Banks Anticipate Tightening Conditions, Slowing Demand

According to the responses to the Lending Survey conducted by the National Bank of Hungary (MNB), credit conditions and credit demand were broadly unchanged in the corporate credit market in the first quarter of 2022.

Looking ahead, around a quarter of the banks plan to tighten lending conditions due to the economic prospects that are becoming uncertain. Accompanied by a recovery in credit demand, the respondent institutions did not change the conditions of housing loans in the first three months of 2022. Banks forecast an increase in spreads on mortgage loans in 2022 Q2 and Q3 by passing on the increase in funding costs, while half of the banks anticipate a decline in credit demand.

MNB conducts a questionnaire-based survey in each quarter among the senior loan officers of domestic banks to report on current changes in credit demand and credit supply. The current questionnaire was completed by the senior loan officers between April 1 and 20, 2022.

Senior loan officers explained the expected tightening of credit conditions (25% of the banks plan to tighten them in Q2 and Q3), which mainly involves an increase in spreads and the tightening of borrowers’ covenants (higher own funds and collateral requirements), by the economic prospects that are becoming uncertain and industry-specific problems.

During the quarter under review, the downward effect of the rise in the general level of interest rates on demand for credit was offset by companies’ increasing working capital financing needs. As a result, corporate demand for credit was unchanged overall. However, due to the rising interest environment, 14% and 17%, respectively, of the respondents anticipate a fall in demand for SME and long-term loans over the next six months.

In net terms, 36% of banks tightened the conditions of commercial real estate loans in 2022 Q1 due to industry-specific problems and declining risk tolerance. Looking ahead, a net 29% of institutions anticipate additional tightening measures.

In the case of housing projects, a net 65% of the respondents anticipate tightening due to the risks affecting the sector (rising funding and construction costs, VAT and the phase-out of certain housing subsidies). 40% of the respondents experienced a fall in demand for the financing of all types commercial property, except for logistics centers, in Q1, which banks expect to continue in the next six months in all categories.

Due to competition and their favorable liquidity position, banks did not change the conditions of housing loans in Q1, which therefore may remain unchanged over the next six months. As regards the individual conditions, nearly half of the institutions reported a fall in spreads due to the delayed pass-through of rising funding costs to bank interest rates, while about the same proportion of them anticipate an increase in spreads in Q2 and Q3.

In net terms, 60% of the respondent institutions reported a pick-up in demand for housing loans in 2022 Q1, which was also attributable to growth in demand for the Green Home Program. However, a net 55% of them expect a decline in demand for credit in Q2 and Q3.

A net 10% of banks tightened the conditions of consumer loans in Q1, and a net 45% of respondents anticipate tightening in 2022 Q2 and Q3. Banks reported steady demand for consumer loans, while they expect demand to fall in the next six months.