Hungary’s Banking System Outlook Remains Negative

The outlook on Hungary’s banking system remains negative, says Moody’s Investors Service in its latest ‘Banking System Outlook’. The key drivers of the outlook are:

  • A persistently weak operating environment.
  • Further deterioration in asset quality.
  • Continued pressure on profitability, funding and capitalisation.

“We expect Hungarian banks to face a weak operating environment in the next 12-18 months. Hungary’s economy continues to deteriorate, as its high dependence on exports and capital inflows exposes the country to the euro area’s weak growth prospects,” said Simone Zampa, a Moody’s vice president and senior analyst. “Combined with other challenges for banks in Hungary, including a series of government measures which are detrimental to banks’ profitability, high unemployment and fairly high household indebtedness, particularly in foreign currency, the weak operating environment will continue to limit domestic demand for credit, and banks’ ability and willingness to lend.”

The credit ratings agency (CRA) said that the pressures within the operating environment will cause the banks’ asset quality to deteriorate further over the outlook period. Adverse exchange-rate dynamics, a large loan portfolio denominated in Swiss francs, weak macro-conditions, increasing business bankruptcies and a construction slump indicate mounting pressure on problem loans. According to the Hungarian National Bank, the level of problem loans in banks’ portfolios is expected to rise to around 15% in early 2013 from 13.1% at the end of 2011 for the retail sector, and to around 22% in 2013 from 17.4% at the end of 2011 for the corporate sector.

Moody’s also noted that over the outlook period, Hungarian banks’ funding and liquidity profiles will remain weak and exposed to market sentiment given the large foreign exchange (FX) funding needs to refinance the large foreign-currency loan book in the system.

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