Hungary lending losses to grow, banks solid, watchdog says

By Reuters Staff
December 15, 2009

BUDAPEST, Dec 15 (Reuters) – Hungary’s lending portfolios and profitability are set to deteriorate until the end of next year, although the financial system is stable and banks are well-capitalised, financial markets watchdog PSZAF said.

Hungary became the first European Union member to seek international aid amid the global crisis last year and although it has returned to market financing, mounting job losses are set to put further pressure on lending portfolios next year.

Central European currencies fell again on Tuesday, pressured by gains in the dollar a day after Austria — a key player in the region’s bank sector — nationalised Hypo Group Alpe Adria.

But PSZAF said on Tuesday a repeat of extreme market conditions seen early this year and late last year, when Hungary sought financial assistance from the IMF and the European Union, were unlikely to return even in case of a bigger market correction.

“The Hungarian financial intermediary system has retained its stability throughout 2009 and performed its function in an orderly manner,” PSZAF Chairman Adam Farkas told a news conference presenting a regular review of the financial sector.  (To read the review in Hungarian, please click here, to read a translation via Google, please click here.)

It said the average capital adequacy ratio in the banking sector rose to 13.1 percent by the end of September — well above the 8 percent regulatory minimum — as foreign parents provided ample liquidity and capital to their Hungarian units.

But the average return on equity in the sector fell to 12.7 percent in the in the first nine months from 14.5 percent in the first half due to increased provisioning and PSZAF said lending losses were likely to increase well into next year.

Hungarians took out billions in foreign currency loans during the boom years to take advantage of lower interest rates than on local currency debt and many households struggled with repayments when the forint plumbed record lows this spring.

Hungary’s PSZAF said the ratio of loans 90 days past due rose to 5.4 percent by the end of September, double that at the end of last year, but the pace of increase has abated and a turnaround may come at the end of 2010 the earliest.

“We believe that these trends are in line with the developments in the broader economy and therefore we can expect a reversal only when the growth cycle turns around,” PSZAF’s Farkas said.

Hungary’s economy is expected to begin growing again in annual terms in the second half of next year. (Reporting by Gergely Szakacs; Editing by Jon Loades-Carter)

((gergely.szakacs@thomsonreuters.com; +36 1 327 4748; Reuters Messaging: gergely.szakacs.reuters.com@reuters.net))

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