Analysis of Financial Stability Report
This report discusses the impact of settlement of FX loans on financial intermediation, lending profitability, capital position, and more. It also highlights measures for FX loan conversion to HUF and the changes it brings for foreign exchange debtors.
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Report on Financial Stability Vonn k Bal zs director 12th November 2014 1
Content I. Settlement of FX loans II. The asset management agency III. Vulnerability results of the stresstest IV. Lending developments Dia c me Magyar Nemzeti Bank 2
Settlement of the FX loan problem has a significant impact on every aspect of financial intermediation Lending Profitability, capital position Reliance on external debt Competition Liquidity Short term Medium term Significant one-off losses, decreasing interest bearing assets Downward risks due to loan losses Settlement More intense competition for FX loan conversion to HUF Worsening liquidity position Decreasing reliance Moderating credit and financing risks Moderating risks has a positive effect Healthy assets may contribute to a banking system which supports growth better Loan conversion to HUF Fair refinancing conditions intensify competition in household lending Decreasing interest margins Downward risks due to loan losses Fair banking system Source: MNB 4
Fx loan measures What is the main point? Who is affected? Every credit to consumers which was disbursed after 1 May 2004 and was not terminated before 26 July 2009 (excluding state-subsidised loans, credit card and current account ) Decrease of outstanding debt, or reimbursement, and resetting the interest rate to its fair level Settlement - Maturity shorter than 3 years: fixed interest rate and spread - Maturity longer than 3 years: interest and spread changes along consecutive changes in the specific rates of modifications Fair banking system All new and currently outstanding loans FX loan conversion to HUF Conversion to HUF and defining the new pricing conditions Currently outstanding FX mortgage loans Source: MNB 5
What will change in case of a typical foreign exchange debtor? Settlement and interest rates reset to the fair level At the time of contracting Currently In the future 5,6 HUF million (37 CHF thousand) 7,5 HUF million (29,1 CHF thousand) 6 HUF million (23,4 CHF thousand) Level of initial interest rates after loan conversion to HUF is not defined yet Outstanding debt 5,7 percent (FX) 7,8 percent (FX) 5,7 percent (FX) Interest rate Change in interest rates and interest spreads will be possible in predefined periods (at least every 3 years) along consecutive changes in the specific rates of modifications accepted by the MNB. Spread (above the reference rate) 3,4 percentage point (CHF LIBOR) 7,8 percentage point ( CHF LIBOR) 5,7 percentage point ( CHF LIBOR) Instalment 40 HUF thousand 78 HUF thousand 56 HUF thousand Source: MNB 6
The impact of the settlement arising from nullification of the exchange rate spread and unilateral contract modifications on the profitability of the financial institutions Estimated gross effect Forcast for annual loss in interest income Forcast for the reduction in net interest margin (percentage point) Estimated net effect on income Forcast for the reduction in ROE (percentage point) Terminated contracts and other loans HUF billion FX mortgage loans Total Banking sector and branches 695 89 784 608 92.1 0.27 3.24 Total financial intermediary system 786 156 942 731 0 0 0 Source: MNB,CCIS Magyar Nemzeti Bank 7
Substantial heterogeneity is expected in the reduction of borrowers debt per cent per cent 35 35 30 30 25,2 27,9 26,9 24,8 25 25 22,7 19,4 20 20 15 15 13,1 12,9 12,1 10 10 7,8 5 5 3,5 2,3 0,8 0,6 0 0 0-5 per cent 25-30 per cent 20-25 per cent 15-20 per cent 10-15 per cent >30 per cent 5-10 per cent Decrease in outstanding principle Based on outstanding debt Based on number of contracts Estimated distribution of debt reduction of performing CHF-denominated mortgage loans following the settlement Source: MNB Magyar Nemzeti Bank 8
Expected details and effects of FX loan conversion to HUF Only mortgage loans will be affected Official MNB exchange rate on 7th November (EUR: 309, CHF: 256,5) OR average exchange rates since the decision of the Curia on June 16th whichever is lower; Banking clients have the right to terminate within 60 days if conditions change according to the framework of the fair banking system Household's open foreign currency position disappears External debt and currency swaps decrease as open foreign currency position closes MNB provides the necessary foreign exchange liquidity Systemic HUF liquidity decreases Due to the FX loan conversion competition may arise in Pricing of HUF loans according to the framework of the fair banking system HUF funding, i.e. for HUF deposits Magyar Nemzeti Bank 9
Households FX debt significantly decreases due to the conversion into HUF per cent HUF Bn 9 000 55 8 000 50 7 000 45 6 000 40 5 000 35 4 000 30 3 000 25 2 000 20 1 000 15 0 10 Jul-10 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Oct-05 Oct-06 Apr-07 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Apr-14 Oct-14 Oct-15 Apr-05 Apr-06 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-15 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Household HUF loans Household FX loans Household loans/GDP (RHS) Households debt structure by currency and in percent of GDP Source: MNB Magyar Nemzeti Bank 10
Household's open foreign currency position decreases per cent per cent 65 65 60 60 55 55 50 50 45 45 40 40 35 35 30 30 25 25 20 20 15 15 10 10 5 5 0 0 -5 -5 -10 -10 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 Household sector Non-financial corporate sector General government consolidated with MNB Open FX position of the main sectors in the balance sheet as percentage of GDP Source: MNB Magyar Nemzeti Bank 11
The fair banking system creates transparent pricing for long term loans Possibility of unilateral interest-rate hikes Earlier Disbursement Reference rate based product with flexible interest rate spread (at the end of the periods: can be amended along consecutive changes in the specific rates of modifications accepted by the MNB) Disbursement Right to terminate (free of charge) Fix interest rate through the Interest period (at least 3 years) (at the end of the periods: can be amended along consecutive changes in the specific rates of modifications accepted by the MNB) Fair banking system Disbursement Right to terminate (free of charge) Effects of the fair banking system on the pricing of long term loans Source: MNB Magyar Nemzeti Bank 12
...and also for short term loans Possibility of unilateral interest-rate hikes Earlier Disbursement Reference-rate based product with fix interest rate spread Disbursement Fair banking system Fixed interest rate Disbursement Effects of the fair banking system on the pricing of short term loans Source: MNB Magyar Nemzeti Bank 13
Banks with outstanding levels of liquidity and capital buffer are expected to benefit the most from the conversion 120 Deposit coverage ratio after the settlement 100 80 (per cent) 60 40 20 0 8 10 12 14 16 18 20 CAR after the settlement (per cent) Estimated level of capital adequacy and deposit coverage ratio after the settlement, by banks the bigger the bubble, the bigger the loss born Source: MNB Magyar Nemzeti Bank 14
Hungary is expected to be among the less efficient countries in international comparison per cent per cent 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 Croatia Greece Italy Romania Poland Hungary Spain Estonia Lithuania Cyprus Bulgaria Slovenia Czech Republic Malta Portugal HU after settlement Latvia Slovakia Cost to income ratio (2013) Cost to income ratio in international comparison Source: MNB Magyar Nemzeti Bank 15
II. The asset management agency 16
Following a continuous decrease for almost two years, the NPL-ratio increased in 2014 per cent HUF Bn 22 1 300 1 200 20 1 100 18 1 000 16 900 14 800 12 700 600 10 500 8 400 6 300 4 200 2 100 0 0 Q4 Q3 Q2 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 31-90 days delinquency ratio 90+ days delinquency ratio Loans with 90+ days delinquency (RHS) Share of non-performing corporate loans of the banking sector Source: MNB. 17
The deterioration of the corporate loan portfolio can be clearly linked to real estate project loans per cent HUF Bn 900 33 800 30 700 27 600 24 500 21 400 18 300 15 200 12 100 9 0 6 Q2 Q3 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q4 Q2 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 NPL - project financing NPL - other corporate loans NPL ratio - project financing (right-hand scale) NPL ratio - other corporate loans (right-hand scale) Non-performing project and other corporate loans within the banking sector Source: MNB. 18
The high NPL portfolio lowers the efficiency of the lending channel 10 outstanding between December 2008 and June 2014 (per Bank7 Exchange rate adjusted change in corporate loans 0 -10 Bank1 Bank6 -20 cent) Bank8 Bank9 -30 Bank4 Bank5 -40 Bank2 -50 Bank3 -60 0 5 10 15 20 25 30 35 NPL ratio of corporate loans, June 2014 (per cent) Change in loans outstanding and NPL ratio in the corporate segment Source: Jones Lang LaSalle. 19
The asset manager proposed by the central bank could efficiently remedy the distressed corporate portfolio Any solvent and liquid credit institution (both corporations and co-operatives) active in the EU, which has commercial real estate exposure in Hungary or holds Hungarian commercial real estate on its balance sheet. Eligible counterparty Commercial real estate loan or foreclosed commercial property, where the bank provided financing for property development for future sales or rentals, partly or totally, or where the source of repayment is the cash-flow generated by the real estate property. Eligible assets For commercial real estate loans min HUF 500 million. For foreclosed real estate properties min HUF 200 million. Will be determined later on. The pricing technique remains to be determined, no conciliations have taken place with the banks. The transfer price may be below book value. MNB credit line up to HUF 300 billion, with a term of maximum 10 years. Minimum value threshold for assets Time of origination Transfer price Financing Planned operating period of the Asset Management Agency 10 years maximum The main characteristics of the asset management agency initiated by the Central Bank Source: MNB. 20
III. Vulnerability result of the stress test 21
Ratio of non-performing FX mortgage loans are still increasing per cent per cent 26 26 24 24 22 22 20 20 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 Q3 Q3 Q4 Q3 Q2 Q2 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q4 Q2 Q3 Q4 Q2 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 Household NPL ratio by products Source: MNB. 22
The banking systems resilience to shocks will decline considerably after the settlement per cent HUF Bn 1 200 40 900 30 600 20 300 10 0 0 -300 -10 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 Capital need to meet regulatory requirement Capital buffer above the regulatory requirement Solvency Stress Index (RHS) Solvency Stress Index with FX mortgage loan conversion (RHS) Capitalisation of the banking sector in stress Source: MNB. 23
FX risk disappears from households loan portfolio after FX conversion to HUF HUF Bn HUF Bn 1 100 1 100 1 000 1 000 +52 HUF Bn 900 900 800 800 700 700 600 600 500 500 400 400 300 300 200 200 100 100 0 0 +11 Huf Bn -100 -100 Now After the conversion Capital need to meet regulatory requirement Capital buffer above the regulatory requirement Consolidated capital buffer and capital need along the stress scenario Source: MNB. Magyar Nemzeti Bank 24
The FGS generated new demand for loans Would has the client borrowed for the same purpose if there was no FGS? Magyar Nemzeti Bank 26 Source: MNB, Survey
It was primary spent on capacity extension Investment loans by their purpose according to a corporate survey Magyar Nemzeti Bank 27 Source: MNB, Survey
Corporate lending has improved significantly as a result of the FGS per cent per cent 0 0 -100 -100 -200 -200 -300 -300 -400 -400 -500 -500 -600 -600 -700 -700 -800 -800 -900 -900 -1 000 -1 000 -1 100 -1 100 -1 200 -1 200 -1 300 -1 300 2012 Q1 Q2 Q3 Q4 2013 Q1 Q2 Q3 Q4 2014 Q1 Q2 Q3 Q4 2015 Q1 Q2 Q3 Q4 2016 Q1 Q2 Q3 Fact Forcast - 2012 Q4 (FGS is not given) Forcast - 2013 Q3 Forcast - 2014 Q2 Forcast - 2014 Q3 (with new framework) Forecast for corporate lending in different periods (cumulative transactions) Source: MNB. 28
Market-based lending still has not recovered yet HUF Bn HUF Bn 1 400 1 400 1 200 1 200 1 000 1 000 800 800 600 600 400 400 200 200 0 0 -200 -200 -400 -400 -600 -600 -800 -800 Jul Oct Jul Oct Jul Oct Jul Oct Jul Oct Jul Oct Jan-14 Jul Apr Apr Apr Apr Apr Apr Apr Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Privately owned credit institutions without FGS new loans Overall transactions State owned banks and FGS new loans 12-month cumulative corporate loan transactions vis- -vis the government and privatly- owned institutions Source: MNB. 29
Corporate lending is expected to accelerate further on the forecast horizon per cent per cent 2 2 1 1 0 0 -1 -1 -2 -2 -3 -3 -4 -4 -5 -5 -6 -6 Q3 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q4 Q2 Q3 Q4 Q2 Q3 2012 Q1 2011 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 Actual Forecast - March 2014 Forecast - September 2014 Forecast for lending to non-financial corporations (transaction-based, year-on-year data) Source: MNB. 30
After a drop due to settlements, yoy growth rate predicts slowing deleveraging of households per cent per cent 0 0 -2 -2 -4 -4 -6 -6 -8 -8 -10 -10 -12 -12 -14 -14 -16 -16 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 Actual Forecast - March 2014 Forecast - September 2014 Forecast for lending to households (transaction-based, year-on-year data) Source: MNB. 31
