23 May 2019 Tamás Nagy| - PowerPoint Presentation

1. 23 May 2019Tamás Nagy| Head of DepartmentFinancial System Analysis DirectorateFinancial stability report2019 May

2. Main messages

3. International macroeconomic environmentDecelerating growth, wait-and-see monetary policy

4. Economic outlook worsened especially in EuropeSource | IMF World Economic Outlook (April 2019)Changes in the macroeconomic environment of developed economies

5. Monetary policy normalisation is protracted even further Source | ECB Evolution of the EONIA forward curveThe EONIA is the overnight interbank interest rate of the euro zone. The EONIA + 10 bps line indicates the point in time by which the market prices a 10 basis point higher level from its current level (i.e. when the forward curve intersects this level). This is consistent with the assumption that the first interest rate hike will be 10 bps.

6. Market uncertainty has been increasing yet again during last weeksSource | DatastreamEvolution of volatility indices (1 Jan 2018 = 100 per cent) The value of the VIX (VSTOXX) index is calculated at the Chicago Board of Options Exchange (European Options Exchange) and shows the market’s expectation of the development of volatility for the next thirty days.

7. Global environment remains uncertain, but domestic shock resistance capacity strengthenedSource | MNBThis time is differentEurope could be the main source of an external shock for Hungary

8. Bank stress testsBanks continue to have a high resilience to shocks

9. Only a few institutions would fall below the LCR limit in a severe negative shockSource | MNB Liquidity Stress IndexNote: 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. The periods for which the test is performed on an enlarged institutional base are marked by a blue band.

10. No capital need would occur in the banking system even in a stress scenarioSource | MNB Stress test results at capital requirements of 8 per cent and 10.5 per cent

11. the new stress test methodology allows the segmentation of portfolios by risk levelSource | MNB Expected loan loss provision over exposure for the household mortgage portfolioNote | Data expected for 2019 Q4, based on the stress scenario.What can be seen?In case of a stress scenariohow would the impairment on mortgage loans be distributed by the year of disbursement.Most of the outstanding provisions would continue to be behind old disbursements, while the disbursements of recent years have a lower risk.

12. Real estate marketsThe pick-up in the housing market does not pose a substantial risk for banks

13. The risk of overvaluation increased in the housing market of BudapestNote | For the detailed methodology see: Magyar Nemzeti Bank, Housing Market Report, November 2018.Source | MNB Deviation of house prices from the level justified by fundamentals, nationally and in Budapest15 per cent

14. Transactions financed with a mortgage can be risky in overheated marketsForrás | MNB Level of average square metre prices in 2013 and its relative change between 2013 and 2018, and the ratio of mortgage loans to housing transactions in rural and urban districtsNote | The width of the bubbles is proportional to the quotient of the new 2018 mortgage loan contracts (including loans for renovation purposes) and housing market transactions.

15. The share of relatively risky loans is moderateSource | MNB Distribution of mortgage loans contracted in 2018 according to the upturn in the housing market of the given rural or urban district and the LTV ratioNote | Distribution based on contract amount, values above 80 per cent are possible due to refinancing activity. Based on rural and urban districts according to the location of collateral.

16. THE BUILD-UP OF RISKS is not visible yetMortgage loans with LTV exceeding 70 per cent, as a percentage of the regulatory capitalSource | MNB

17. Trends in lendingThe significant credit expansion has not led to excessive indebtedness

18. Corporate loans outstanding continued to grow dynamicallyGrowth rate of loans outstanding of the total corporate sector and the SME sector along with indicators of the real economySource | MNB2019 Q1Corporate loans(annual growth rate): 14,3%SME loans (annual growth rate): 13,0%

19. growth in corporate loans was broadly basedSource | MNBCorporate loan portfolio and its GDP contribution by sectorNote: Bubble sizes on the basis of the value added of sectors.

20. Structural issues (1): Fix / variable rate in corporate segmentSource | MNB Breakdown of corporate loans not exceeding EUR 1 million by rate fixation period and maturity

21. Structural issues (2): a deepening of the bond market is neededSource | Eurostat Outstanding bond portfolio of non-financial corporations in the European Union, as a percentage of GDP (2018 Q3)from 1 July 2019 the Bond Funding for Growth Scheme is launchedHUF 300 billionThe program contributes to the diversification of the financing structure of the corporate sector

22. With its continuing increase the volume of newly contracted housing loans reached the pre-crisis levelAnnual growth in new loans over the past 12 months+33%Personal loans: 44%Housing loans: 27%New household loans in the credit institution sector Source | MNBAnnual change in stock+8,5%Unsecured consumer loans: +25%Housing loans: +11%Home equity loans: -11%2019 Q1

23. the current increase in borrowing is taking place against the background of a much higher income levelSource | HCSO, MNB Household Lending in nominal and real terms, and as a proportion of disposable incomeNote: Real value calculated for 2005 prices using the consumer price index. Disposable income estimated for 2018 using the 2017 value.

24. Most of the new disbursement is dominated by longer interest rate fixationNote: Share of CCHL products compared to new issues with at least 3 years of interest rate fixation (at least 5 years since 2018 Q4) excluding disbursements by building societies. New housing loans by interest rate fixation and the share of Certified Consumer-Friendly Housing Loans (CCHL)Source | MNB

25. Which also gradually affects the stockSource | MNB Factors affecting the share of variable-rate loans in credit stockCertified Consumer-friendly Housing LoansChange in PTI rule

26. Special Topic (Chapter 9)Possible measures to decrease the interest rate risk of outstanding mortgages

27. The problem: The interest rate risk of loans outstanding is not decreasing fast enough by itselfDecreasing the interest rate risk: refinancing variable-rate loans with fix-rate loansMarket friction I: Unsatisfying financial awarenessThe debtor cannot identify the risk, or cannot assess the extent of it, or cannot react to itMarket friction II:High refinancing costsThe debtor cannot take out a loan with such low interest rate spread, which would compensate the one-off costs of refinancing2015: the loans converted to forint could be refinanced preferentially, still, barely 1.5 per cent of loans outstanding utilized this possibility2019: questionnaire-based surveyWe analyzed what is the share of loans which are profitably refinanceable with another variable-rate loan.22-31 per cent of loans outstanding

28. 14 per cent underestimate, 42 per cent cannot estimate the effect of interest rate riskImpact of a 1 percentage point rise in the interest rate on loan instalmentNote: Exact wording of the question: "The monthly instalment of a loan of HUF 10 million with a maturity of 20 years and an annual interest rate of 5 per cent is HUF 66,000. If in the first years of the repayment the loan interest rises from 5 per cent to 6 per cent, by what amount will the monthly instalment of this loan increase without changing the maturity?" Responses could be given by selecting one of the categories shown on the chart. We depicted the right answer in green colour, while the red colour shows respondents, who underestimated the risk or did not try to estimate it at all. Source | MNB, Századvég surveyoverestimateunder-estimate

29. Taking out fixed rate loans became the normWhat aspects would you consider when taking a housing loan?Note: The respondents could select the three most important criteria. * In the survey in 2017 it was not asked whether the respondent preferred long to short maturity, or mortgage collateral to the absence thereof, only whether they would give consideration to the maturity and the mortgage collateral. Due to this, in the case of these criteria we indicated the same values. Source | MNB, Századvég surveyNearly 90 per cent of households is willing to assume a realistic or greater increase in instalments for interest rate fixation.The size of instalment and APRC were the most important aspect when choosing a loan 2 years ago, currently fixed-rate is the clear-cut preference.However, the majority of respondents could not tell which is the fixed interest rate loan from a selected group of loan facilities.

30. According to our estimate, on a market basis 22-31 per cent of loans outstanding would be profitably refinanceableWhat did we do?1. With the help of four methods, we estimated the spread with which the debtors can take out refinancing loans currently.2. We examined if the customer saves enough with the new spread on the remaining maturity to be compensated for the costs of refinancing. 3. We excluded the debtors who would not be able to take out loans based on selected aspects (previous delinquency, high LTV ratio, low income, age).Due to the peculiarities of our data in our estimates we examined variable rate-variable rate loan refinancing, thus the estimate only indicates the order of magnitude concerning fix rate-variable rate loan refinancing. If the debtors:are willing to pay higher spreads for fixed instalments, we underestimated the ratio, are only willing to pay lower spreads, we overestimated the ratio.In detail: Financial and Economic Review – June 2019

31. MNB recommendation concerning interest rate risks: targeted information, lower costs130 thousand informing letters to customers until January 2020 (variable-rate mortgage loans with over 10 year remaining maturity)First round: 50 thousand informing letters, riskiest contracts, until September 2019 (remaining maturity of over 15 years)What does the letter contain?Information about the interest rate riskDemonstration of the effect of interest rate shocks (positive and negative) on instalments A proposal to change to interest rate fixation with the presentation of the conditionsThrough the informing of the debtors, the increase in awareness is achieved in a targeted manner, while the possibility of contract modification means lower costs compared to refinancing. Thus the share of debtors changing to interest rate fixation may increase substantially.

32. Portfolio qualityThe heterogeneous pick-up in the real estate market only helps some debtors

33. Mortgage loans: Gradual improvement on the financial sector levelSource | CCIS, MNB Change in the number of overdue household mortgage loan receivables between 2013 and 2018Credit institutionsRatio of non-performing household loans: 7.0%Ratio of household loans with 90+ days delinquency: 4.5%70 per cent of stock is at financial enterprises.

34. The LTV ratio is still above 100 per cent in a lot of casesNote: *Home Purchase Subsidy Scheme for Families. Source | CCIS, MNB Distribution of the loan-to-value ratio of households’ mortgage loans outstanding according to performanceFor half of the delinquent stock, the LTV ratio exceeds 100 percent.This ratio is only 4 per cent concerning performing loans.The rural HPS* may ease the situation in the near futureShare of debtors living in settlements affected by the rural HPS within the non-performing debtors: 31%The same ratio for performing debtors: 19%

35. The upturn in the real estate market is not helping everyoneSource | CCIS, MNB Correlation between the change in square meter price and the loan-to-value ratio in the case of defaulting mortgage loans

36. The programme of the Hungarian National Asset Management Inc. has endedThe Hungarian National Asset Management Inc. purchased 36 thousand real estates until the end of 2018Until that point in time 1451 non-performing debtors got back their properties.2019: the renters can choose Preferential lump-sum repurchase (~19%)* Repurchase in instalments (~71%)* Remain rentersIn the last years the Hungarian National Asset Management Inc. had a significant role in helping to ease the state of families which are in the most difficult situation. It can be considered a successful conclusion of the programme that ten thousands of the renters get back their homes as proprietors.*Data as of 9 May 2019, based on 20 thousand letters of intent sent back

37. Income and capital positionProfit-improving effect of impairment reversals declined substantially

38. Bank profitability decreased compared to the previous yearSource | MNB, Government Debt Management Agency 12-month rolling after-tax income ratios of credit institutions and the risk premiumROE2017: 17,5 per cent2018: 13,7 per centAfter-tax income2017: HUF 630 Bn2018: HUF 536 Bn

39. The normalisation of net impairment drags profit backSource | MNBDistribution of credit institutions’ total assets based on net impairments as a ratio of total assetsNote: Positive figures represent net reversal of impairment, while negative figures represent net recognition of impairment.

40. EfficiencyProfitability may increase through digitalisation, financial deepening and market consolidation

41. The three main pillars of increasing efficiency

42. A Turn-around in efficiency is imperativeSource | ECB CBD.Cost-to-assets and cost-to-income ratios of banking systems in the EU, 2018 Q3Note: In the case of the cost-to-income ratio, HU* is adjusted for the effect of subsidiaries and the bank levy on operating expenses, while in the case of the cost-to-assets ratio the transaction levy is also filtered out.

43. Higher credit penetration ensures an adequate foundation for boosting efficiencyNote: The operating expenses for HU* are adjusted for one-off effects (foreign subsidiaries, state levies). Source | MNBRelationship between financial penetration and the level of cost-to-assets

44. Digitalisation might help, but it does not depend solely on banksSource | MNB, ECB CBD, Eurostat, WB, DESIRelationship between DESI and the digitalisation sub-pillar of the MNB Banking Sector Competitiveness IndexNote (right side): The DESI composite index integrates the following indicators: level of Connectivity, Human Capital, Use of Internet Services, Integration of Digital Technology and Digital Public Services.The relationship between cost-to-assets and bank digitalisationNote (left side): The operating costs-to-assets ratio is based on consolidated data, HU* is adjusted for one-off effects (foreign subsidiaries, state levies). The MNB BSCI Banking digitalisation sub-pillar includes the following indicators: the share of individuals using internet for banking and the share of individuals using digital payment, mobile payment and online payment.Greater banking digitalisation, lower expensesGreater general digitalisation, greater banking digitalisation

45. Main messages

46. Thank you for your attention!