Financial Stability Report – MAY 2018

Press Conference • 31 MAY 2018 • ZsoltOláh | Head of Department Financial Stability Report– MAY 2018

Key Messages of the Report

Economic prospects continue to improve in both advanced and emerging economies • Source | IMF WEO • The development of the global economic environment

…however, Risks havesimultaneously repriced and spread to emerging markets • Source | Reuters Datastream • The development of US and British stock market composite indices and 10-year bond yields

Marketwide uncertainty have increased • Source |MNB • Factor based Index of Systemic Stress (FISS)

Risks of theEU banking sector Have decreased, but structural problems remain • Note: The diameter of the bubbles shows the ratio of non-performing loans in 2017. Source | SNL, ECB • The development of problem loans of European countries compared to gross loans outstanding

Some countries are facing new risks • Note | Circled in red are the countries warned by the ESRB. • Source | Eurostat, ECB, BIS • Changes in house prices and the ratio of housing loans to gdp in a european comparison

The shock-absorbing capacity of the domestic banking system remained strong • Note | The distribution shows the 40–60 and 20–80 percentiles of the EU banking sectors. • Source | ECB • After-tax ROE of the EU banking sector

The level of corporateloans outstanding is below the CEE average, while its course differs from the regionaswell • Corporate credit-to-GDP in an international comparison • Source | ECB, MNB

…the balance sheet adjustment following the crisis and the relative lack of substitutive alternativesarethereasonbehind • Corporate loans outstanding (left) and GDP (right) in the V4 countries • Source | ECB, Eurostat

credit cycle catching upIn the shortrun and trend of financial deepening in thelongrunmaymaterialize • Corporate sector indebtedness as a proportion of GDP and changes in the additional credit/GDP gap Note | Based on exchange rate adjusted loans outstanding received from the whole financial intermediary system. Source | MNB

There is a room for an increase in household indebtedness … • Household credit-to-GDP in the region • Source | ECB, MNB

…through broad-based expansion in a healthy structuralmanner • Household sector indebtedness as a proportion of whole household sector in international comparison • Source | MNB, ECB

higher cyclical convergence of household indebtedness is expected • Household sector indebtedness as a proportion of GDP and the additional credit-to-GDP gap • Source | MNB

Increasing lending capacity on the liquidityside Loan-to-deposit ratio of the credit institutions sector in international comparison • Source | ECB, MNB

Corporate lending reached double-digit growth • Growth rate of outstanding loans of the overall corporate sector and the SME sector • Source | MNB

Central bank programmes played a substantial role in lending growth in 2017 • Note | Two small banks with extremely high commitment and performance are not shown in the chart • Source | MNB • Fulfilment of the lending commitments under the Market-based Lending Scheme

The volume of long-term loans remained significant in 2017 evenafter the phase out of FGS • Source | MNB • New SME loans by maturity

The Quality of SME loan composition weakened after the FGS • The volume and ratio of loans with longer initial interest rate fixation declined • Longer-term loans are substituted by loans with shorter maturity • Source | MNB • Volume of new SME loans with fixed and variable rates by maturity

Expansion in Household lending continued, mainly as a result of demand side effects… • Source | MNB • New household loans in the credit institution sector

…whilecredit institutions held out theprospect of easingtheir credit conditions Changes in credit conditions and credit demand in the household segment Source | MNB

A favourabledevelopment is observed in aggregatedSpreadsaswell • Source | MNB • Composition effect of housing loan spreads • The share of loans with a fixed interest rate is increasing • Widening customer base • Increasing share of cheaper banks • Decreasing „clean” spread component

The share of loans fixed for a longer period is increasing, and within those the share of CCHL • Source | MNB • New housing loans by interest rate fixation and the proportion of Certified Consumer-Friendly Housing Loans (CCHL)

The CCHL bears a price advantage over loans with similar characteristics in every risk category • Source | MNB • The APRC-based interst rate spread advantage of Certified Consumer Friendly Housing Loans in comparison to non-certified longer interest rate period housing loans according to various risk characteristics

The CCHLprovidesCLIENTS more room formanoeuvre • Source | MNB • Main average values for new certified loans and other housing loans on the market with an interest period of at least 3 years

Trends in the housing market: A continuously widening geographic gap in house prices • Source | MNB • House price indices and average square meter prices by settlement type

… despite all these, no overheating is observed either nationally or in the capital • Forrás | MNB • Deviation of house prices from the estimated equlibrium level justified by fundamentals, nationally and in Budapest

Bank profitability woulddecline to around 5–7 per cent without the volatileP&L items • The long-term average of the income components was calculated from June 2002 and the risk premium was calculated above the return of 12-month T-bills. • Source | MNB • Deviation of volatile income components from their long-term average and the risk premium of ROE calculated with their average values

besides increased activity, outstanding „capacity” is available to improve efficiency… • Source | ECBCBD. • Staff expenses as a percentage of total assets in EU banking sectors

…whilea higher degree of process automation and digital solutions can also improve efficiency • Source | MNB Align the goals outlined in the digital IT strategies with the business objectives Paperless operation through digital document management Enhancement of the traditional banking service model (electronic channels) Increased IT infrastructure resilience, larger focus on cyber security By operating the Financial Innovation Platform (Innovation Hub), the MNB has been supporting the safe spreading of new FinTech initiatives in financial markets while preserving financial stability

Thank you for your attention!

appendix

credit demandrises in parallel witheasing credit conditionsmainlyforsmall and microenterprises Changes in credit conditions and credit demand in corporatelending Source | MNB

The cyclical effect of the banking system on growth is neutral Financial condition index (FCI) and annualrealgdpgrowth Megjegyzés: The FCI quantifies the banking system's contribution to the annual GDP growth rate through lending. The 2018 Q1 data for the real GDP annual growth rate is the seasonally and calendar adjusted first estimate of the HCSO. Source | MNB, HCSO

Financial Stability Report – MAY 2018