1. Financial Stability Report – November 2017
Magyar Nemzeti Bank
Budapest
29 November 2017

2. Agenda
Existing external risks have moderately eased, but have not disappeared completely. The shock absorbing capacity of the domestic banking sector remained strong over the past period.
In 2017, a broad-based expansion was observed in domestic lending and housing market as well. Housing prices do not show excessive level of increase compared to economic fundamentals.
Special attention is devoted to household’s financial vulnerability and financial literacy as well. The report focuses on mitigating interest rate risks on housing loans.
In 2017, domestic banks are characterized by high profitability, mainly due to one-off and unsustainable items. Long-term sustainability of bank’s profitability can be ensured by digitalisation and automatisation.
Similarly to the previous years, portfolio cleaning has been continued, which contributes to an improvement in lending capacity. Social implications of debt settlement, however, should be monitored with increased attention.
Magyar Nemzeti Bank

3. Macroeconomic outlook has improved and risks have moderated in Europe
Changes in VSTOXX volatility indices and the European political uncertainty index from 2007
Source: PolicyUncertainty.com, Datastream
Magyar Nemzeti Bank

4. Due to unresolved issues, complete lending turnaround has not occurred in some countries yet
Annual growth rate of the private sector’s outstanding loans in Europe
Source: ECB
Magyar Nemzeti Bank

5. Outstanding non-performing loans are still high in many countries
Problem loans compared to gross loans outstanding in European countries (2010–2016)
Source: SNL
Magyar Nemzeti Bank

6. High level of indebtedness can result in an increasing vulnerability
Gross government debt and household indebtedness to GDP ( )
Source: Eurostat
Magyar Nemzeti Bank

7. In many countries, house price growth is coupled with increasing indebtedness
Changes in house prices and the share of housing loans to GDP in European comparison
Source: ECB, BIS
Magyar Nemzeti Bank

8. Gradually growing investor demand can be identified in the commercial real estate market of the CEE region
Vacancy rates and prime yields on the regional capital cities' office markets
Source: Based on data published by CBRE, Colliers, Cushman&Wakefield and JLL
Magyar Nemzeti Bank

9. Agenda
Existing external risks have moderately eased, but have not disappeared completely. The shock absorbing capacity of the domestic banking sector remained strong over the past period.
In 2017, a broad-based expansion was observed in domestic lending and housing market as well. Housing prices do not show excessive level of increase compared to economic fundamentals.
Special attention is devoted to household’s financial vulnerability and financial literacy as well. The report focuses on mitigating interest rate risks on housing loans.
In 2017, domestic banks are characterized by high profitability, mainly due to one-off and unsustainable items. Long-term sustainability of bank’s profitability can be ensured by digitalisation and automatisation.
Similarly to the previous years, portfolio cleaning has been continued, which contributes to an improvement in lending capacity. Social implications of debt settlement, however, should be monitored with increased attention.
Magyar Nemzeti Bank

10. The upswing of the housing market has continued with the previously observed heterogeneity of regions
MNB house price index for the whole country and for Budapest, and the annual number of housing market transactions
Magyar Nemzeti Bank
Source: HCSO, MNB

11. A revival has been experienced in the number of building permits issued and home completions
Granted building permissions for homes and newly built homes
Source: HCSO
Magyar Nemzeti Bank

12. Housing prices are under the level justified macroeconomic fundamentals
House prices' deviation from the estimated equilibrium level in the whole country and in Budapest in percentages
Magyar Nemzeti Bank
Source: MNB

13. The affordability of newly built dwellings in Hungary are similar to that of other CEE countries
How many years of gross income is needed for the purchase of an average, 70 sq. metre new dwelling?
Source: European statistical offices, Deloitte
Magyar Nemzeti Bank

14. The affordability of houses did not deteriorate significantly despite the price increase
Housing Affordability Index (HAI) and its decomposition
The HAI (Housing Affordability Index) shows how many times the income of a household with two average wages covers the income necessary for the purchase of an average (65 m2) dwelling with a loan. Parameters of the loan product, except for the interest rate, are constant until maturity. LTV = 70%, PTI = 30%, maturity = 15 years.
Magyar Nemzeti Bank
Source: MNB

15. Household borrowing continued to improve both in the segment of housing and in the consumer credit
New household loans in the entire credit institution sector
Source: MNB
Magyar Nemzeti Bank

16. The upswing in lending is primarily driven by the increase of demand
Changes in credit conditions and in credit demand in the household segment
Source: MNB, based on the answers of respondent banks
Magyar Nemzeti Bank

17. No major increase in risk taking was observed among borrowing households
Distribution of PTI values of new loans by number of units
Source: MNB
Magyar Nemzeti Bank

18. In addition to the SME segment, corporate lending has also reached the desired level
Annual changes in lending to non-financial corporates and SMEs
Source: MNB
Magyar Nemzeti Bank

19. The phase-out of the FGS did not cause a setback in long-term financing
Maturity distribution of new SME loan contracts
Source: MNB
Magyar Nemzeti Bank

20. Agenda
Existing external risks have moderately eased, but have not disappeared completely. The shock absorbing capacity of the domestic banking sector remained strong over the past period.
In 2017, a broad-based expansion was observed in domestic lending and housing market as well. Housing prices do not show excessive level of increase compared to economic fundamentals.
Special attention is devoted to household’s financial vulnerability and financial literacy as well. The report focuses on mitigating interest rate risks on housing loans.
In 2017, domestic banks are characterized by high profitability, mainly due to one-off and unsustainable items. Long-term sustainability of bank’s profitability can be ensured by digitalisation and automatisation.
Similarly to the previous years, portfolio cleaning has been continued, which contributes to an improvement in lending capacity. Social implications of debt settlement, however, should be monitored with increased attention.
Magyar Nemzeti Bank

21. Financial vulnerability can be mitigated by increasing financial literacy
Dimensions of financial fragility and financial awareness within Hungarian households repaying loans
Source: MNB - Századvég survey
Magyar Nemzeti Bank

22. Fixed-rate housing loans are more expensive than variable-rate products
Interest rate spreads on new household loans
Source: MNB
Magyar Nemzeti Bank

23. Variable-rate and over 5 year initial rate fixation loans represent a significant proportion
Distribution of new housing loans by initial rate fixation in selected countries (2017 Q1)
Source: European Mortgage Federation
Magyar Nemzeti Bank

24. Low interest rates can be ensured by a solid covered bond market
Components of the difference between interest rates of housing loans fixed for 1-5 years and loans with a floating rate
Source: National central banks, ECB
Magyar Nemzeti Bank

25. Looking ahead, variable-rates may impose significant risks
Change in instalments in the case of a loan with a floating rate, assuming different risk shocks
Source: MNB
Magyar Nemzeti Bank

26. Agenda
Existing external risks have moderately eased, but have not disappeared completely. The shock absorbing capacity of the domestic banking sector remained strong over the past period.
In 2017, a broad-based expansion was observed in domestic lending and housing market as well. Housing prices do not show excessive level of increase compared to economic fundamentals.
Special attention is devoted to household’s financial vulnerability and financial literacy as well. The report focuses on mitigating interest rate risks on housing loans.
In 2017, domestic banks are characterized by high profitability, mainly due to one-off and unsustainable items. Long-term sustainability of bank’s profitability can be ensured by digitalisation and automatisation.
Similarly to the previous years, portfolio cleaning has been continued, which contributes to an improvement in lending capacity. Social implications of debt settlement, however, should be monitored with increased attention.
Magyar Nemzeti Bank

27. As a result of the loan loss reversals, banking sector has achieved outstanding earnings similarly to the previous year
Actual RoE of credit institutions and its value adjusted by cyclical provisioning
Source: MNB
Magyar Nemzeti Bank

28. Real profitability can be treated satisfactory compared to 2006-2007
Nominal and real RoE of credit institutions and the return above the 3M BUBOR
Source: MNB
Magyar Nemzeti Bank

29. Strategies for credit institutions to increase profitability over the long term
Magyar Nemzeti Bank

30. How open customers are to innovation?
Consumer openness towards e-banking
If every banking service was available on a smartphone…
Source: MNB survey
Magyar Nemzeti Bank

31. How open institutions are to try new solutions?
Planned / already in use innovations by banks and fintech companies
Source: MNB survey
Magyar Nemzeti Bank

32. Agenda
Existing external risks have moderately eased, but have not disappeared completely. The shock absorbing capacity of the domestic banking sector remained strong over the past period.
In 2017, a broad-based expansion was observed in domestic lending and housing market as well. Housing prices do not show excessive level of increase compared to economic fundamentals.
Special attention is devoted to household’s financial vulnerability and financial literacy as well. The report focuses on mitigating interest rate risks on housing loans.
In 2017, domestic banks are characterized by high profitability, mainly due to one-off and unsustainable items. Long-term sustainability of bank’s profitability can be ensured by digitalisation and automatisation.
Similarly to the previous years, portfolio cleaning has been continued, which contributes to an improvement in lending capacity. Social implications of debt settlement, however, should be monitored with increased attention.
Magyar Nemzeti Bank

33. In recent years, risks have significantly reduced in banks’ balance sheets
Net non-performing loans as a proportion of regulatory capital at major banks
Source: MNB
Magyar Nemzeti Bank

34. All institutions fulfil regulatory requirements in both the baseline and the stress scenario
Distribution of the capital adequacy ratio based on number of banks
Source: MNB
Magyar Nemzeti Bank

35. Portfolio cleaning has mitigated risks, but the social implications should be monitored
Number of non-performing mortgage loans and real estates acquired by NAMA
Source: MNB.
Magyar Nemzeti Bank

36. Agenda
Existing external risks have moderately eased, but have not disappeared completely. The shock absorbing capacity of the domestic banking sector remained strong over the past period.
In 2017, a broad-based expansion was observed in domestic lending and housing market as well. Housing prices do not show excessive level of increase compared to economic fundamentals.
Special attention is devoted to household’s financial vulnerability and financial literacy as well. The report focuses on mitigating interest rate risks on housing loans.
In 2017, domestic banks are characterized by high profitability, mainly due to one-off and unsustainable items. Long-term sustainability of bank’s profitability can be ensured by digitalisation and automatisation.
Similarly to the previous years, portfolio cleaning has been continued, which contributes to an improvement in lending capacity. Social implications of debt settlement, however, should be monitored with increased attention.
Magyar Nemzeti Bank

37. Thank you for your attention!