Economy 19 February 2014, 3:53pm

Hungary FX "relief package" results in massive NPL ratio

Portfolio

While the Hungarian government still did not/could not say the final word on what assistance package it would deliver to foreign currency mortgage holders, as the legal situation is yet to be cleared up, the ratio of non-performing household loans climbed to a new record high. At the end of 2013, 18.8% of household loans were NPLs, which marks a 0.3 percentage point rise from the peak at the end of Q3. While FX debtors await decisions to be made by the European Court of Justice, Hungary’s Curia (Supreme Court), the Constitutional Court and the cabinet, they are becoming insolvent one after another, but the moral risk is probably also adding to their aggravation. The extended exchange rate cap scheme is apparently not going to do the trick.

Another record was reached at Hungary’s household loans, but unfortunately it’s not of the good kind. At the end of 2013 the ratio of household loans overdue by more than 90 days (DPD90+) was up at 18.8% and the ratio of loans overdue by less than 90 days came in at 14.7%, central bank data showed. The reading at the end of Q3 was also a record, but the DPD90+ ratio was “only" 18.5% then.

At the end of December Hungarian households owed banks HUF 6,414 billion. Of this sum, HUF 1,208 bn were overdue by more than 90 days and HUF 943 bn were overdue by less than 90 days. The volume of DPD90+ loans was higher than this once before, at HUF 1,240 bn at the end of March. In the meantime, however, total debt of households declined, hence the rise of the NPL ratio to a new all-time high.

Previously, households have been reluctant to repay their smaller but uncollateralized loans (mostly consumer loans), but they were paying bigger attention not to fall behind with mortgage payments, driven by fear that they might lose their home. By now, the situation is the contrary, the NPL ratio of mortgages is higher (19.4%) than that of unsecured loans (16.0%). This most likely is related to the moral hazard linked FX loans, i.e. households choose not to pay their monthly instalments on the government’s promise of an assistance package. The promise of a new relief scheme heralded last year by the cabinet probably gave further impetus to this phenomenon. But it is not just about the problem of FX loans since the biggest NPL ratio is observed at home equity loans and not necessarily at HUF housing loans.

As for mortgage loans the higher or lower NPL ratios depend on which purpose the loan is taken out for. The highest NPLs were recorded at HUF home equity loans and then at foreign currency home equity loans. HUF-based subsidised loans perform the best in this respect, with only 4.6% of these in the non-performing category. As for the whole of FX mortgages - the holders of which are the target of the cabinet’s relief plan - the NPL ratio climbed to 22.6%.

The ratio of DPD90+ loans grew by 0.3 percentage point by end-Dec, whereas the ratio of loans overdue by less than 90 days dropped by 0.7ppt. The latter thought to be attributable to financially strung debtors slipping into the DPD90+ category and also to some of those with overdue loans returning to the group of problem-free debtors.

The NPL ratio of loans restructured by the banks indicates how successful the banks’ assistance programmes were. The chart below clearly shows, however, that the loan restructuring initiative of the banks did not exactly result in a huge victory. More than half (50.3%) of these loans are overdue by more than 90 days and 22% of them are overdue by less than 90 days. Only 27.7% of the restructured loans are not overdue, down from 28% at the end of September.

The volume of DPD90+ loans failed to decrease meaningfully in Q4 and the DPD90+ ratio even rose mainly because the market where problematic claims are sold remains on the backburner. Only HUF 48 bn worth of such claims were sold in the October-December period. Claims worth HUF 21 bn on average in the banks’ books fetched HUF 15 bn.

The high NPL ratio is not the only problem banks are faced with. High LTV (loan-to-value) ratios are a major headache too. A high LTV is also bad for the borrowers because it carries the risk of the bank putting in further large claims even if the collateral gets sold. The situation is the most critical at FX mortgages taken out for home purchase where the ratio of those with over-90% LTV rose to 56.5% by the end of the quarter from 52.9% a year earlier.

Besides the high and rising NPL ratio debtors found themselves in an almost hopeless situation for they cannot rid of their debt even if they sell their mortgages property. Real estate prices are extremely low and monthly instalments on FX loans rose sharply due to the depreciation of the forint. This is why 57% of FX mortgages had a loan-to-value (LTV) ratio of over 90% by the end of December (up 0.5ppt from end-Sept). This means that if the collaterals were sold at least 90% of the proceeds would go to debt repayment. This is bad news for the banks too, because if these loans defaulted they may not fully recover the loans. According to the government’s latest promise (made by Gergely Gulyás, deputy head of the Fidesz party caucus), foreign currency loans will be phased out completely by the end of the next parliamentary cycle (2018).

Only 1,343 debtors joined the extended exchange rate cap scheme in December, while the NPL ratio rose further. This also implies that FX debtors are concerned that once they join, they will be barred from a more beneficial deal, no matter what the government has been communicating.