Report on Financial StabilityVonnák Balázsdirector

1

12th November 2014

Magyar Nemzeti Bank

Content

I. Settlement of FX loans

II. The asset management agency

III. Vulnerability – results of the stresstest

IV. Lending developments

Dia címe2

I. Settlement of FX loans

3

Settlement of the FX loan problem has a significant impact on every aspect of financial intermediation

4Source: MNB

Short term Medium term

Sett lementSignificant one-off losses, decreasing

interest bearing assets

Downward risks due to loan losses

Loan conversion to HUFModerating credit and

financing risksModerating risks has a

positive effect

Fair banking systemDecreasing interest

marginsDownward risks due to

loan losses

Fair refinancing conditions intensify

competition in household lending

Reliance on external debt

Healthy assets may contribute to a banking system which supports growth better

More intense competition for FX loan conversion to

HUF

Worsening l iquidity position

Decreasing reliance

LendingProfitability, capital position

Competition Liquidity

Fx loan measures

5Source: MNB

What is the main point? Who is affected?

Settlement Decrease of outstanding debt, or reimbursement, and resetting the interest rate to its fair level

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 )

Fair banking system

- 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

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

What will change in case of a typical foreign exchange debtor?

6Source: MNB

At the time of contracting CurrentlySettlement and interest

rates reset to the fair levelIn the future

Outstanding debt5,6 HUF million

(37 CHF thousand)7,5 HUF million

(29,1 CHF thousand)6 HUF million

(23,4 CHF thousand)

Interest rate5,7 percent

(FX)7,8 percent

(FX)5,7 percent

(FX)

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

Level of initial interest rates after loan conversion to HUF is not

defined yet

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.

The impact of the settlement arising from nullification of the exchange rate spread and unilateral contract modifications on the profitability of the financial institutions

Magyar Nemzeti Bank 7Source: MNB,CCIS

FX mortgage loans

Terminated contracts and

other loansTotal

Banking sector and branches

695 89 784 608 92.1 0.27 3.24

Total financial intermediary

system786 156 942 731 0 0 0

Forcast for annual loss in interest

income

Forcast for the reduction in net interest margin

(percentage point)

Forcast for the reduction in ROE

(percentage point)HUF billion

Estimated gross effectEstimated net effect on income

Substantial heterogeneity is expected in the reduction of borrowers’ debt

Magyar Nemzeti Bank 8

Estimated distribution of debt reduction of performing CHF-denominated mortgage loans following the settlement

Source: MNB

7,8

22,7

12,1

27,9 25,2

3,50,8

13,1

26,9

12,9

24,819,4

2,3 0,60

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

>30

per c

ent

25-3

0 pe

r cen

t

20-2

5 pe

r cen

t

15-2

0 pe

r cen

t

10-1

5 pe

r cen

t

5-10

per

cen

t

0-5

per c

ent

per centper cent

Decrease in outstanding principle

Based on outstanding debt Based on number of contracts

Magyar Nemzeti Bank

Expected details and effects of FX loan conversion to HUF

9

• 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

Households’ FX debt significantly decreases due to the conversion into HUF

10 Source: MNB

Households’ debt structure by currency and in percent of GDP

10

15

20

25

30

35

40

45

50

55

0

1 000

2 000

3 000

4 000

5 000

6 000

7 000

8 000

9 000Ja

n-05

Apr-

05Ju

l-05

Oct

-05

Jan-

06Ap

r-06

Jul-0

6O

ct-0

6Ja

n-07

Apr-

07Ju

l-07

Oct

-07

Jan-

08Ap

r-08

Jul-0

8O

ct-0

8Ja

n-09

Apr-

09Ju

l-09

Oct

-09

Jan-

10Ap

r-10

Jul-1

0O

ct-1

0Ja

n-11

Apr-

11Ju

l-11

Oct

-11

Jan-

12Ap

r-12

Jul-1

2O

ct-1

2Ja

n-13

Apr-

13Ju

l-13

Oct

-13

Jan-

14Ap

r-14

Jul-1

4O

ct-1

4Ja

n-15

Apr-

15Ju

l-15

Oct

-15

per centHUF Bn

Household HUF loans Household FX loans Household loans/GDP (RHS)

Magyar Nemzeti Bank

Household's open foreign currency position decreases

11 Source: MNB

Open FX position of the main sectors in the balance sheet as percentage of GDP

-10-505101520253035404550556065

-10-505

101520253035404550556065

2000

Q1

Q3

2001

Q1

Q3

2002

Q1

Q3

2003

Q1

Q3

2004

Q1

Q3

2005

Q1

Q3

2006

Q1

Q3

2007

Q1

Q3

2008

Q1

Q3

2009

Q1

Q3

2010

Q1

Q3

2011

Q1

Q3

2012

Q1

Q3

2013

Q1

Q3

2014

Q1

Q3

2015

Q1

per cent per cent

Household sector Non-financial corporate sector General government consolidated with MNB

Magyar Nemzeti Bank

The ”fair banking system” creates transparent pricing for long term loans…

12 Source: MNB

Effects of the ”fair banking system” on the pricing of 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)

Fair banking system

DisbursementRight 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)

DisbursementRight to terminate (free of

charge)

Magyar Nemzeti Bank

...and also for short term loans

13 Source: MNB

Effects of the ”fair banking system” on the pricing of short term loans

Possibility of unilateral interest-rate hikes

Earlier Disbursement

Reference-rate based product with fix interest rate spread

Fair banking system

Disbursement

Fixed interest rate

Disbursement

Magyar Nemzeti Bank

Banks with outstanding levels of liquidity and capital buffer are expected to benefit the most from the conversion

14 Source: MNB

Estimated level of capital adequacy and deposit coverage ratio after the settlement, by banks – the bigger the bubble, the bigger the loss born

0

20

40

60

80

100

120

8 10 12 14 16 18 20

Dep

osit

cove

rage

ratio

aft

er th

e se

ttle

men

t (p

er c

ent)

CAR after the settlement (per cent)

Magyar Nemzeti Bank

Hungary is expected to be among the less efficient countries in international comparison

15 Source: MNB

Cost to income ratio in international comparison

0

10

20

30

40

50

60

70

80

0

10

20

30

40

50

60

70

80G

reec

e

Slov

enia

Port

ugal

Italy

Lith

uani

a

Rom

ania

Cypr

us

Slov

akia

Bulg

aria

Pola

nd

Croa

tia

Spai

n

Latv

ia

Esto

nia

Czec

h Re

publ

ic

Mal

ta

Hun

gary

HU

aft

er s

ettle

men

t

per centper cent

Cost to income ratio (2013)

II. The asset management agency

16

Following a continuous decrease for almost two years, the NPL-ratio increased in 2014

Share of non-performing corporate loans of the banking sector

Source: MNB.

17

0

100

200

300

400

500

600

700

800

900

1 000

1 100

1 200

1 300

0

2

4

6

8

10

12

14

16

18

20

22

2007

Q1

Q2

Q3

Q4

2008

Q1

Q4

Q3

Q2

2009

Q1

Q2

Q3

Q4

2010

Q1

Q2

Q3

Q4

2011

Q1

Q2

Q3

Q4

2012

Q1

Q2

Q3

Q4

2013

Q1

Q2

Q3

Q4

2014

Q1

Q2

HUF Bnper cent

31-90 days delinquency ratio 90+ days delinquency ratio Loans with 90+ days delinquency (RHS)

The deterioration of the corporate loan portfolio can be clearly linked to real estate project loans

Non-performing project and other corporate loans within the banking sector

Source: MNB.

18

6

9

12

15

18

21

24

27

30

33

0

100

200

300

400

500

600

700

800

90020

10Q

1

Q2

Q3

Q4

2011

Q1

Q2

Q3

Q4

2012

Q1

Q2

Q3

Q4

2013

Q1

Q2

Q3

Q4

2014

Q1

Q2

per centHUF Bn

NPL - project financingNPL - other corporate loansNPL ratio - project financing (right-hand scale)NPL ratio - other corporate loans (right-hand scale)

The high NPL portfolio lowers the efficiency of the lending channel

Change in loans outstanding and NPL ratio in the corporate segment

Source: Jones Lang LaSalle.

19

Bank1

Bank2

Bank3

Bank4Bank5

Bank6

Bank7

Bank8Bank9

-60

-50

-40

-30

-20

-10

0

10

0 5 10 15 20 25 30 35

Exch

ange

rate

adj

uste

d ch

ange

in c

orpo

rate

loan

s ou

tsta

ndin

g be

twee

n D

ecem

ber 2

008

and

June

201

4 (p

er

cent

)

NPL ratio of corporate loans, June 2014 (per cent)

The asset manager proposed by the central bank could efficiently remedy the distressed corporate portfolio

The main characteristics of the asset management agency initiated by the Central Bank

20

Eligible counterpartyAny 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 assetsCommercial 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.

Minimum value threshold for assetsFor commercial real estate loans min HUF 500 million.For foreclosed real estate properties min HUF 200 million.

Time of origination Will be determined later on.

Transfer priceThe pricing technique remains to be determined, no conciliations have taken place with the banks. The transfer price may be below book value.

Financing MNB credit line up to HUF 300 billion, with a term of maximum 10 years.Planned operating period of the Asset

Management Agency10 years maximum

Source: MNB.

III. Vulnerability – result of the stress test

21

Ratio of non-performing FX mortgage loans are still increasing

Household NPL ratio by products

Source: MNB.

22

0

2

4

6

8

10

12

14

16

18

20

22

24

26

0

2

4

6

8

10

12

14

16

18

20

22

24

26

2008

Q1

Q4

Q3

Q2

2009

Q1

Q2

Q3

Q4

2010

Q1

Q2

Q3

Q4

2011

Q1

Q2

Q3

Q4

2012

Q1

Q2

Q3

Q4

2013

Q1

Q2

Q3

Q4

2014

Q1

Q2

per centper cent

The banking system’s resilience to shocks will decline considerably after the settlement

Capitalisation of the banking sector in stress

Source: MNB.

23

-10

0

10

20

30

40

-300

0

300

600

900

1 200

2005

Q1

Q2

Q3

Q4

2006

Q1

Q2

Q3

Q4

2007

Q1

Q2

Q3

Q4

2008

Q1

Q2

Q3

Q4

2009

Q1

Q2

Q3

Q4

2010

Q1

Q2

Q3

Q4

2011

Q1

Q2

Q3

Q4

2012

Q1

Q2

Q3

Q4

2013

Q1

Q2

Q3

Q4

2014

Q1

Q2

per centHUF Bn

Capital need to meet regulatory requirementCapital buffer above the regulatory requirementSolvency Stress Index (RHS)Solvency Stress Index with FX mortgage loan conversion (RHS)

Magyar Nemzeti Bank

FX risk disappears from households’ loan portfolio after FX conversion to HUF

24 Source: MNB.

Consolidated capital buffer and capital need along the stress scenario

-100

0

100

200

300

400

500

600

700

800

900

1 000

1 100

-100

0

100

200

300

400

500

600

700

800

900

1 000

1 100

Now After the conversion

HUF BnHUF Bn

Capital need to meet regulatory requirementCapital buffer above the regulatory requirement

+52 HUF Bn

+11 Huf Bn

IV. Lending developments

25

Magyar Nemzeti Bank

The FGS generated new demand for loans

26 Source: MNB, Survey

Would has the client borrowed for the same purpose if there was no FGS?

Magyar Nemzeti Bank

It was primary spent on capacity extension

27 Source: MNB, Survey

Investment loans by their purpose according to a corporate survey

Corporate lending has improved significantly as a result of the FGS

Source: MNB.

Forecast for corporate lending in different periods (cumulative transactions)

28

-1 300-1 200-1 100-1 000-900-800-700-600-500-400-300-200-1000

-1 300-1 200-1 100-1 000

-900-800-700-600-500-400-300-200-100

0

2012 Q1Q2 Q3 Q42013 Q1Q2 Q3 Q42014 Q1Q2 Q3 Q42015 Q1Q2 Q3 Q42016 Q1Q2 Q3

per centper cent

Fact Forcast - 2012 Q4 (FGS is not given)

Forcast - 2013 Q3 Forcast - 2014 Q2

Forcast - 2014 Q3 (with new framework)

Market-based lending still has not recovered yet

Source: MNB.

12-month cumulative corporate loan transactions vis-à-vis the government and privatly-owned institutions

29

-800

-600

-400

-200

0

200

400

600

800

1 000

1 200

1 400

-800

-600

-400

-200

0

200

400

600

800

1 000

1 200

1 400

Jan-

08 Apr

Jul

Oct

Jan-

09 Apr

Jul

Oct

Jan-

10 Apr

Jul

Oct

Jan-

11 Apr

Jul

Oct

Jan-

12 Apr

Jul

Oct

Jan-

13 Apr

Jul

Oct

Jan-

14 Apr

Jul

HUF BnHUF Bn

Privately owned credit institutions without FGS new loans

Overall transactions

State owned banks and FGS new loans

Corporate lending is expected to accelerate further on the forecast horizon

Source: MNB.

Forecast for lending to non-financial corporations(transaction-based, year-on-year data)

30

-6

-5

-4

-3

-2

-1

0

1

2

-6

-5

-4

-3

-2

-1

0

1

2

2011

Q1

Q2

Q3

Q4

2012

Q1

Q2

Q3

Q4

2013

Q1

Q2

Q3

Q4

2014

Q1

Q2

Q3

Q4

2015

Q1

Q2

Q3

Q4

2016

Q1

Q2

Q3

per centper cent

Actual Forecast - March 2014 Forecast - September 2014

After a drop due to settlements, yoy growth rate predicts slowing deleveraging of households

Forecast for lending to households(transaction-based, year-on-year data)

Source: MNB.

31

-16

-14

-12

-10

-8

-6

-4

-2

0

-16

-14

-12

-10

-8

-6

-4

-2

020

11 Q

1

Q2

Q3

Q4

2012

Q1

Q2

Q3

Q4

2013

Q1

Q2

Q3

Q4

2014

Q1

Q2

Q3

Q4

2015

Q1

Q2

Q3

Q4

2016

Q1

Q2

Q3

per centper cent

Actual Forecast - March 2014 Forecast - September 2014

Thank you for your attention!

32