Financial Stability Report – May 2014

1. Financial StabilityReport – May 2014 Balázs Vonnák

2. Banks’ vulnerability decreased further, however, they still does not adequately support sustainable growth Shock-absorbing capacity: Capital injections announced in 2014 improved capital position, while liquidity of the banking sector is also sufficient even in a stress scenario. Procyclicality: Lending activity was stimulated markedly by the MNB’s Funding for Growth Scheme (FGS) and the policy rate cuts. However, market-based corporate lending is still restrained. Magyar Nemzeti Bank

3. Commitment of parent banks plays an important role in theimprovement of resilience • Financial stability heat map Source: MNB. 3

4. Shock-absorbing capacity of the banking system is strong 4

5. The stress level in domestic financial markets remains low • System-wide Financial Stress Index (SWFSI) Source: MNB. 5

6. Liquidity position remains solid evenunderstress scenario • Liquidity Stress Index, and banks' liquidity surplus or deficit relative to the regulatory level in the stress scenario Source: MNB. 6

7. Decreasingvulnerability, but substantial outflow of external funds may continue to pose a considerable risk • Development of banking system's foreign funds and the loan to deposit ratio through the forecast horizon Source: MNB. 7

8. Despite significant losses, the banking system’s need for capital in stress scenario is minimal… • Solvency Stress Index Source: MNB. 8

9. …due to capital injections carried out this year • Capital injections in the banking system Source: MNB. 9

10. Although average capital adequacy is solid, the aggregate indicator conceals significant heterogeneity • Distribution of the capital adequacy ratio based on thenumber of banks Source: MNB. 10

11. Lending does not adequately support economic growth 11

12. Positive turnaround in corporate lending in the second half of 2013, mainly due to theFGS • Forecast of lending to non-financial corporations (transaction-based, y-o-y data) Source: MNB. 12

13. Utilization of the second phase of FGS is proportionally higher than in the first • The diagram on the right shows the utilization of the credit line in percentage (Credit line of the first phase: HUF 750 billion, Credit line of the second phase: HUF 500 billion) Source: MNB. 13

14. While the utilization of new investment loans is even higher • Utilization of new loans in terms of time proportionality • Utilization of new investment loans in terms of time proportionality Source: MNB. 14

15. Butreboundinmarket-basedlending is neededaswellforsupportingsustainableeconomicgrowth • Changes in credit conditions and factors contributing to the changes in the corporate segment Note: Net percentage balance of respondents tightening/easing credit conditions weighted by market share. • Source: MNB, based on banks' responses. 15

16. Increase in Household lending, which may be prudentby regulating LTV/PTI standards • New disbursementsintheHouseholdsegment • Source: MNB.

17. Measures of the MNB are aimed atmitigatingvulnerability by changing asset composition of banks • Preferred directions in the change in banking sector asset structure and steps supporting them Source: MNB. 17

18. The sluggishportfolio cleaning of corporate loans isasignificantmacroprudentialrisk 18

19. In the case of corporate loans, quality improvement and portfolio cleaning decreased the NPLratio by the end of 2013 • Share of non-performing corporate loans of the banking sector by customers Source: MNB. 19

20. Movements in the cleaning component may be mostly accounted for one-off effects • Factors affecting changes in the ratio of non-performing corporate loans in the banking sector Source: MNB. 20

21. Thecorporate NPL ratio is expected to stagnate • Ratio of non-performing loans and the cost of provisioning in the corporate segment Source: MNB. 21

22. Shareof defaultedloansstuckforyearswithin the non-performing portfolio issignificant... • Distribution of corporate NPL according to time elapsed since becoming non-performing Source: CCIS. 22

23. …in which the share of project loan portfolio is significant • Portfolio quality in the corporate segment Source: MNB. 23

24. High vacancy rate among commercial properties compared to other European markets • Vacancy rate and capital value of the office market in an international comparison • Source: Jones Lang LaSalle. 24

25. Portfolio cleaning: mid-term benefits may outweigh short-term costs Improving portfolioquaility Improving maturity mismatch Growing risk appetite Released liquidity Decreasing funding costs Improved liquidity Increasing lending activity Released human resources Decreasing risk of future losses Improving profitability Released capital Potential for increased loan loss provisioning on the remaining stock 25

26. Low profitability may lead to consolidation in the banking sector 26

27. Domestic banking sector continues to becharacterised by weak profitability • Return on equity in an international comparison • Source: EKBCBD. 27

28. Persistentlyweak profitability hampers lending in support ofsustainable growth • Deterioration in asset quality and weak profitability are endogenous. Deleveraging Deteriorating ability to attract funds and capital Decreasing net incomes Weak profitability Reluctance to realize further losses Higher funding costs External vulnerability Subdued portfolio quality Increasing loan losses Source: MNB. 28

29. Subdued profitability poses risks to growth • Return on equity (2010-2013) and decline in the corporate loan portfolio (2013) by bank Source: MNB. 29

30. Persitently lowprofitability may lead to consolidation and a higherconcentration of the banking sector • Cumulative net profits of profitable, unprofitable banks and the banking sector since 2008 Source: MNB. 30

31. Increasing concentration in Household lending since the onset of the crisis • Herfindahl-Hirschmann-index based on new disbursements in each segment Source: MNB. 31

32. Thank you for your attention! 32