless, the financial stability risks related to these developments are limited in the domestic banking system. The portfolio of banks is sound, the share of non-performing loans is low, but looking ahead banks are also prepared for a possible increase in defaults by setting aside loan loss provisions.

The risks from the international environment - high inflation environment worldwide and the uncertainty caused by the prolonged Russian-Ukrainian war - have had a significant impact on the banking system over the past one and a half years. During the spring of 2023, the turbulence caused by US bank failures and the forced merger of major Swiss banks had a temporary negative impact on investor sentiment both in Europe and overseas. Nonetheless, banking regulation in the EU, including in Hungary, is much stricter than in the US and can therefore prevent similar problems.

The liquidity reserves of the banking system are stable and at high levels. The sector's operational liquidity reserves amount to nearly HUF 18,000 billion, equivalent to 63 per cent of deposits. The sector's liquidity position remains robust, and based on the liquidity stress test, the sector would meet the regulatory requirements even in the event of a significant shock. In order to maintain sufficient bank liquidity, the stability of the deposit portfolio will be crucial in the future as well.

Bank lending to the private sector continued to grow in 2022, albeit at a slowing pace. Although the share of FX loans in corporate loan issuance increased, the majority of borrowers had natural collateral. Corporate credit conditions have tightened, driven mainly by cyclical factors. The expanded and newly launched subsidised loan programmes can help refinance previous low-interest loans. The volume of newly contracted household loans declined in 2022 H2. New housing loan disbursement has fallen by a half, in line with the trends in other countries in the region. In terms of indebtedness, those borrowers of prenatal baby support loans and Home Purchase Subsidy Scheme for Families (HPS) claimants who do not meet the conditions of state subsidies, and those who have taken out market based loans in addition to subsidised loans deserve special attention. Overall, banks' lending capacity is adequate, but due to the increased economic uncertainty, the strict monetary environment and the resulting decline in demand, the stocks of both corporate and household loans may show single-digit growth in 2023.

Housing market activity has weakened significantly due to the above factors and falling demand caused by the significant increase in housing price levels in recent years. Average house prices fell even in nominal terms in 2022 H2. The financial stability risks of overvaluation are mitigated by the fact that debts on collateral is at moderate levels, with the median loan-to-value (LTV) ratio of mortgages issued since 2016 being only around 50 per cent. Large-scale completions are expected in the domestic commercial real estate market, but rental demand in most segments is below pre-pandemic levels. As a result, vacancy rates are rising, while the increase in expected yields on real estate investments points to a reduction in property values. The volume of the banking system's exposure to the commercial real estate market relative to own funds and total assets is also around a half of the level of the ratio seen in 2011-2012, reflecting banks' strong resilience to shocks.

After the narrowing of the general payment moratorium to vulnerable debtors in October 2021, the non-performing loan (NPL) ratio increased from its historical minimum, but remained at a low level at the end of 2022. The rise in loan loss coverage ratios of household and corporate loans indicates that the banking system is preparing for a possible future increase in defaults.

The sector's return on equity and return on assets fell slightly over the course of a year. This was mainly due to the profit and loss impact of the recognition of higher loan loss provisioning and the extra profit tax, as well as the impact of the interest rate cap, but this was almost fully offset by strong interest income.

The consolidated capital position of credit institutions is stable, above 18 per cent, and their free capital above the total capital requirement exceeds HUF 1,500 billion. Based on the results of the solvency stress test, the banking system's capital position is robust even in the event of significant stress.

https://www.mnb.hu/en/publications/reports/financial-stability-report

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