The considerable share of bad loans on banks’ loan books represented a primary risk for the banking sector, the National Bank of Hungary (NBH) said in its latest Financial Stability Report. Addressing the bad loan issue was a crucial condition for improving the banking sector ability to support sustainable economic growth, it said. The share of non-performing corporate loans fell to 18.4% at end-2015 while the share of non-performing retail loans stood at fell at a slower extent to 17.7%. Portfolio cleaning remained slow so external help was needed to support the process, the NBH said. Banks could start selling bad corporate property loans to the bad bank MARK as of H2/2016, which could bring the bad loan ratio in the corporate loan portfolio by 5pps by the end of 2017, the report said. The NBH also expected that the clean-up of the retail loan portfolio could accelerate slightly in the next two years, leading to a decline of the bad loan ratio to 14.2% by end-2017.
Mortgage loans continue to represent the highest risk among retail loans, the NBH said. It expected a possible concentration of foreclosures as a result of the depletion of assets by the national asset manager and the expiration of the winter eviction moratorium. The NBH considered such a development undesirable and therefore recommended mortgage loan restructuring, saying that there were significant reserves for such a process in the banks’ loan portfolio. It added that the recommendations could also support further improvement in portfolio quality.
The shock-absorbing capacity of the banking sector remained robust and external vulnerability continued to decline, the NBH said. Capital adequacy was 20% and the sector liquidity position was adequate, it added. The capital position of the sector will remain solid even in case of severe financial and economic stress, the NBH stress tests showed. All banks will continue to meet the capitalisation requirement under a stress scenario so no bank needs a capital injection even in such conditions, the NBH said. On the other hand, some banks might fail to meet the liquidity requirement in a stress scenario – complying with a 70% liquidity coverage ratio would require HUF 300bn of liquid assets and HUF 600bn for compliance with the 100% ratio valid as of April.
The IRS operations of the NBH countered the interest rate risk from the banks’ increased exposure to fixed-rate government securities but did not cover two other risks, the NBH said. The remaining risks included a base risk related to a change in the steepness of the yield curve and a maturity mismatch risk. The base risk could result in a loss of nearly HUF 70bn for the banks through a revaluation of their government bond portfolio in case the spread between the short- and long-term government security yields widens by 1pp. The maturity mismatch risk could bring a HUF 15bn loss to the banks in case of such a yield curve shift due to the mismatch between the government security exposure and the shorter-term IRS hedge, the NBH said. The potential losses cannot be considered significant since they represented 2% of the banks’ liquid assets and even the worst value did not exceed 3.5%. The risk could be further reduced by the mortgage funding adequacy ratio as of Apr 2017 through the issue of fixed-rate mortgage bonds, the NBH pointed out.