1. Financial Stability Report May 2017
Magyar Nemzeti Bank
25 May 2017

2. I. Shock resilience of the banking sector
II. Highlights

3. The capital position of the banking sector is highly stable
Solvency Stress Index
Note: The indicator is the sum of normalised capital shortages relative to the regulatory minimum level, weighted by the capital requirement in a common stress scenario calculated with fixed shock. The higher the value of the index, the higher the solvency risk. Source: MNB.
Magyar Nemzeti Bank

4. Liquidity is sufficient even in a stress scenario
The Liquidity Stress Index
Note: The indicator is the sum of the liquidity shortfalls in percentage points (but maximum 100 percentage points) compared to the 100 per cent regulatory limit of the LCR, weighted by the balance sheet total in the stress scenario. The higher the value of the indicator, the greater the liquidity risk. Source: MNB.
Magyar Nemzeti Bank

5. Highlights
The EMU’s banking system is still vulnerable in the changing interest rate environment.
There was an improvement in the domestic operating environment of banks, but developments in the real estate sector need close monitoring.
Banks closed the year with outstanding profit, however, this was mainly the result of one-off, not sustainable items.
Portfolio cleaning is intensive in the corporate sector, the remaining stock can be managed within a market-based framework.
The non-performing household portfolio is characterized by more sales than before, but the social aspect of the problem still needs to be treated.
There is a need for a more intensive price competition in household lending. Decline in spreads can be offset by increasing cost efficiency.
Magyar Nemzeti Bank

6. Highlights
The EU’s banking system is still vulnerable in the changing interest rate environment.
There was an improvement in the domestic operating environment of banks, but developments in the real estate sector need close monitoring.
Banks closed the year with outstanding profit, however, this was mainly the result of one-off, not sustainable items.
Portfolio cleaning is intensive in the corporate sector, the remaining stock can be managed within a market-based framework.
The non-performing household portfolio is characterized by more sales than before, but the social aspect of the problem still needs to be treated.
There is a need for a more intensive price competition in household lending. Decline in spreads can be offset by increasing cost efficiency.
Magyar Nemzeti Bank

7. With an improving outlook, expectations lead to divergent developments in capital markets
Changes in the S&P 500 composite index and the 10-year US bond index following the US elections
Source: Datastream.
Magyar Nemzeti Bank

8. Eurozone lending activity has remained weak
Annual growth rate of the private sector’s outstanding loans in the euro area
Source: EKB.
Magyar Nemzeti Bank

9. The persistently low profitability affects recapitalization efforts in a negative way
The relationship of European listed bank's price to book value and five year average of ROE ratio
Source: Datastream.
Magyar Nemzeti Bank

10. In Europe increasing risks are priced in, in parallel with an increase in perceived political uncertainty
Changes in volatility indices and the European political uncertainty index
Source: PolicyUncertainty.com, Reuters.
Magyar Nemzeti Bank

11. Highlights
The EU’s banking system is still vulnerable in the changing interest rate environment.
There was an improvement in the domestic operating environment of banks, but developments in the real estate sector need close monitoring.
Banks closed the year with outstanding profit, however, this was mainly the result of one-off, not sustainable items.
Portfolio cleaning is intensive in the corporate sector, the remaining stock can be managed within a market-based framework.
The non-performing household portfolio is characterized by more sales than before, but the social aspect of the problem still needs to be treated.
There is a need for a more intensive price competition in household lending. Decline in spreads can be offset by increasing cost efficiency.
Magyar Nemzeti Bank

12. Corporate lending expanded dynamically in 2016
Growth rate of loans to the whole corporate sector and the SME sector
Source: MNB.
Magyar Nemzeti Bank

13. FGS: nearly 40,000 enterprises obtained financing with favourable conditions
Sectoral distribution of the FGS loans
Source: MNB.
Magyar Nemzeti Bank

14. The FGS may be phased out in parallel with a steady expansion in lending
Forecast for SMEs (corporate sector including self-employed)
Source: MNB.
Magyar Nemzeti Bank

15. With dynamic expansion the credit gap may close on the forecast horizon
6-8 % y-o-y
4-6 % y-o-y
4 % y-o-y
Corporate sector credit-to-GDP and the structural credit gap
Source: MNB.
Magyar Nemzeti Bank

16. The volume of new lending to households increased further in 2016
New household loans in the entire credit institution sector
Source: MNB.
Magyar Nemzeti Bank

17. We expect a sustained turnaround in household lending
Household lending forecast
Source: MNB.
Magyar Nemzeti Bank

18. Household indebtedness may remain on a convergence path even with more dynamic lending
8-12 % y-o-y
5-7 % y-o-y
1-2,5 % y-o-y
Household sector credit-to-GDP and the structural credit gap
Source: MNB.
Magyar Nemzeti Bank

19. The commercial real estate market has been picked up not only in Europe, but in Hungary as well
Volume of newly built commercial real estate projects
Source: MNB, ibuild.info.
Magyar Nemzeti Bank

20. The housing market is characterized by increasing, although geographically concentrated demand
Real MNB housing price index broken down by settlement type (average of 2010 = 100%)
Source: MNB.
Magyar Nemzeti Bank

21. Housing prices are below the level justified by macroeconomic fundamentals
Deviation of housing prices from the estimated equilibrium level
Magyar Nemzeti Bank
Source: MNB.

22. Housing prices in the capital slightly exceed the estimated equilibrium level
Estimated deviation from the equilibrium house prices in Budapest
Source: MNB.
Magyar Nemzeti Bank

23. Highlights
The EU’s banking system is still vulnerable in the changing interest rate environment.
There was an improvement in the domestic operating environment of banks, but developments in the real estate sector need close monitoring.
Banks closed the year with outstanding profit, however, this was mainly the result of one-off, not sustainable items.
Portfolio cleaning is intensive in the corporate sector, the remaining stock can be managed within a market-based framework.
The non-performing household portfolio is characterized by more sales than before, but the social aspect of the problem still needs to be treated.
There is a need for a more intensive price competition in household lending. Decline in spreads can be offset by increasing cost efficiency.
Magyar Nemzeti Bank

24. Profit of credit institutions reached high level in 2016 even in a historical comparison
Domestic banks’ distribution based on 12-month rolling return on equity
Note: based on 11 banks’ pre-taxation data. Rectangles indicate the ranges between the 25th and 75th percentile, while the lines indicate the ranges between minimum and maximum level. Source: MNB.
Magyar Nemzeti Bank

25. The improvement in profitability is mostly the result of one-off items
Difference and components of the 2015 and 2016 profit after tax of the credit institutions
Source: MNB.
Magyar Nemzeti Bank

26. After adjusting for one-off and volatile profit items, the pre-tax ROE may be 4–7 per cent
One-off items
Volatile profit items
Profitability as a proportion of equity, one-off effects and volatily components
Source: MNB.
Magyar Nemzeti Bank

27. Highlights
The EU’s banking system is still vulnerable in the changing interest rate environment.
There was an improvement in the domestic operating environment of banks, but developments in the real estate sector need close monitoring.
Banks closed the year with outstanding profit, however, this was mainly the result of one-off, not sustainable items.
Portfolio cleaning is intensive in the corporate sector, the remaining stock can be managed within a market-based framework.
The non-performing household portfolio is characterized by more sales than before, but the social aspect of the problem still needs to be treated.
There is a need for a more intensive price competition in household lending. Decline in spreads can be offset by increasing cost efficiency.
Magyar Nemzeti Bank

28. Cleaning of the non-performing corporate loan portfolio continues further
Share of non-performing corporate loans of the credit institution sector
Source: MNB.
Magyar Nemzeti Bank

29. Despite the portfolio cleaning project loans still pose a risk
Highlighted topic:
Introduction of the Systemic risk buffer (SRB)
Non-performing corporate loans by project and other categories and by delinquency
Source: MNB.
Magyar Nemzeti Bank

30. Highlights
The EU’s banking system is still vulnerable in the changing interest rate environment.
There was an improvement in the domestic operating environment of banks, but developments in the real estate sector need close monitoring.
Banks closed the year with outstanding profit, however, this was mainly the result of one-off, not sustainable items.
Portfolio cleaning is intensive in the corporate sector, the remaining stock can be managed within a market-based framework.
The non-performing household portfolio is characterized by more sales than before, but the social aspect of the problem still needs to be treated.
There is a need for a more intensive price competition in household lending. Decline in spreads can be offset by increasing cost efficiency.
Magyar Nemzeti Bank

31. Cleaning of the household portfolio started, but the unsolved stock is still high
Ratio and volume of household loans overdue for more than 90 days by product
Source: MNB.
Magyar Nemzeti Bank

32. Number of arrangements being in line with MNB recommendation is still low, solutions based on burden sharing needed
Performance indicators of solution-seeking procedure according to MNB recommendation
Source: MNB.
Magyar Nemzeti Bank

33. Voluntary asset sale is the most favorable solution for both the debtors and the lenders
Number of collateral realizations in the banking sector and average return
Source: MNB.
Magyar Nemzeti Bank

34. Installments are going to increase in the case of debtors participating the exchange rate cap scheme
The difference was shared by the state, the bank and the debtor
The difference is recorded by the bank and paid by the debtor later
Installments increase after five years (by HUF ~6 thousand at a typical debtor)
Credit history of a typical debtor in the exchange rat cap scheme – theoretical and actual installments
Note: the debtor represented on the figure took a CHF loan amounting HUF 6 million in June 2007, with 20 years initial maturity and an interest rate of 5 per cent. The debtor suffered a 1.8 interest rate hike. Source: MNB.

35. Installments of 69 thousand debtors will increase, in 44 thousand cases the maturity will rise as well
120 thousand debtors
HUF 828 Bn debt
Exchange rate cap debtor with a living contract?
69 thousand debtors
~ HUF 496 Bn debt
Increasing installment?
44 thousand debtors
~ HUF 303 Bn debt
Maturity lengthening?
5 thousand debtor
~ HUF 55 Bn debt
Maturity lengthening > 5 years?
Forrás: based on the answers of the 10 most active Hungarian retail banks.

36. Following the extension of the loan term the installments rise by 6-8 thousands HUF on average
Distribution of the contracts based on the expected increase of the installments and average increase of the installments by categories
Note: the chart show the increase of the installment following the extension of the loan term. Source: based on survey filled in by 10 banks being most active in retail.

37. Highlights
The EU’s banking system is still vulnerable in the changing interest rate environment.
There was an improvement in the domestic operating environment of banks, but developments in the real estate sector need close monitoring.
Banks closed the year with outstanding profit, however, this was mainly the result of one-off, not sustainable items.
Portfolio cleaning is intensive in the corporate sector, the remaining stock can be managed within a market-based framework.
The non-performing household portfolio is characterized by more sales than before, but the social aspect of the problem still needs to be treated.
There is a need for a more intensive price competition in household lending. Decline in spreads can be offset by increasing cost efficiency.
Magyar Nemzeti Bank

38. High operating expenses are compensated via interest income
Net interest income and operating expenses as a proportion of total assets
Source: ECB.
Magyar Nemzeti Bank

39. The domestic banking sector is heterogenous: only a part of banks improve their cost efficiency
Distribution and average of banks' cost efficiency (operative expenses / total assets ratio)
Magyar Nemzeti Bank
Note: The lines are representing minimum-maximum, while rectangles are showing the range between the 25th and 75th percentiles.
Source: MNB.

40. High spreads are applied mainly in the case of mortgage loans with a long interest rate period
Share of housing loans with an initial interest rate fixation of more than one year and average premium of longer interest rate fixation compared to short term fixation
Source: MNB.
Magyar Nemzeti Bank

41. Spreads are 50 per cent higher on average in the case of loans with an interest rate fixation of over one year
In order to increase comparability of products and raise the level of competition MNB developed the concept of „Certified consumer-friendly housing loan”.
Distribution of spreads over IRS and BUBOR for variable-rate housing loans and those with interest rate fixation
Magyar Nemzeti Bank
Source: MNB.

42. With a more intensive price competition banks’ cost efficiency and the ability to innovate may rise
Higher price competition
Lower spreads
Lower income
Improvement in efficiency
Cheaper banking
Sustaining profit
Accommodation of banks
Increasing competitiveness, increasing stability!
Forrás: MNB.
Magyar Nemzeti Bank

43. Highlights
The EU’s banking system is still vulnerable in the changing interest rate environment.
There was an improvement in the domestic operating environment of banks, but developments in the real estate sector need close monitoring.
Banks closed the year with outstanding profit, however, this was mainly the result of one-off, not sustainable items.
Portfolio cleaning is intensive in the corporate sector, the remaining stock can be managed within a market-based framework.
The non-performing household portfolio is characterized by more sales than before, but the social aspect of the problem still needs to be treated.
There is a need for a more intensive price competition in household lending. Decline in spreads can be offset by increasing cost efficiency.
Magyar Nemzeti Bank

44. Thank you for your attention!