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INTERNATIONAL TRAINING
CENTRE FOR BANKERS
The impact and consequences of the
financial crisis on Hungary
Erika Marsi
Vice President
International Centre for Bankers
Kiev
28th May 2010
INTERNATIONAL TRAINING CENTRE FOR BANKERS
AGENDA
• Macroeconomic situation: vulnerability
• First phase: Pre-crisis banking system
• Lending in FX
• Second phase: Liquidity crisis
• Third phase: strong orientation
• What’s next?
INTERNATIONAL TRAINING CENTRE FOR BANKERS
• Macroeconomic situation: vulnerability
• First phase: Pre-crisis banking system
• Lending in FX
• Second phase: Liquidity crisis
• Third phase: strong orientation
• What’s next?
INTERNATIONAL TRAINING CENTRE FOR BANKERS
Annual and quarterly changes in GDP (seasonally adjusted data, per cent)
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Source: MNB
Annual GDP growth rate: stable 4-6% until 2006
Growth is fueled by retail consumption, financed from loans – retail lending is
booming
Constantly increasing budget deficit
EU accession on 1. May 2004 – Governmental adoption of a non-structural
reform program in 2006, aiming to decrease budget deficit
As a result of the program, GDP growth fell back
The Hungarian economic growth was already on a downslide trend before
2008 – the crisis hit an already weakened economy.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
Net external debt as a percentage of GDP
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Source: MNB
Ratio of external financing is very high
30% of the outstanding government bond stock was financed from foreign
sources
The foreign indebtedness of the banking system increased even more than
that of the governmental, which is basically due to foreign banks financing
their Hungarian subsidiaries
The weak spot of the Hungarian economy: high external financing need.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
Net external debt as a proportion of GDP, 2008
Source: IFS, Eurostat
Hungary is the 5th worst state in Europe regarding net external debt to
GDP.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
• High budget deficit and external financing need
decreased the efficiency of the monetary policy
• Monetary policy was restrictive – leading to
relatively high HUF interest rates
• Therefore, FX loans were more popular –
further decreasing the room of monetary policy
• Loose fiscal policy was paired with restrictive
monetary policy – the worst combination
Hungary’s financial stability could only be maintained as long as external
financing was available.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
• Macroeconomic situation: vulnerability
• First phase: Pre-crisis banking system
• Lending in FX
• Second phase: Liquidity crisis
• Third phase: strong orientation
• What’s next?
INTERNATIONAL TRAINING CENTRE FOR BANKERS
• The structure of the Hungarian banking system is
practically unchanged since 2000:
– one big, listed Bank with over 20% market share,
– 6 banks with about 6-10% Hungarian market share, subsidiaries of
banking groups of the European Union,
– The remaining market share is divided between small- and mid sized
banks, also subsidiaries of foreign banks, specialising in a segment
– Most banks are universal banks, but the market size of Capital market
is not significant in Hungary
– There are also special credit institutions: mortgage credit institutions,
building societies and savings banks
– Mainly Austrian, Italian and German bank groups
The Hungarian banking system consists of a big, listed bank and a number
of mid-sized banks, subsidiaries of banking groups.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
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Until 2000 the financial penetration to GDP ratio was even below 70%,
mainly the retail sector’s financial penetration was low:
– Only one bank had a retail portfolio of significant size
– Subsidiaries of foreign banks focused on the corporate sector
• Governmental adoption of interest rate subsidy of housing loans,
which did not only boost retail lending, but also the real estate
market
• 2004-2005: interest rate subsidy system is found to be
unsustainable – but at that time, banks found out, that retail
lending is more profitable than corporate lending
• Accession to the EU, „obligatory” convergence course
higher growth potential expected – financial
penetration increased to 100%
Interest rate subsidy was decreased, higher
HUF interest rates
Parent banks gave unlimited access to FX
financing
FX loans were getting
more and more popular
FX lending was becoming more popular in the pre-crisis period
INTERNATIONAL TRAINING CENTRE FOR BANKERS
• Equity mortgage loans were also becoming
more popular
• Strong competition, turning into a risk-taking
competition:
– Increase of loan to deposit ratio
– Higher LTV ratios
– Lower expected income
• No classic subprime loans – but some financial
products poses similarity (for example loans
disbursed without income proof)
Increased competition evolved, leading to higher risk taking and lower
expected returns.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
Source: ECB, MNB
Loan-to-deposit ratios in international comparison
Source: ECB, MNB
Increased competition evolved, leading to higher risk taking and lower
expected returns.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
• Profitability of the Hungarian bankings
system was high between 2000 and 2008:
– Improved cost-efficiency
– High interest margin
– Good credit portfolio quality
• Risk premia is highly above the margin of
the countries of the parent companies
The Hungarian banking system was very profitable before 2008, inciting
parent banks to support their subsidiaries.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
Changes in the net interest margin
Source: SMNB, ECB EU Banking Sector Stability (Augustus 2009)
The Hungarian banking system was very profitable before 2008, inciting
parent banks to support their subsidiaries.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
• Macroeconomic situation: vulnerability
• First phase: Pre-crisis banking system
• Lending in FX
• Second phase: Liquidity crisis
• Third phase: strong orientation
• What’s next?
INTERNATIONAL TRAINING CENTRE FOR BANKERS
• The risk of the FX loans was clear for the authorities –
although no decision was made to limit FX lending
• Major „arguments” against the regulation:
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FX lending contributed to the growth of housing
Growth of economy, growth of taxes
Borrowers not eligible for HUF loans may get FX loans
Supporters of the regulation want to cause “bad for the people”
Hungary will be part of the Monetary Union
HUF loans bear even more FX risk (!) due to uncertain exchange rate
at the adoption of the euro
– CHF loans: Switzerland is highly integrated to the EU (carry trade?)
• Only obligations for risk assessment aimed at consumer
protection got into the regulations, which only resulted in
customers having to sign one more paper
• Luckily, JPY loans were successfully regulated
Although FX loan risk was clear, no regulation was adopted to limit the
lending: many, in some cases demagogic explanations were present.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
• Macroeconomic situation: vulnerability
• First phase: Pre-crisis banking system
• Lending in FX
• Second phase: Liquidity crisis
• Third phase: strong orientation
• What’s next?
INTERNATIONAL TRAINING CENTRE FOR BANKERS
• The crisis shocked Hungary on 8th October 2008
• The Hungarian banks had no access to the swap markets
– The FX loans are hedged with FX swaps
• Even worse: the Hungarian State had no access to foreign
funds
• Meanwhile the foreigners sold the Hungarian government
bonds
• The HUF weakened significantly
• Result: requesting for IMF (and EU) loan
• The market confidence was regained at the mid 2009
The crisis caused a serious liquidity shock in October 2008, Hungary had
to turn to IMF to regain the market’s confidence.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
5-year CDS spreads of selected countries of the region
Source: Thomson Reuters
The crisis caused a serious liquidity shock in October 2008, Hungary had
to turn to IMF to regain the market’s confidence.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
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The banks’ focus was on liquidity: no new disbursements
– No financing for SME-s – further deepening the crisis
Strong efforts in deposit collection: the former credit competition has
been transformed to a deposit competition
The weakening of the HUF
repriced loans
Higher risk premia
(major consumer
protection concerns)
Many high debtor with high LTV
• The deterioration of the portfolio quality has started at the end of 2008
• Parent banks’ financing
• CHF and euro swap facilities by the National Bank
The liquidity situation
consolidated
at the end of 2008
Although the liquidity crisis has been solved at the end of 2008, the
portfolios started to deteriorate due to recession and the weakening HUF
INTERNATIONAL TRAINING CENTRE FOR BANKERS
• Macroeconomic situation: vulnerability
• First phase: Pre-crisis banking system
• Lending in FX
• Second phase: Liquidity crisis
• Third phase: strong orientation
• What’s next?
INTERNATIONAL TRAINING CENTRE FOR BANKERS
• The liquidity situation has been normalised
• The new focus on:
– Stability of the balance sheet structure
– Stability of the activities
• Improvement of the loan/deposit ratio
• Decreasing the costs and the RWA
• Active management of the problematic portfolios
• The dynamic of the lending has slowed down
– Demand problems
– Stricter lending norms
• Risks have been decreased in every area (with the exception
of lending activity and credit portfolio quality)
As the liquidity crisis ended, the banks started to stabilize their portfolios
by increasing loan / deposit ratio and decreasing costs and RWA.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
Changes in main risk indicators between December 2008 and December 2009
Source: Hungarian National Bank
As the liquidity crisis ended, the banks started to stabilize their portfolios
by increasing loan / deposit ratio and decreasing costs and RWA.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
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Decreasing risk exposures: high economic price
Corporate loans: - 6.2% (2009)
Constrained lending deepened the recession
Companies: „there is no credit” – Banks: „there is no credit demand”
• Hungary: no room for anticyclical fiscal policy
• But: the state owned guarantee program’s importance raised
• 2009: 13% of the SME bank loans were covered with state guarantee
The stricter credit conditions caused a decrease in the corporate loans,
which was not stimulated by the state, only by a guarantee program.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
Composition of the net borrowing of corporations from domestic banks
Source: Hungarian National Bank
The stricter credit conditions caused a decrease in the corporate loans,
which was not stimulated by the state, only by a guarantee program.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
Factors contributing to changes in corporate credit standards and conditions
Source: Hungarian National Bank
The stricter credit conditions caused a decrease in the corporate loans,
which was not stimulated by the state, only by a guarantee program.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
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The retail loans (largely in FX) did not decrease during 2009
But the structure of the newly exposed loans has changed essentially
The dominating CHF loans disappeared
Euro loans took over the FX loans
• Stabilization of the budget deficit
• Low inflation rate
cuts in the base rate
HUF loans appeared again and are more competitive
• The accumulated amount of FX loans is still very high, it can only be
changed on long term.
The structure of new retail loans has changed: no more CHF, only EUR
loans with the even more competitive HUF loans together.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
New loan agreements and total loans by denomination in the banking sector
Source: Hungarian National Bank
The structure of new retail loans has changed: no more CHF, only EUR
loans with the even more competitive HUF loans together.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
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The recession of the economy
The increase of the unemployment rate
Weakening of the HUF rate in early 2009
Even riskier credits before the crisis
significant increase of the
non performing loans
• The main task in 2009 : active portfolio management
– Restructuring of credits
• NPL ratio (loans with more than 90 days delinquency)
– corporate loans: 10%
– retail loans: 7%
Due to the recession the non performing loans’ proportion increased
essentially by the corporate and retail loans as well.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
Major quality indicators of banks’ corporate portfolio and their distribution
Source: Hungarian National Bank
Due to the recession the non performing loans’ proportion increased
essentially by the corporate and retail loans as well.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
Major quality indicators of the credit institutions’ household portfolio and their distribution
Source: Hungarian National Bank
Due to the recession the non performing loans’ proportion increased
essentially by the corporate and retail loans as well.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
• Very active credit restructuring - 4% of the retail loans got restructured
• Government’s measure: interim loan construction for customers getting
unemployed or suffering income decrease due to the crisis
• The corporate loan portfolios are still deteriorating - NPL ratio may reach 15%
• Positive sign: the GDP is increasing again: 2010 Q1 0,2% growth year/year
• Important trend: cost cutting
• OTP’s cost/income ratio decreased from 42% to 34% in 2009
• Almost every bank’s cost income is below 50%.
• Loan/deposit ratio : decreased from 160% to 143%
– Due to the strong deposit collection
– Still pretty high
The banks focus was on the credit restructuring and cost cutting in 2009.
The increasing GDP might be a good sign for the portfolios.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
Profitability position of the domestic banking sector in regional comparison
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The profitability: really good in international comparison too
Negative effect: Loan loss provision has been doubled
Positive side:
• Increase of the interest margin
• Cost cutting
Source: National
central banks
The profitability of the banks remained high in the international
comparison although loan provisions are increasing .
INTERNATIONAL TRAINING CENTRE FOR BANKERS
Capital adequacy ratio of the banking sector in 2008-2009 and decomposition of its change
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Source: MNB
Capital adequacy ratio 2008: 11.2% - 2009: 12.8%
The capital basis has been also increased (because of the higher profit reserves
and issued capital)
More important: less risk weighted assets (RWA)
The capital adequacy ratio increased due to the less risk weighted assets.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
• Macroeconomic situation: vulnerability
• First phase: Pre-crisis banking system
• Lending in FX
• Second phase: Liquidity crisis
• Third phase: strong orientation
• What’s next?
It’s almost over
INTERNATIONAL TRAINING CENTRE FOR BANKERS
• It was proved: pairing a high net external debt with fiscal
“alcoholism” highly increases the vulnerability of the banking
sector
• Even worse: restrictive monetary policy leads to useage of
assets outside the scope of the National Bank
– The monetary transmission mechanism weakens
• Example: FX lending - rational for creditors and debtors.
• The most important safeguard is joint responsibility of the
National Bank, the Government and the Financial Services
Authority
• If necessary, this must be guaranteed by legislation, as in Hungary
The bad macroeconomic situation was caused by the irresponsible fiscal
and restrictive monetary policy – they must go hand by hand.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
• Basel II Capital Regulation is in effect in Hungary (Capital
Requirement Directive, CRD)
• The regulation is strongly procyclical - in case of a crisis the
capital requirement increases significantly
• Therefore banks restricts lending instead of supporting the
recovery
• The capital requirement under second pillar (stress tests) was
not appropriately established.
Currently the Basel II regulation is in force in Hungary, which is strongly
procyclical and works restrictively during crisis.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
• The FX lending and the liquidity shall be regulated
– but it can not be procyclical – not with the current
circumstances
• Positive experiences: parent banks will stand for the subsidiaries
with financing and capital
– they will review the regional strategy
– The region was worth to finance: due its convergence and
developing potential of the financial intermediary
– They were right in that, but perhaps not that right
The parent banks behaved really well during the liquidity crisis: no
Hungarian bank got in trouble.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
• Financing and lending shall be stable even more locally – for
international groups too
• Globalised financial system - safe local operation
• Currently: restrictions everywhere (ideas or suggestions)
• Banking will be much more regulated and boring
• Danger: the regulation shall not limit the banks’ basic functions
– financing the economy,
– financing the extra needs of the developing countries
The regulation’s focus will be on the locally stable operation – but it shall
not be too strict to limit growth opportunities.
INTERNATIONAL TRAINING CENTRE FOR BANKERS
Thank you for your kind attention!
[email protected]