Central Bank on COVID-Tested Hungarian Banking System

The shock-absorbing capacity of the Hungarian banking sector remains strong. In the second half of 2020, the sector’s capital position improved further, while banks’ liquidity continued to rise even from its previous high level, according to an analysis by the National Bank of Hungary (MNB).

The banking system is characterised by a balanced funding structure even in the protracted pandemic situation. As a result of the sector’s stable position, banks are able to provide corporations and households with the necessary funds, thereby supporting relaunch of the economy.

The well-functioning credit markets during the coronavirus epidemic provided one of the most important pillars of domestic crisis management. Growth in domestic loans were strongly supported by the central bank and government credit schemes and the comprehensive moratorium on payments. In 2020, the outstanding borrowing of corporations and households rose by 9.4% and 14.5%, respectively, which may be deemed high even in a European Union comparison. This is largely attributable to the payments reducing effect of the moratorium. Contrary to the period after the 2008 crisis, one favourable development is that banks perceive strong demand for investment loans as well at present. Furthermore, credit supply conditions were tightened only in a much narrower range and over a shorter horizon than during the previous crisis. According to our expectations, growth in the loan portfolio will persist even aside from the prolongation of the moratorium in the forecast horizon.

Vulnerable borrowers participating in the moratorium hold 10-12% of the entire loan portfolio, which represents a risk of manageable size for the banking sector. The ratio of the corporate loan portfolio participating in the moratorium fell significantly (to 39% of the eligible portfolio) by the end of 2020, while it did not change substantially for household debtors (54%). According to our estimate, roughly 12% of the corporate loan portfolio and 10% of the household loan portfolio may be regarded as particularly high-risk portfolio. On the other hand, the effect of credit risks on banks and on the overall macro economy is mitigated by the fact that the indebtedness of corporations and households to banks as a percentage of GDP is low, both by international standards and compared to the previous crisis period, and that the MNB supports prudent lending via its set of macroprudential instruments.

Rising credit risks were also reflected by the significant growth in impairment recognised by banks. In 2020, the ratio of the banking sector’s non-performing loan portfolio fell to a historic low. However, at present the non-performing ratios do not provide a full picture of the quality and risk level of the loan portfolio, as the moratorium on payments temporarily conceals the real risk of default for some debtors. At the same time, increasing risks are reflected by the rise in the ratio of loans within the portfolio which are allocated to the Stage 2 IFRS 9 accounting category and the rise in impairment coverage. In 2020, Hungarian banks recognised impairment of roughly HUF 260 billion, which corresponds to 0.5% of the assets and may be regarded as prudent provisioning also by European Union standards.

Due to the rising risk costs, profitability has deteriorated significantly. Nevertheless, the banking sector’s capital position strengthened further. Based on non-consolidated data, the credit institution sector’s profit after tax was HUF 206 billion in 2020, representing a drop of almost 60% in annual comparison. The annual return on equity fell to a five-year low, i.e. to 4.4%. In 2021, due to the deterioration in risk of loans participating in the moratorium for more than nine months the sector’s profitability may decline further, however, the capital position is robust. In the second half of 2020, capital adequacy was improved both by the positive results and regulatory easing, accordingly, the banking sector’s consolidated capital adequacy ratio rose to 18.3%. Considering the release of the buffer requirements, the free capital of the sector amounts to HUF 2,110 and calculating with the total annual profit, the free capital of all institutions as a percentage of exposure exceeds 4%.

"In our stress test exercise, calculations include payment moratorium until June 2021, in accordance with the legal framework in force at the time of the preparation. Based on our stress test result, almost all institutions in the domestic banking sector would be able to comply with the regulatory requirements related to liquidity and capital position, even under a much more severe crisis scenario than expected. The prolongation of the moratorium after June 2021 could modify the estimation results significantly; however, an accurate quantification of this effect will be possible only after publication of the legislation containing detailed rules," the report states.

As a result of the wide-ranging payment moratorium on loan repayments, which was introduced in March 2020, additional liquidity amounting to some HUF 1,700 billion was made available for actors in the private sector in 2020. However, the risks may exceed the advantages of the programme in parallel with the economic recovery and the increase in the vaccination coverage rate. Maintaining the moratorium in the current, wide-ranging form may lead to the increase of consumer protection risks as well as bank credit risks, while a possible narrowing in banks' lending capacity could decelerate the pace of recovery. Accordingly, when extending the payment moratorium, the National Bank of Hungary considers it extremely important that the majority of the debtors currently participating in the program restart the repayment of their respective loans, and only those should take the opportunity offered by the extension of the program who really need the backstop provided by the moratorium.