Financial Stability Report – May 2014

Balázs Vonnák

22 May 2014

Banks’ vulnerability decreased further, however, they still does not adequately support sustainable growth

Shock-absorbing capacity: Capital injections announced in 2014 improved capital position, while liquidity of the banking sector is also sufficient even in a stress scenario.

Procyclicality: Lending activity was stimulated markedly by the MNB’s Funding for Growth Scheme (FGS) and the policy rate cuts. However, market-based corporate lending is still restrained.

Magyar Nemzeti Bank 2

Commitment of parent banks plays an important role in the improvement of resilience

Financial stability heat map

Source: MNB.

3

Procyclicality Shock-absorbing capacity

November 2013

May 2014

May 2014

November 2013

Shock-absorbing capacity of the banking system is strong

4

The stress level in domestic financial markets remains low

System-wide Financial Stress Index (SWFSI)

Source: MNB.

5

-0,4-0,3-0,2-0,10,00,10,20,30,40,50,60,70,80,91,0

-0,4-0,3-0,2-0,10,00,10,20,30,40,50,60,70,80,91,0

Jan-

07M

ar-0

7Ju

n-07

Sep-

07Dec

-07

Mar

-08

May

-08

Aug

-08

Nov

-08

Feb-

09M

ay-0

9Ju

l-09

Oct

-09

Jan-

10Apr

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11Aug

-11

Nov

-11

Feb-

12M

ay-1

2Aug

-12

Oct

-12

Jan-

13Apr

-13

Jul-

13O

ct-1

3Dec

-13

Mar

-14

SWFSI Correlation contribution (smoothed)

Liquidity position remains solid even under stress scenario

Liquidity Stress Index, and banks' liquidity surplus or deficit relative to the regulatory level in the stress scenario

Source: MNB.

6

-90-75-60-45-30-150153045607590

-2 400-2 000-1 600-1 200

-800-400

0400800

1 2001 6002 0002 400

Jan-

09M

arM

ay Jul

Sep

Nov

Jan-

10M

arM

ay Jul

Sep

Nov

Jan-

11M

arM

ay Jul

Sep

Nov

Jan-

12M

arM

ay Jul

Sep

Nov

Jan-

13M

arM

ay Jul

Sep

Nov

per centHUF Bn

Liquidity need to meet the regulatory requirementLiquidity buffer above the regulatory requirementLiquidity Stress Index (right-hand scale)

Decreasing vulnerability, but substantial outflow of external funds may continue to pose a considerable risk

Development of banking system's foreign funds and the loan to deposit ratio through the forecast horizon

Source: MNB.

7

10

40

70

100

130

160

190

0

5

10

15

20

25

30

Jun-

10

Sept

Dec

-11

Mar Jun

Sept

Dec

-12

Mar Jun

Sept

Dec

-13

Mar Jun

Sept

Dec

-14

Mar Jun

Sept

Dec

-15

per centEUR Bn

Foreign funds Baseline scenario Loan-to-deposit ratio (right-hand scale)

Despite significant losses, the banking system’s need for capital in stress scenario is minimal…

Solvency Stress Index

Source: MNB.

8

-10

0

10

20

30

40

-300

0

300

600

900

1 200

2005

Q1

Q2

Q3

Q4

2006

Q1

Q2

Q3

Q4

2007

Q1

Q2

Q3

Q4

2008

Q1

Q2

Q3

Q4

2009

Q1

Q2

Q3

Q4

2010

Q1

Q2

Q3

Q4

2011

Q1

Q2

Q3

Q4

2012

Q1

Q2

Q3

Q4

2013

Q1

Q2

Q3

Q4

per centHUF Bn

Capital need to meet regulatory requirementCapital buffer above the regulatory requirementSolvency Stress Index (RHS)

…due to capital injections carried out this year

Capital injections in the banking system

Source: MNB.

9

0

50

100

150

200

250

300

350

400

0

50

100

150

200

250

300

350

400

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Q1

HUF BnHUF Bn

Capital injections Parent bank fund forgiveness

Although average capital adequacy is solid, the aggregate indicator conceals significant heterogeneity

Distribution of the capital adequacy ratio based on the number of banks

Source: MNB.

10

0

4

8

12

16

20

24

28

32

36

40

0

4

8

12

16

20

24

28

32

36

40

End of first year End of second year End of first year End of second year

per centper cent

Capital adequacy ratio of banking sector

Minimum regulatory capital requirement

Stress scenarioBaseline scenario

Lending does not adequately support economic growth

11

Positive turnaround in corporate lending in the second half of 2013, mainly due to the FGS

Forecast of lending to non-financial corporations (transaction-based, y-o-y data)

Source: MNB.

12

-8-7-6-5-4-3-2-1012345

-8-7-6-5-4-3-2-1012345

2011

Q1

Q2

Q3

Q4

2012

Q1

Q2

Q3

Q4

2013

Q1

Q2

Q3

Q4

2014

Q1

Q2

Q3

Q4

2015

Q1

Q2

Q3

Q4

2016

Q1

per centper cent

Fact - total corp. Forecast - total corp. (prior to FGS)Forecast - total corp. (new) Fact - SME Forecast - SME (prior to FGS) Forecast - SME (new)

Utilization of the second phase of FGS is proportionally higher than in the first

The diagram on the right shows the utilization of the credit line in percentage (Credit line of the first phase: HUF 750 billion, Credit line of the second phase:

HUF 500 billion)

Source: MNB.

13

0

100

200

300

400

500

600

700

800

0

100

200

300

400

500

600

700

800

FGS, first phase FGS, second phase

billion HUF billion HUF

0

10

20

30

40

50

60

70

80

90

100

0

10

20

30

40

50

60

70

80

90

100

FGS, first phase FGS, second phase

per cent per cent

While the utilization of new investment loans is even higher

Utilization of new loans in terms of time proportionality

Source: MNB.

14

Utilization of new investment loans in terms of time proportionality

0

50

100

150

200

250

300

350

0

50

100

150

200

250

300

350

FGS, first phase FGS, second phase

billion HUF billion HUF

0

30

60

90

120

150

180

210

0

30

60

90

120

150

180

210

FGS, first phase FGS, second phase

billion HUF billion HUF

But rebound in market-based lending is needed as well for supporting sustainable economic growth

15

Changes in credit conditions and factors contributing to the changes in the corporate segment

Source: MNB, based on banks' responses.

Note: Net percentage balance of respondents tightening/easing credit conditions weighted by market share.

-80

-60

-40

-20

0

20

40

60

80

100

-80

-60

-40

-20

0

20

40

60

80

100

2008

H2

2009

Q1

Q2

Q3

Q4

2010

Q1

Q2

Q3

Q4

2011

Q1

Q2

Q3

Q4

2012

Q1

Q2

Q3

Q4

2013

Q1

Q2

Q3

Q4

2014

H1

(e.)

per centper cent

Capital position Liquidity positionEconomic outlook Industry-specific outlookRisk tolerance Market share goalsChanges in credit conditions

Tigh

teni

ngEa

sing

Increase in Household lending, which may be prudent by regulating LTV/PTI standards

16Source: MNB.

New disbursements in the Household segment

0

100

200

300

400

500

600

700

0

100

200

300

400

500

600

700

2008

Q1

Q3

2009

Q1

Q3

2010

Q1

Q3

2011

Q1

Q3

2012

Q1

Q3

2013

Q1

Q3

2014

Q1

Q3

2015

Q1

Q3

2016

Q1

HUF BnHUF Bn

Confidence band New disbursements Refinancing for early repayments

Measures of the MNB are aimed at mitigating vulnerability by changing asset composition of banks

Preferred directions in the change in banking sector asset structure and steps supporting them

Source: MNB.

17

Measures

SME lending is increasing FGS pillar I

Contraction in loans to companies without natural hedge

FGS pillar II

Household lending increases, risk of imprudent lending may increase

LTV, PTI regulation may contribute to more sound lending practices

FX household debt is shrinking, risks are decreasing

Government, Supreme court decision

Household NPLs is decreasingNational Asset Management Agency

mitigates the problem

Corporate NPLs is decreasingRegulatory steps are needed to boost

portfolio-cleaning

The volume of 2-week central bank instruments is decreasing

Government securities holdings are increasing

Asset side of banks

Loan

s Pr

oble

m/ r

isky

loan

sLi

quid

ass

ets

Self-financing concept gives incentives

The sluggish portfolio cleaning of corporate loans is a significant macroprudential risk

18

In the case of corporate loans, quality improvement and portfolio cleaning decreased the NPL ratio by the end of 2013

Share of non-performing corporate loans of the banking sector by customers

Source: MNB.

19

0

2

4

6

8

10

12

14

16

18

20

22

0

2

4

6

8

10

12

14

16

18

20

22

2007

Q1

Q2

Q3

Q4

2008

Q1

Q2

Q3

Q4

2009

Q1

Q2

Q3

Q4

2010

Q1

Q2

Q3

Q4

2011

Q1

Q2

Q3

Q4

2012

Q1

Q2

Q3

Q4

2013

Q1

Q2

Q3

Q4

per centper cent

30-90 days delinquency 90+ days delinquency ratio

Movements in the cleaning component may be mostly accounted for one-off effects

Factors affecting changes in the ratio of non-performing corporate loans in the banking sector

Source: MNB.

20

-2,5-2,0-1,5-1,0-0,50,00,51,01,52,02,53,03,54,0

-2,5-2,0-1,5-1,0-0,50,00,51,01,52,02,53,03,54,0

2010

Q1

Q2

Q3

Q4

2011

Q1

Q2

Q3

Q4

2012

Q1

Q2

Q3

Q4

2013

Q1

Q2

Q3

Q4

Stock component Portfolio cleaning componentPortfolio impairment component Change of NPL ratio

percentage point percentage point

The corporate NPL ratio is expected to stagnate

Ratio of non-performing loans and the cost of provisioning in the corporate segment

Source: MNB.

21

0

5

10

15

20

25

30

0

1

2

3

4

5

6

2007 2008 2009 2010 2011 2012 2013 2014 2015

per centper cent

Loan loss provisioningLoan loss provisioning - forecastNon-performing loan ratio (RHS)

Share of defaulted loans stuck for years within the non-performing portfolio is significant...

Distribution of corporate NPL according to time elapsed since becoming non-performing

Source: CCIS.

22

0

5

10

15

20

25

30

0

5

10

15

20

25

30

0-6 months

6-12 months

1-2 years 2-3 years 3-4 years 4-5 years Above 5 years

per centper cent

By number of contracts By outstanding amount

…in which the share of project loan portfolio is significant

Portfolio quality in the corporate segment

Source: MNB.23

0

5

10

15

20

25

30

0

5

10

15

20

25

30

2012

.I. II. III.

IV.

2013

.I. II. III.

IV.

per centper cent

Other corporate NPL/total coporate loansProject loans NPL/total coporate loansProject loans restructured/total project loans

High vacancy rate among commercial properties compared to other European markets

Vacancy rate and capital value of the office market in an international comparison

Source: Jones Lang LaSalle.

24

0

10

20

30

40

50

0

5

10

15

20

25

Hun

gary

Irela

nd

Net

herla

nds

Russ

ia

Czec

h Re

p.

Italy

Spai

n

Pola

nd

Belg

ium

Ger

man

y

Fran

ce

Uni

ted

King

dom

Luxe

mbo

urg

thous. EUR/m2per cent

Vacancy rate (2010 Q4)Vacancy rate (2013 Q4)Capital value (2013 Q4, RHS)

Portfolio cleaning: mid-term benefits may outweigh short-term costs

25

Released capital

Decreasing funding costs

Potential for increased loan loss provisioning

on the remaining stock

Improved liquidity

Decreasing risk of future losses

Released human

resources

Improving maturity

mismatch

Improving portfolio quaility Growing risk

appetite

Released liquidity

Increasing lending activity

Improving profitability

Low profitability may lead to consolidation in the banking sector

26

Domestic banking sector continues to becharacterised by weak profitability

Return on equity in an international comparison

Source: EKB CBD.

27

-15

-10

-5

0

5

10

15

20

25

30

-15

-10

-5

0

5

10

15

20

25

30

2007 2008 2009 2010 2011 2012 2013 H1

Hungary

per cent per cent

Persistently weak profitability hampers lending in support of sustainable growth

• Deterioration in asset quality and weak profitability are endogenous.

Weak profitability

Deleveraging

Subdued portfolio quality

Deteriorating ability to attract funds and capital

Decreasing net incomes

Reluctance to realize further losses

Higher funding costsExternal

vulnerability Increasing loan losses

Source: MNB.

28

Subdued profitability poses risks to growth

Return on equity (2010-2013) and decline in the corporate loan portfolio (2013) by bank

Source: MNB.

29

-60

-50

-40

-30

-20

-10

0

10

20

-20 -15 -10 -5 0 5 10 15

Aver

age

ROE

(201

0-20

13, p

er c

ent)

Annual change of lending to corporations (YoY, per cent)

Persitently low profitability may lead to consolidation and a higher concentration of the banking sector

Cumulative net profits of profitable, unprofitable banks and the banking sector since 2008

Source: MNB.

30

-1500

-1000

-500

0

500

1000

1500

-1500

-1000

-500

0

500

1000

1500

2008 2009 2010 2011 2012 2013

HUF BnHUF Bn

Unprofitable banks Profitable banks Net profit after taxation

Increasing concentration in Household lending since the onset of the crisis

Herfindahl-Hirschmann-index based on new disbursements in each segment

Source: MNB.

31

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

Jan-

05M

ay-0

5Se

p-05

Jan-

06M

ay-0

6Se

p-06

Jan-

07M

ay-0

7Se

p-07

Jan-

08M

ay-0

8Se

p-08

Jan-

09M

ay-0

9Se

p-09

Jan-

10M

ay-1

0Se

p-10

Jan-

11M

ay-1

1Se

p-11

Jan-

12M

ay-1

2Se

p-12

Jan-

13M

ay-1

3Se

p-13

Jan-

14

Housing loans Unsecured loans Home Equity loans

Thank you for your attention!

32