On 5 April the
commercial bank MKB Bank (MKB Bank Zrt.) issued annual reports for 2012, both a
consolidated interim report according to IFRS and an unconsolidated interim report
according to Hungarian Accounting Standards (Magyar Számviteli Szabványok).
Below are some
highlights from the consolidated annual report, which besides MKB Bank’s core
market of Hungary Romania Bulgaria 31 Dec. 2012 .)
Assets:
Total assets at end-2012 were HUF 2,579.2 bln (€ 8.85 bln), down 12.4%
from the figure of HUF 2,943.9 bln at end-2011.
This is accounted for primarily by a 16.9% decline in the size of its
loan portfolio (loans and advances to customers), from HUF 1,994.6 bln at
end-2011 to HUF 1,658.4 bln at end-2012, but was partly offset by an increase
in cash reserves during the same period, from HUF 321.7 bln to HUF 413.8
bln. The notes to the statement explain
that the decline in the value of the loan portfolio was due to a strengthening
of the Hungarian forint with respect to the euro and the Swiss franc, since
loans in foreign currencies make up a considerable part of the loan portfolio.
Liabilities:
Deposits declined by 5.1% in 2012, from HUF 1,463.5 bln to HUF 1,389.0
bln (€ 4.768 bln).
Income:
The bank registered a net loss for the year (adózás utáni eredmény)
of HUF 87.7 bln (€ 301 mln), an improvement over the net loss of HUF 121.0 bln
in 2011 and the loss of HUF 108.2 bln in 2010.
Net interest margin:
2010: 2.56%
2011: 3.07%
2012: 3.22%
MKB Bank is controlled
by the German bank Bayerische Landesbank
(BayernLB), which is headquartered in Munich
Sources:
Consolidated report for 2012: 24/2008
(VilI. 15) PM rendelet alapján a 2012. évi konszolidált éves beszámolóról és
vezetőségi jelentésről (2013-04-05)
Consolidated report for 2011: Konszolidált
éves jelentés IFRS. szerint - 2011. (2012-04-07)
On 4 April the Hungarian
National Bank (Magyar Nemzeti Bank) announced that it would be beginning
a program or refinancing for small and medium enterprises, the “Funding for
Growth Scheme” – FGS (Növekedési Hitel Program – NHP). The program is intended to reverse a decline
in the volume of outstanding business loans which began in 1Q 2009.
The program will
consist of three pillars:
I. The central bank will loan Hungarian forints (HUF) to interested
commercial banks at an annual interest rate of 0% so that the banks can use
them to refinance loans to small and medium enterprises (SMEs), preferably at
an interest rate of 2%. The maximum
amount to be dedicated to this is HUF 250 bln (€ 0.8 bln).
II. The central bank will loan its foreign-exchange reserves to
interested commercial banks at an annual interest rate of 0% so that the banks
can use the funds to refinance foreign-currency loans of SMEs as HUF loans,
preferably at an interest rate of 2%.
The maximum amount to ge dedicated to this is HUF 250 bln (€ 0.8 bln).
III. The central bank will use its foreign exchange reserves to reduce
the country’s short-term external debt by HUF 1,000 bln (€ 3.3 bln).
How the first pillar of the program will function
Source:
Az
MNB Növekedési Hitel Programot (NHP) indít (2013-04-04)
In earlier news, on
29 March the International Monetary Fund issued a staff report on Hungary
[...]
RECENT
ECONOMIC DEVELOPMENTS
[...]
5.
Financial intermediation declined sharply. Banks have continued to scale down their operations
under pressure from heavy taxation, losses from government mortgage relief schemes,
and rising NPLs (Figure 3). The reduction in external funding accelerated
beyond the pace seen in peer countries, and the loan-to-deposits ratio dropped
sharply to 111 percent at end-2012. Most of this reflects reduced lending as
the deposit base has remained broadly stable. Banks have tightened their
lending standards and are less willing to expand in the corporate sector, particularly
to small and medium enterprises (SMEs). Demand for new loans, especially from households,
is also very weak. Non-performing loans (NPLs) continued to increase in both
the retail and corporate segments (reaching 15 percent and 21 percent,
respectively).1 Restructured loans are on the rise
(11 percent of all loans), reflecting the implicit incentive by the absence of
penalties in the form of provisions.
1 Part of the increase in household
NPLs reflects the impact from the mortgage pre-payment scheme which reduced the
total value of loans.
[...]
POLICY
DISCUSSIONS
[...]
C. Financial
Sector—Restore Conditions for Financial Intermediation
23. While the banking
system is generally stable, important vulnerabilities remain. Banks’ average capital
adequacy ratio (CAR) as of end-2012 (15 percent) appears adequate and stress
tests conducted by the Central Bank indicate an improvement in the
shock-absorbing capacity of the banking sector as a whole. However, with
subdued economic activity, rising nonperforming and restructured loans,
possibly over-stated collateral, and a heavy tax burden,8 banks’ profitability is
projected to remain low. In this difficult landscape, banks are planning to further
scale down their operations. Credit growth is projected to remain negative in
2013 on the back of weak household demand and banks’ limited appetite to lend.
Reduction of parent banks’ cross-border exposure (including to their
subsidiaries) is likely to continue, albeit at a more gradual pace, and thus
contribute to the negative credit growth and weak economic activity in the
period ahead.9
24. Higher bank
provisioning is needed in view of the worsening asset quality and weak
collateral. Rising corporate and household NPLs point to the risk of further
losses,10 particularly given the
relatively low provisioning (47 percent), and the high level of restructured
and evergreened loans.11 Staff underscored that adequate provisioning, including through
more frequent and realistic appraisals of collateral, would help minimize uncertainty
regarding future losses and assist with the cleanup of balance sheets.12 In addition, staff
stressed the need for closer monitoring of repeated loan restructurings to
ensure that non-performing loans are adequately reported and provisioned for.
25. Speeding up
portfolio cleaning is desirable but banks’ capacity to absorb further losses is
limited. Portfolio
cleaning remains sluggish. Staff concurred with the authorities that resolution
of NPLs should be led by banks in a cooperative fashion, yet noted that a more proactive
approach, which would provide incentives for the banks to clean up their
portfolios, is warranted. In this regard, staff stressed the need to remove
legal, tax and regulatory
impediments to
facilitate speedy liquidation of collateral while keeping an adequate balance between
creditors and debtors rights.13 Establishing
a personal insolvency framework would also help expedite the portfolio cleaning
process. Staff noted that developing an out-of-court debt restructuring
framework would reduce present delays and high collection costs while further alleviating
the pressure on the judicial system. Staff welcomed the establishment of the
National Asset Management Agency (NAMA), though saw room to relax the
participation requirements and change its financing structure to reduce the
burden on the treasury.14
26. Banks need more stable sources
of external funding to reduce reliance on FX swaps. The stock of FX swaps (used to hedge
on-balance sheet open FX positions) declined in 2012, in tandem with the
reduction in banks’ FX assets. But at a level of €10 billion (about 10 percent
of GDP) and with relatively short maturity (on average 1½ years), FX swaps
represent a significant vulnerability to the financial system as they can
amplify the negative effects of external shocks on the exchange rate. Staff
noted the recent improvements in the macro-prudential regulatory framework,
including the introduction of the FX Funding Adequacy Ratio (FFAR),15 and stressed that, as the reduction of banks’ FX
assets continues, banks should be encouraged to turn to more stable sources of
external financing. In this regard, staff also welcomed the authorities’
efforts to reduce the rollover and liquidity risks associated with FX swaps by
negotiating with the banks to voluntarily limit their off-balance sheet net FX
position to below 15 percent of total assets.
27.
Hungarian banks’ regional operations should continue to be monitored to minimize
the risk of potential adverse outward spillovers. The largest domestic bank has
several subsidiaries in the region accounting for about 40 percent of its total
assets. While these subsidiaries are mostly small, they are relatively large in
Bulgaria and Montenegro (among the top three banks by bank assets).16 The HFSA is in regular contact with host country
supervisors and staff does not see an imminent risk of systemic spillovers in
the host countries from the activities of this bank. Continued effective supervision
of banking group’s and enhanced cooperation with host country supervisory
agencies will be critical to ensure the stability and soundness of host country
financial systems.
28. Staff warned against an
increased role of the government in providing credit to the economy,
particularly given the limited fiscal space. The government’s efforts to facilitate lending to
SMEs through tax incentives, refinancing, and direct lending by the
state-controlled banks has had little success so far, and further efforts to
expand the government’s involvement in lending to the private sector are
underway. Staff argued that the most efficient way to restore credit growth is
through improving the broader policy framework and its predictability,
including by abolishing the bank levy, which is delinked from banks’ current
size and performance. Staff, in this regard, welcomed the governments’ intent
to re-engage with banks in an effort to establish a better operational
environment.
Authorities’ views
29. The
authorities agreed that the lack of financial intermediation undermines economic
activity. They
concurred that credit is likely to continue to contract in 2013 due to both
demand and supply factors. They saw a role for government action, including
through credit guarantees and mortgage rate subsidies, to improve SMEs’ access
to credit and reduce the cost of borrowing to households. While agreeing that
the high share of NPLs and restructured loans burdens banks’ balance sheets,
the authorities expressed concern that forcing banks to move faster with
portfolio cleaning would amplify their losses, particularly given the weak real
estate market. The MNB agreed that the regulatory framework could be
strengthened to ensure adequate provisioning. However, the financial supervision
authority (HFSA) was more optimistic arguing that loan-loss provisioning is
adequate and the recent improvement in the banks’ capital position would be
sufficient to withstand possible losses. The HFSA noted its intent to issue guidelines
to banks within the first half of 2013, requiring additional provisions for
loans that have been restructured multiple times. They also stressed their
plans to enforce stricter collateral valuation for real estate, and harmonize
appraisal methods across banks. The authorities are working on a bank
resolution framework, including with IMF technical assistance, aiming to submit
legislation for parliamentary approval by June-2013.
8 The levy imposed on banks has a fixed base reflecting the
size of the banks’ balance sheets in 2009. However, since then, some banks’
balance sheets have contracted by as much as 20 percent, resulting in a rising
tax burden.
9 See Selected Issues Paper “NPLs in CESEE: Determinants and
Impact on Macroeconomic Performance”.
10 The recent rise in NPL ratio in the household segment
is in part due to the early mortgage repayment scheme, which reduced the stock
of outstanding household loans by 12 percent.
11 This in part reflects banks’ reluctance to realize
losses in the face of a frozen real estate market.
12 Adequate provisioning would reduce the system-wide
capital adequacy ratio but would still leave it above the minimum requirement.
13 For instance, by reconsidering the regulations for
debt cancellation, such that under certain conditions it would not result in
income for debtors (i.e. no tax consequence), and could be booked as cost by
banks (i.e. tax shield effect).
14 NAMA started to operate in the summer of 2012 with the
objective of helping lower income families who are unable to repay their loans
by purchasing their properties and renting them back at a price determined by
law. It is not clear, however, whether NAMA would be able to purchase the full
25,000 properties allowed by the law by 2014 given the strict requirements (for
example, only those that have at least one child and receive some sort of social
benefits are eligible to participate).
15 The liquidity buffer has to exceed 20 percent of
corporate and retail deposits and/or exceed 10 percent of total assets (January
2012). Under FFAR, the ratio of stable FX funding (including FX swaps above one
year) to FX assets needs to exceed 65 percent.
16 Other subsidiaries are located in Russia, Ukraine,
Croatia, Romania, Slovakia, and Serbia, and make up between 1 and 7 percent of
total banking group assets each. They are increasingly locally funded and are
more active in retail banking, though some specialize in corporate lending.
[...]
STAFF
APPRAISAL
[...]
38.
Restoring financial intermediation is critical for economic recovery. A turnaround in bank lending
requires improving the banking system’s operational environment. Key steps include
scaling down the tax burden on the financial sector and facilitating conditions
to help banks clean up their asset portfolio from rising NPLs, including by
removing tax, legal, and regulatory obstacles that hamper the resolution of
impaired assets. This would be a more effective and less costly way to support
credit growth than resorting to ad-hoc initiatives involving tax incentives,
credit guarantees, and on-lending by state-controlled banks. At the same time,
the authorities should step up the monitoring of NPL classification and
provisioning, including for repeatedly restructured loans.
[...]
Source:
Mark Pleas
[contact]
