4 December 2019 Bálint Dancsik | Magyar Nemzeti Bank - PowerPoint Presentation

1. 4 December 2019Bálint Dancsik | Magyar Nemzeti Bank Senior economistFinancial Stability report december 2019

2. Main messagesThe dynamic change in the external environment and the large-scale government measures significantly shape banks’ operational environment and existing risks.The benign domestic economic environment provides a unique opportunity for domestic financial institutions to accommodate to these changes.Financial institutions that delay the accommodation process will not be able to meet profitability expected from them, and may be excluded from the market in the medium term.

3. The Hungarian banking sector is under pressureSource: MNBPrenatal baby supportHPSMÁP+FGS fixCBPSCCFHLMortgage bond purchasePaymentsMoney exchangeCreditNarrow marginsUnfavorable investment opportunitiesFewer large banksEfficiencyCompetitionQuicknessFavorable pricingComfort1. State3. FinTech 5. Low yield environment4. Society2. MNB6. MergersHU banking sector

4. Stress test resultsbanks’ stress-absorbing capacity remains strong

5. Stress test assumptionsSource | MNB Main parameters of the liquidity stress test

6. Shortage in liquidity (measured by lcr) would remain low even during a strong negative shockSource | MNB The 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 with a blue background. Liquidity stress remains low in historical comparison

7. There is no capital shortage in the banking sector even in a stress scenarioNote: Vertical line: 10–90 per cent range; rectangle: 25–75 per cent range. Source | MNB Distribution of the capital adequacy ratio based on the number of banksStress scenario assumptions:Slowing global growth,lower investment activity,money market tensions, prolonged global trade tensionsConsequences:Demand for domestic export declines, which reduces investment activity.As a result, the rate of economic growth decreases. Altogether, in the stress scenario the growth of the economy falls short of the baseline scenario by almost 4 percentage points in two years on a cumulative basis. Lower growth is associated with higher interest rates and weaker exchange rate.

8. International environmentslowing growth and persistently low interest rates pose challenges

9. International sentiment deteriorated in the past half yearNote: For the economic sentiment indices, the data are seasonally adjusted, but not calendar adjusted. VSTOXX is calculated on the European Futures and Options Exchange and shows the market's expectation as regards volatility in the next 30 days. GEPU depicts the global economic policy uncertainty index. Evolution of composit economic sentiment indices and volatility indicesSource: Datastream, Eurostat, Economic Policy Uncertainty

10. Central banks in developed countries were forced to take a u-turnSource | Thomson Reuters Datastream, SNL, Bloomberg Long-term yields and evolution of policy rates, volume of negative yielding bondsNote: For the Fed policy rate, the data refer to the first day of the month, while for the ECB policy rate, they refer to the last day of the month. Data for the negative yielding bond volumes and government bond volumes are monthly averages.Low interest rates may remain longer than previously anticipated. Long yields decreased markedly.

11. This time hungary is more prepared for the deteriorating external conditionsSource | Eurostat, HCSO, MNB, GDMAEvolution of selected economic indicators in HungaryNote: For GDP growth, seasonally and calendar adjusted data. For government debt, in gross, consolidated, nominal terms (Maastricht) debt. *2019 September Inflation Report

12. Real estate marketshouse price increase in Budapest not linked to excessive expansion in risky lending

13. máp+ may have an attenuating impact on the risk of overvaluation in 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 BudapestPotential effects of MÁP+:Housing and Real Estate Market Advisory Board: a decline in demandNumber of transactions decreased in Q2Quarterly increase in house prices slowed down somewhat in Budapest in Q3Order of magnitudes:MÁP+ stock (Q3): HUF 2124 BnValue of house transactions (2018): Budapest: ~HUF 1100 BnCountrywide: ~HUF 2700 BnHousehold deposits: HUF 8700 Bn

14. risky exposure of the Hungarian banking sector to the housing market is limited Source | MNBBanking sector’s exposures sensitive to the real estate market cycle as a percentage of regulatory capitalNote: The volume of the 2019 H1 new mortgage loan contracts is an annualised value (multiplied by two).

15. Trends in lendingloans expanding in parallel with strengthening fundamentals

16. Dynamic expansion continues in the corporate segmentSource | MNB Growth rate of loans outstanding of the total corporate sector and the SME sectorNote: Transaction based, prior to 2015 Q4 data for SMEs are estimated based on banking system data.Loans from credit institutions y/y (2019 Q3, %)Non-financial corporations: 15.4%SMEs: 14.8%

17. The share of highly leveraged corporations did not increase markedlyBased on micro level dataIs dynamic expansion in corporate lending pose a risk?15.4%Non-financial corporations y/y growth (2019 Q3)14.7%SME y/y growth(2019 Q3, preliminary)More favorable sectoral distribution than before the crisisManufacturing, trade and accommodation sectors have a more significant share in loan expansionReal estate financing is less relevantLarger individual transactionsLarge borrowings of sizable corporationsBorrowings of holding companies, financing M&ABanks have already tightened conditions on commercial real estate loansBased on the Lending SurveyEstimated credit gaps: negative value

18. What does this mean on a micro level? (1)Source | MNB, NAV, KHR Number and ratio of highly leveraged companies and the proportion of their loans outstandingNote: Highly leveraged companies, where loans outstanding exceed the quadruple of the EBITDA.The number of highly leveraged companies decreased in 2018 as well, however, their share in non-financial corporations’ loans outstanding already increased. Highly leveraged corporation 

19. Source | MNB, NTCA Distribution of interest expense to EBITDANote: Including companies that have loan in a given year. Cumulated distribution.Based on „flow leverage”there was no significant change in the distributionEBITDA increasedInterest expenses remain low What does this mean on a micro level? (2)

20. The additionality of Prenatal baby support loans is highSource | MNB New household loans in the credit institutions sector Note: Loan refinancing indicates only refinancing related to the early repayment scheme and the FX conversion. Other consumer loans include vehicle, hire purchase and other consumer loans, including lombard loans. FGS loans granted to sole proprietors are included in other loans. The new loans/income indicator shows the total annual nominal lending as a percentage of households’ annual disposable income.Prenatal baby support loans (2019 Q3)29 thousand contractsHUF 277 BnAverage loan amount: HUF 9.6 million

21. Prenatal loans raised the year-on-year dynamics significantlySource | MNB Quarterly transactions of the household loan portfolio by loan purposeNote: Seasonally unadjusted net change in outstanding amounts, with rolling exchange rate adjustment. The transactions reflect the effect of the settlement.Loans from credit institutions y/y(2019 Q3, %)Household loans: 13.8%Housing loans: +9.4%Personal loans: +32.2%Home equity: -10.4%

22. Prenatal baby loan borrowers show similarity to housing loan debtorsSource | HCSO, MNB Distribution of new loans by income quintileNote: Loans issued by credit institutions and financial corporations in 2019 H1. The income quintiles are based on the income of the total domestic population.66 per cent of housing loans,55 per cent of prenatal loans,37 per cent of personal loans,were taken out by debtors belonging to the 5th quintile based on income.For a detailed analysis of prenatal baby loans and debtors, see Box 2 in the Report. For further characteristics of household debtors, see box 3.

23. 47 per cent of Prenatal Borrowers does not have any other substantial debtSource | MNB Cumulated distribution of prenatal baby support loans (25,550 contracts) by PTI and debtors' other liabilitiesNote: Based on 2019 Q3 disbursement, which may differ somewhat from the number of contracts concluded in the same period.Average payment-to-income ratio (PTI): 25%Two-thirds of loans have a PTI less than 30%Only 10 per cent of loans have a PTI exceeding 40%

24. There is ample room for loan expansion based on loan-to-GDP ratiosSource | ECB, Global Findex Database. Credit penetration in a European comparisonNote: Credit-to-GDP values refer to the end of 2019 Q2, the share of households with housing loans refer to 2017.

25. Interest rate of new loans: the number of loans with a longer initial rate fixation increasesSource | MNB Distribution of new housing loan volume by interest rate fixation, and the share of Certified Consumer-friendly Housing Loan productsNote: Share of CCHL products compared to new issues with at least 3-year interest rate fixation (at least 5-year since Q4 2018) excluding disbursements by building societies.

26. Outstanding loans: the Lower for longer interest rate environment shapes risksMain messages:From a stability perspective, time is working for us,Low interest rates provide a unique opportunity for fixing interest rates and protecting debtors against unexpected risks.Interest rate fixation = insurance

27. Portfolio qualitydelinquencies are few, but cycle-sensitive exposures require attention

28. NPL ratio of corporate loans fell below 5 per centSource | MNB Ratio of non-performing corporate loans in the credit institution sectorNote: The definition of non-performing loans changed in 2015. From then on, in addition to the loans over 90 days past due, loans less than 90 days past due where non-payment is likely are also classified as non-performing. Calculated by clients until 2010 and by contracts from 2010.

29. The ratio of defaulted household loans is extremely lowSource | KHR, MNB Delinquency ratio of mortgage loan agreements concluded between 2010 and 2018 depending on the time elapsed, according to the year of concluding the contract

30. Profitability, Efficiency, outstanding profit can be maintained by increasing efficiency

31. Outstanding level of profitability, but not in the proper structure12-month income components as a ratio of total assetsSource | MNB

32. Significant improvement is needed in efficiency (at the european level as well!)Source | SNL, Eurostat, WB – GFD, WB – FII, Deloitte, EBA, ESMA, EIOPA, national banksEfficiency indicators of European credit institutionsNote (LHS chart): The indicators were standardised on a scale of 0-100 (with 100 as the best), and the values of the pillar were calculated by simple arithmetic averaging. The labels show the ranking in the indicators.Ranking of the MNB BSCI Technology and Efficiency pillarNote (RHS chart): Yellow denotes the Hungarian banks included in the sample; the impact of the levy on banks and the financial transaction tax was filtered out from their operating expenses.For details see box 5 in the Report.

33. Significant portion of the banking sector expects roe above 10 per cent in the long runProfitability and cost-of-equity expectations of banksNote: Weighted by total balance sheet.Source | MNB Bank Sentiment Survey8 per cent of the market expect ROE to be lower than their cost of equity in the long run Details: Box 4 in the Report

34. The main messages of the December report

35. Thank you for your attention!https://www.mnb.hu/en/publications/reports/financial-stability-report