MNB: Hungarian Banking System Remains Stable

The Hungarian banking system remains stable and its resilience to shocks is strong, but after last year's outstanding profitability, its profits will decline in 2024, Bálint Dancsik, head of the National Bank of Hungary's (MNB) Financial Stability Report, said on Tuesday.

Last year's outperformance in profitability was mainly due to the high interest rate environment and rising net interest income, as well as one-off items. However, this profit is unsustainable and its decline may be driven not only by the normalization of monetary conditions but also by rising credit risks and government measures on interest rates, as well as some bank commitments, the report said.

Based on the central bank's assessment, the banking system's liquidity has continued to increase from ample levels and its capital position is adequate, even taking into account the buffer requirements in 2024.

Non-performing loan ratios are low, stagnating in the corporate segment over the past year and declining significantly in the household segment, and portfolio quality is generally adequate. Household credit dynamics could bottom out in 2023 and corporate in early 2024, but credit dynamics could remain in single digits in both segments this year.

Based on the stress tests carried out, the domestic credit sector would meet regulatory requirements for liquidity and capital adequacy even in the event of a severe shock with a very low probability of occurrence, the MNB's head of department said.

Bálint Dancsik also pointed out that credit risks are likely to increase in several segments. The future of the household mortgage interest rate freeze is uncertain, but its removal may lead to a significant increase in repayments only for a narrow group of affected borrowers.

There could also be a risk of non-compliance with the conditions for having children under subsidized credit schemes linked to family allowances, with a quarter of borrowers who took out baby loans in the second half of 2019 not yet having a child in mid-2023, he added.

In line with global trends, the risks associated with domestic commercial real estate lending also merit particular attention, the report said. Last year, the proportion of project loans backed by these properties was high, with the proportion of collateral increasing in value based on bank valuations, a trend that runs counter to market trends, making it important for lending institutions to closely monitor the value of the properties they back.