Hungary central bank projects bleak lending conditions

Summary

“The January survey found that funding conditions for domestic banks had tightened and become more expensive, resulting in deterioration in their lending capacity. In other words, banks are less able to lend to corporations. Parallel to these developments, major euro-area banks are strengthening their balance-sheet positions by restraining lending, which is leading to tighter funding conditions in Hungary as well. The Hungarian banking sector is unprofitable at the moment, and thus regional competition for external funding is becoming more difficult for domestic banks."

Credit conditions for household loans were reported to have tightened. A major part of the banking sector is focusing on the premium segment, i.e. on higher-income clientele with significant down-payment capacity and high-quality collateral.

According to the NBH’s experts, banks are currently concentrating on the difficulties with the outstanding portfolio, and thus “new lending may become a priority for banks again after conclusion of the early repayment and applications for the exchange rate cap scheme."

The recent deterioration in lending capacity can be mitigated by the measures introduced by the NBH in February, namely the two-year collateralised loan tender, lowering of the eligibility criteria for collateral and the new mortgage bond purchase programme, the Bank added.

Household lending

Non-price credit conditions for household loans were reported to have tightened. The tightening of conditions was reflected in the loan-to-value ratio and in personal income requirements. Price conditions for mortgage loans also became stricter, i.e. the total APR increased in the fourth quarter. With the current credit conditions, a significant part of the banking sector is focusing on the premium segment, i.e. on higher-income clientele with significant down-payment capacity and high-quality collateral. It is still uncertain whether this behaviour will continue or it is a temporary impact of the early repayment scheme at favourable exchange rate. Banks expected further tightening of the payment-to-income ratio and required credit score over the next six months.

As regards unsecured consumer loans, the minimum required credit score and the payment-to-income ratio were reported to have tightened . In vehicle financing, some tightening banks and leasing companies reported that they had ceased EUR-denominated financing, which accounted for 15-20 per cent of new financing in 2011.

Looking at the demand side, a net 15% of banks reported that they had perceived decreasing demand for housing loans, while demand for consumer loans was reported to have remained unchanged in 2011 Q4 . Over the next six months a net 12% of banks expected increasing demand for housing loans, but this only represents a relative rebound from a low level after the sharp decline in demand in the previous quarters. By contrast, as regards consumer loans, a net 12% of banks anticipated lower demand in 2012 H1 relative to the last quarter of 2011. The NBH emphasised that banks did not account for re-mortgaging in the early repayment scheme at favourable exchange rate as new lending in their responses.

Corporate lending

In the corporate segment, credit conditions were reported to have tightened as well, and a significant portion of the banking sector is planning further tightening in the next half year. In previous surveys, banks cited lower risk appetite as contributing to tightening, but in this lending survey the role of deteriorating lending capacity increased considerably.

The most important factor is the deterioration in funding, which is attributable to shrinking external funding and rising foreign currency funding costs. The deterioration in lending capacity was last reported by such proportion of banks upon the outbreak of the September 2008 crisis.

The trends in Hungary are not country-specific, as credit conditions in the private sector were reported to have tightened in the euro area and the CEE region as well.

“Based on the ECB lending survey, the number of tightening euro-area banks jumped relative to the previous quarters. Banks cited the deteriorating economic outlook and lending capacity as reasons for tightening. Parallel to these developments, the expanding corporate lending experienced earlier recoiled in December, and − similarly to Hungary − corporate loans outstanding declined by 1-2 %. It may turn out in the coming months whether this development is permanent or merely temporary," the NBH said.

In the corporate segment, a net 30% of banks2 reported that they had tightened their credit conditions in Q411, and a significant portion of the banking sector anticipated further tightening in the first half of 2012.

The tightening primarily concerned credit conditions for large and medium-sized companies as well as commercial property loans, but conditions became stricter for small- and micro-sized enterprises as well. The tightening affects almost all non-price conditions, including in particular loan covenants, collateral requirements and the minimum required credit score.

The most important factor is the deterioration in funding (a net 42% of banks cited for the fourth quarter, while forward-looking net 70% for 2012 H1), which is attributable to shrinking external funding and rising foreign currency funding costs. The deterioration in lending capacity was last reported by such proportion of banks upon the outbreak of the September 2008 crisis.

Loans extended to municipalities

Banks’ risk appetite and willingness to finance continued to decline in the local government segment. The majority of banks (80% in net terms) reported that they had tightened their credit conditions again. At the meetings with senior lending officers, it became obvious that now banks consider this segment very risky. Consequently, lending is expected to be strongly restrained in the local government segment.

The survey

The NBH launched its questionnaire-based survey in the spring of 2003. The survey, conducted on a quarterly basis, gathers information on Hungarian commercial banks’ lending practices. It aims to present banks’ assessments regarding domestic market credit conditions. The latest survey is based on the questionnaires completed by banks in January 2012: it reflects their responses to backward-looking questions relating to 2011 Q4 and their expectations for 2012 H1.

• Tags:
• economy,
• lending,
• municipality,
• corporate,
• household