MNB Financial Stability Report, May 2020

Leaving behind the legacy of the 2007-2008 crisis, the Hungarian banking system is prepared to face the challenges likely to result from the COVID-19 pandemic with healthy balance sheets and adequate capital and liquidity reserves. That is according to the latest financial report by the National Bank of Hungary (MNB).

The report states that "based on our stress test exercise, most of the banks would require no capital replenishment even if a very severe economic path were to materialize. At the same time, the real economic impacts of the coronavirus will have a significant negative effect on the banking system and, consequently, the financing of economic agents."

The spread of the coronavirus presents an unexpected and novel shock for the world economy struggling with multiple vulnerabilities, the document says. The pandemic – which originated in China, a country deeply integrated into the global production chain – initially caused disruption in production chains leading to a supply-side shock. With the spread of the pandemic, the government restrictions introduced as precautionary measures drastically altered consumer behavior, and demand collapsed in numerous sectors (in particular tourism, catering, leisure and commerce related enterprises). In order to offset the negative economic impacts, many countries took extremely large-scale fiscal and monetary measures. Global economic growth may drop significantly in 2020, while the scale and rate of a post-pandemic recovery will essentially depend on the effectiveness of the announced government schemes and the lending capacity of the financial system.

Hungarian banks prepared to weather the impacts
The Hungarian financial system is prepared to face the coronavirus-related negative impacts in a fortified state. The balance sheet of the Hungarian banking sector has improved tremendously in recent years. Liquidity reserves are abundant, while profitable operations and the macroprudential capital buffers built up in recent years have led to a robust capital position. Lending risks have been reduced thanks to a healthier loan portfolio structure and low-level indebtedness. The debt cap rules introduced in 2015 put an end to excessive indebtedness in retail lending. Thanks to the conversion of retail foreign exchange loans into HUF loans, the exchange rate vulnerability of the retail loan portfolio ceased to exist, and by the end of 2019 loans with an initial interest rate fixation of over one year accounted for more than 50 per cent of mortgage loans outstanding. The share of project loans has declined significantly within the corporate loan portfolio. Non-performing loans in both the household and corporate segments reached their pre-2008 rates. Consequently, supported by the government and central bank measures, Hungarian banks have successfully overcome the difficulties of the previous crisis and are prepared to weather the impacts of a shock similar to the present one.