Report on Financial Stability (November 2012) 5 November 2012.
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Transcript of Report on Financial Stability (November 2012) 5 November 2012.
Report on Financial Stability
(November 2012)
5 November 2012
2
Financial stability heat map
Source: MNB.
Procyclicality Shock-absorbing capacity
November 2012
April 2012
November 2012
April 2012
• Credit conditions: The banking system is supporting the economy to a limited extent
Owing to the low willingness to lend, the banking system is strongly procyclical in corporate lending.
• Resilience: The resilience of the Hungarian financial system has improved markedly
LIQUIDITY: Despite the dynamic outflow of external funds, liquidity risks have abated due to the appreciation of the forint, the drop in CDS spreads, decrease in net FX swap exposure, and the longer maturities of swaps.
CAPITAL: Capital injections by parent banks, steady deleveraging and the apprecation of the forint resulted in higher capital adequacy ratio, despite persistently high risk costs and fiscal burdens on the banking sector.
Summary I. – Credit contraction may persist longer than anticipated
3
• Risks: Several external and domestic perils
1. The protracted sovereign debt crisis in the euro-area remains a key risk, despite the improvement in investor sentiment.
2. The economic outlook of Hungary is deteriorating further.
3. Outflows of external funds may accelerate, while the reliance of the banking sector on the FX swap market remains high.
4. The ratio of non-performing loans is high in the domestic banking sector and the risk of insufficient loan loss coverage is rising.
5. Given the deteriorating portfolio quality and high tax burdens, banks’ profitability may remain subdued, which may translate into further deterioration in already low willingness to lend.
6. Banks partially offset rising loan losses by increasing interest rate margins, this, however, is not a sustainable income structure over the longer term.
Summary II. – Credit contraction may persist longer than anticipated
4
Credit conditions
5
6
The banking sector is not supporting economic growth
Source: MNB.
Note: The annual growth in the FCI shows the contribution of the financial intermediary system (banking sector) to the annual growth rate of real GDP. If the sign of the FCI is identical to that of the output gap, then the banking sector behaves procyclically.
Financial Conditions Index (FCI), real GDP growth and the output gap
-8
-6
-4
-2
0
2
4
6
-8
-6
-4
-2
0
2
4
6
2006 Q
1Q
2Q
3Q
42007 Q
1Q
2Q
3Q
42008 Q
1Q
2Q
3Q
42009 Q
1Q
2Q
3Q
42010 Q
1Q
2Q
3Q
42011 Q
1Q
2Q
3Q
42012 Q
1Q
2
per centper cent
Output gap Real GDP FCI
7
Tight credit conditions, particularly in corporate lending, have been causing credit
contraction for a long time
Source: MNB.
Net quarterly changes in corporate loans outstanding
-15
-10
-5
0
5
10
15
20
25
-300
-200
-100
0
100
200
300
400
5002008 Q
1Q
2Q
3Q
42009 Q
1Q
2Q
3Q
42010 Q
1Q
2Q
3Q
42011 Q
1Q
2Q
3Q
42012 Q
1Q
2Q
3Q
42013 Q
1Q
2Q
3Q
42014 Q
1Q
2Q
3Q
4
per centHUF Bn
Forecast Actual Growth rate (RHS)
8
Credit supply constraints are driven primarily by low willingness to lend
Source: MNB.
-20
0
20
40
60
80
100
-20
0
20
40
60
80
1002008 Q
2-3
2009 Q
1
Q2
Q3
Q4
2010 Q
1
Q2
Q3
Q4
2011 Q
1
Q2
Q3
Q4
2012 Q
1
Q2
H2 e
xp.
per cent
Easi
ng
per cent
Tig
hte
nin
g
Capital position (lending capacity)Liquidity position (lending capacity)Cyclical factors (willingness to lend)Competition (willingness to lend)Change in credit conditions
Changes in credit conditions of corporate loans and factors contributing to changes
9
Despite tighter credit conditions, banks lend to corporations with higher default risk as a result
of deteriorating economic conditions
Source: CCIS, MNB estimate.
Distribution of new loans according to probability of default in the given years
0
2
4
6
8
10
12
14
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8 9 10
per centper cent
Probability of default (per cent)
2007 2011 2011 (assuming an unchanged macroeconomic environment)
10
Banks adjusted in terms of quantities and maturities against the deteriorating corporate
credit quality
Source: CCIS, MNB estimate.
Maturity structure of newly issued corporate loans
14
16
18
20
22
24
26
28
30
0
200
400
600
800
1 000
1 200
1 400
1 600
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
MonthHUF Bn
Over 5 years maturity 1-5 years maturityShort-term Average maturity (RHS)
11
In contrast to corporate lending, household lending is driven predominantly by demand
factors
Source: MNB.
Net quarterly changes in household loans outstanding
-21
-14
-7
0
7
14
21
28
35
-300
-200
-100
0
100
200
300
400
5002008 Q
1Q
2Q
3Q
42009 Q
1Q
2Q
3Q
42010 Q
1Q
2Q
3Q
42011 Q
1Q
2Q
3Q
42012 Q
1Q
2Q
3Q
42013 Q
1Q
2Q
3Q
42014 Q
1Q
2Q
3Q
4
per centHUF Bn
Forecast ActualEffect of early repayments scheme Exchange rate fixationGrowth rate (RHS)
HUF 552.6 Bn HUF 468 Bn
12
The state interest rate subsidy scheme reduces the initial interest costs markedly (to 8-9 per
cent), which may boost credit demand
Source: MNB.
45678910111213141516
050
100150200250300350400450500550600
2005 Q
1Q
2Q
3Q
42006 Q
1Q
2Q
3Q
42007 Q
1Q
2Q
3Q
42008 Q
1Q
2Q
3Q
42009 Q
1Q
2Q
3Q
42010 Q
1Q
2Q
3Q
42011 Q
1Q
2Q
3Q
42012 Q
1Q
2
HUF BnHUF Bn
Mortgage loansOther loansRefinancing for early repaymentsAverage APRC of mortgage loans (RHS)
New disbursements of credit institutions in the household segment
Resilience
13
14
System-wide Financial stress Index (SWFSI) is on low level
Source: MNB.
Note: Higher levels denote higher stress.
0,0
0,1
0,2
0,3
0,4
0,5
0,6
0,7
0,8
0,9
1,0
0,0
0,1
0,2
0,3
0,4
0,5
0,6
0,7
0,8
0,9
1,0
2008 2009 2010 2011 2012
The System-wide Financial stress Index
15
The stress scenario of liquidity stress test
Source: MNB.
Note: The liquidity stress test is 30-day forward looking.
Assets Liabilities
ItemDegree (per
cent)
Currencies
affectedItem
Degree (per
cent)
Currencies
affected
Default on interbank
assets20 HUF
Withdrawals in
household deposits10 HUF/ FX
Exchange rate shock on
swaps15 FX
Withdrawals in
corporate deposits15 HUF/ FX
Depreciation of assets
eligible at the central
bank
10 HUF
16
The Liquidity Stress Index (LSI) has improved markedly
Source: MNB.
Note: The ratio is the liquidity need to 10 percent of balance sheet total weighted by balance sheet total. Higher ratio is mean higher liquidity risk along baseline scenario.
-125
-100
-75
-50
-25
0
25
50
75
-2,500
-2,000
-1,500
-1,000
-500
0
500
1,000
1,500Ja
n-09
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan-
10
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan-
11
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan-
12
Feb
Mar
Apr
May
Jun
per centHUF Bn
Liquidity buffer above the regulatory requirementLiquidity need to meet the regulatory requirementLiquidity Stress Index (right-hand scale)
Liquidity Stess Index, liqudity surplus of banks above the regulatory limit, and need along baseline scenario
17
The scenarios of the solvency stress test
• Over the 8 quarter forecast horizon beginning 2012 H2, the shock hits in 2012 Q4.
• Our baseline scenario is the forecast of the Report on Inflation 2012 Q2.
• Our stress scenario relative to our baseline scenario:
4.3 percentage points lower GDP growth;
15 per cent deprecation of HUF;
300 basis points risk premium shock;
10 per cent drop in house prices.
• Along the stress scenario we accounted for additional loan loss provisioning on outstanding non-performing loans as in a significantly deteriorating economic environment their recovery rate falls.
• As regards the exchange rate cap scheme, we assumed 70 per cent participation ratio both along the baseline and the stress scenario.
• The postponement of halving the bank levy and the pass-through of the entire financial transaction tax are taken into account.
18
Main components of the losses of the banking sector in the stress test over a two-year
horizon
Source: MNB.
Baseline scenario Stress scenario
Loan losses on corporate and household
portfolio555 971
Loan losses on new non-performing corporate
loans280 411
Loan losses on new non-performing household
loans275 425
Additional loan losses on the already non-
performing loans135
Loan losses on local government portfolio 11 24
Exchange rate risk of open position -64
Interest rate risk 80
Bank levy 205 205
Interest cost of the exchange rate cap scheme 36 65
Main components of losses of banking
system in eight quarter horizon (HUF
Bn)
19
The Solvency Stress Index (SSI) shows one of the lowest value since the onset of the crisis
Source: MNB.
Note: The indicator is the sum of normalised capital shortages relative to the 8 per cent level, weighted by the capital requirement. The higher the value of the index, the higher the solvency risk in the stress scenario.
-10
0
10
20
30
40
-300
0
300
600
900
1,2002005 Q
2Q
3Q
42006 Q
1Q
2Q
3Q
42007 Q
1Q
2Q
3Q
42008 Q
1Q
2Q
3Q
42009 Q
1Q
2Q
3Q
42010 Q
1Q
2Q
3Q
42011 Q
1Q
2Q
3Q
42012 Q
1Q
2Q
3
per centHUF Bn
Capital buffer above the regulatory requirementCapital need to meet regulatory requirementSolvency Stress Index (RHS)
Stress test index, capital buffer and need in stress scenario at the end of 8 quarter horizon
20
Foreign-owned banks have injected EUR 2.4 billion capital since 2009
Source: MNB.
20
25
30
35
40
45
50
55
60
-400
-300
-200
-100
0
100
200
300
4001998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Jun-
2012
per centHUF Bn
After tax profit Dividends (with opposite sign)Capital injection Dividend ratio (right-hand scale)
Profit after tax, dividend and capital raise of existing foreign owned banks
Risks
21
• Protracted sovereign debt crisis in the euro area. Several periphery countries are compelled to implement stricter fiscal
austerity measures. In some of the core countries, major fiscal consolidation measures will be
implemented as well. Significant deterioration in the economic outlook of the euro area, while
investor sentiment might remain volatile .
• Weak earning capacity of European banks due to the high funding costs and deteriorating portfolio quality.
• Worsening economic outlook weigh on banks’ balance-sheet.• In several peripheral countries banking systems need substantial capital
injections.
• Steady, or even accelerating deleveraging by parent banks.
Risks in the external environment of the financial intermediary system
22
23
Deteriorating domestic economic outlook
Source: Eurostat.
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
0 5 10 15 20 25 30 35
GDP g
row
th 2
012 H
1(c
om
pare
d t
o e
nd
-2011,
per
cent)
Cumulated GDP growth 2005-2011 (per cent)
HU
Euro area
LV
EE
LTRO
BG
PL
SK
CZ
Economic growth in international comparison
24
The recently benign investor sentiment and expectations over the EU/IMF negotiations
reduced markedly the Hungarian CDS premia
Source: MNB.
-100
0
100
200
300
400
500
600
700
800
-50
0
50
100
150
200
250
300
350
400
Jul-1
1
Aug-11
Sep-
11
Oct
-11
Nov-11
Dec-11
Jan-
12
Feb-
12
Mar-1
2
Apr-1
2
May-12
Jun-
12
Jul-1
2
Aug-12
Sep-
12
Oct
-12
basis pointbasis point
International componentIndividual componentHungarian sovereign CDS spread (right-hand scale)
Decomposition of the Hungarian 5–year CDS spread
25
The outflow of external funds continues to be strong, significant drop in loan-to-deposit ratio
Source: MNB.
20
22
24
26
28
30
32
34
36
38
112
116
120
124
128
132
136
140
144
148Dec-09
Jan-
10
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan-
11
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan-
12
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
EUR Bnper cent
Foreign funds - estimated band (RHS)Foreign funds - actual (right-hand scale)Loan-to-deposit ratio - actualLoan-to-deposit - estimated
Estimated and actual change of foreign funds and loan-to-deposit ratio
26
Given the still large FX swap exposure (open on-balance-sheet position), cap is necessary
Source: MNB.
0
5
10
15
20
25
30
35
40
45
50
55
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500Ja
n-08
Mar
May
Jul
Sep
Nov
Jan-
09
Mar
May
Jul
Sep
Nov
Jan-
10
Mar
May
Jul
Sep
Nov
Jan-
11
Mar
May
Jul
Sep
Nov
Jan-
12
Mar
May
Jul
per centHUF Bn
Amount of excessOn-balance-sheet open FX positionOn-balance-sheet open FX position/ Total assets (RHS)Total assets based market share of banks exceeding the 15 per cent limit (RHS)
15percent limit
On-balance-sheet open position of the banking system and the total assets based market share of banks exceeding the 15 per cent limit
27
The greatest challenge of the domestic financial intermediary system is managing the
deteriorating portfolio quality Ratio of non-performing loans and the cost of provisioning
Source: MNB.
Corporate Household
0
3
6
9
12
15
18
0
1
2
3
4
5
6
2007
Q2
2008
Q2
2009
Q2
2010
Q2
2011
Q2
2012
Q2
2013
Q2
2014
Q2
per centper cent
Loan loss provisioningLoan losses related to the early repayment schemeLoan loss provisioning - forecastNon-performing loan ratio (RHS)
0
5
10
15
20
25
30
0
1
2
3
4
5
6
2007
Q2
2008
Q2
2009
Q2
2010
Q2
2011
Q2
2012
Q2
2013
Q2
2014
Q2
per centper cent
Loan loss provisioningLoan loss provisioning - forecastNon-performing loan ratio (RHS)
28
High NPL ratio may persist amid sluggish portfolio cleaning
Source: MNB.
Cleaning of non performing loans
0
2
4
6
8
10
12
14
16
0
10
20
30
40
50
60
70
802008 Q
2
Q3
Q4
2009 Q
1
Q2
Q3
Q4
2010 Q
1
Q2
Q3
Q4
2011 Q
1
Q2
Q3
Q4
2012 Q
1
Q2
per centHUF Bn
Cleaned loans - households Cleaned loans - corporate
Cleaning ratio - households (RHS) Cleaning ratio - households (RHS)
• Flow problem: new defaults weigh on profitability through loan loss provisioning. (moderate risk)
• Stock problem:
1. High NPL ratio freeze banks’ balance-sheet (moderate risk)
• Reduces itself willingness to lend, particularly in the corporate segment.
• Refinance of non-performing loans erodes profitability.
• Deteriorates liquidity, increases maturity mismatch, diverts funds from lending.
2. Not just the NPL ratio, but also loan loss coverage matters (high risk)
• The higher the NPL ratio, the higher the risk of collateral misvaluation.
3. Despite its flaws in terms of international comparability, analysts pay particular attention to it in their risk perception over the banking sector in the CEE region. (high risk)
In evaluating portfolio quality, in addition to the dynamics, the level is also crucial
29
30
Reducing NPL ratio is key
• Reduction of NPL ratio:
1. Through nominator:
• Portfolio cleaning and debtor rescue packages (by reviving loans from defaults) reduce the nominator.
2. Through denominator:
• Rebound in lending increases the denominator.
• If the NPL ratio cannot be reduced, then the loan loss coverage should be raised:
a.Higher loan loss coverage may boost portfolio cleaning or
b.Otherwise would make the banking sector safer, though portfolio cleaning would be more sluggish.
31
Loan loss coverage is low in regional comparison
Source: EBCI, MNB.
Note: (1)= 2011Q4, (2)= 2012Q1, (3)= 2012Q2.
Montenegro (1)Albania (1) Serbia (1)
Lithuania (3)
Latvia (2)
Bulgaria (1)Ukraine (3)
Romania (2)
Bosnia and Herzegovina (3)
Hungary (3)
Croatia (3)
Moldova (3)
FYR Macedonia (2)
Poland (1)
Slovakia (2)Czech Republic (2)
Slovenia (2)
Estonia (2)
0
5
10
15
20
20 40 60 80 100
Rati
o o
f non p
erf
orm
ing l
oans
to t
ota
l lo
an
port
folio(%
)
Coverage ratio of non performing loans(%)
NPL ratio and loan loss coverage in international comparison
32
In the case of project loans and restructured foreign currency denominated, insufficient
coverage is plausible
Coverage of non-performing loans - corporate
Coverage of non-performing loans - household
Source: MNB.
0
100
200
300
400
500
600
700
800
0
100
200
300
400
500
600
700
800
NFC Project-finance NFC Project-finance
NPL Restructured (performing)
HUF BnHUF Bn
Value of collaterals Provisions Outstanding amount
0
100
200
300
400
500
600
700
800
0
100
200
300
400
500
600
700
800
HUF EUR CHF HUF EUR CHF
HUF BnHUF Bn
Value of collaterals Provisions Outstanding amount
Non-performing mortgage Restructured mortgage loans passed due less than 90 days
33
Banks are attempting to offset higher costs by increasing interest margin
Banking sector ROE in international comparison
Net interest income to total assets (Dec 2011 – consolidated data)
Source: IMF GFSR, EKB CBD database, MNB.
-5
0
5
10
15
20
25
30
-5
0
5
10
15
20
25
30
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
per centper cent
Germany Italy AustriaHungary Bulgaria CroatiaPoland Czech Republic SlovakiaRomania
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Ger
man
y
Belg
ium
Ital
y
Aust
ria
Lith
uani
a
Latv
ia
Slov
enia
Pola
nd
Cze
ch R
epub
lic
Esto
nia
Slov
akia
Bulg
aria
Rom
ania
Hun
gary
per centper cent
34
The interest margin remained high on the performing portfolio
Source: MNB.
Interest margin (based on aggregated individual, non-consolidated data)
2,5
2,6
2,7
2,8
2,9
3,0
3,1
3,2
3,3
3,4
3,5
0
100
200
300
400
500
600
700
800
900
1000
Jan-
09Fe
bM
arAp
rM
ay Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan-
10Fe
bM
arAp
rM
ay Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan-
11Fe
bM
arAp
rM
ay Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan-
12Fe
bM
arAp
rM
ay Jun
per centBn HUF
12-month rolling net interest income
Net interest income as a propotion of the gross interest bearing assets (right-hand scale)
Net interest income as a propotion of the net interest bearing assets (right-hand scale)
• The resilience of the banking sector and thus its lending capacity is strong.
• Given the deteriorating portfolio quality and high tax burdens, banks’ earnings may remain subdued, which may translate into further deterioration in low willingness to lend.
• The procyclical behaviour of banks concerns both new lending and loans outstanding.
• No turnaround is expected in new lending, leading to further contraction in loans outstanding.
• Banks are attempting to offset rising losses by widening interest margin (pass-through of costs to customers).
• Financial intermediation is becoming more expensive, leading to unsustainable state, as feedback loop may emerge: loan losses interest margin debt servicing burden consumption and investment non-performing loans interest margin ….
Credit contraction may persist longer than anticipated
35
36
Financial stability heat map
Source: MNB.
Procyclicality Shock-absorbing capacity
November 2012
April 2012
November 2012
April 2012