News and announcements

15 April 2016

Fitch: MARK serves as a useful opportunity

illustration

In part due to the conversion of foreign currency denominated loans and the cleaning of MKB Bank’s portfolio, the stock of non-performing loans (NPL) of Hungarian credit institutions fell by 26% last year. NPL ratios were nevertheless still very high, with the gross value of distressed loans equalling HUF 1,734 billion at the end of 2015. However, Fitch Ratings envisages improvement in its latest analysis. It finds the activity of MARK Zrt. especially useful, since it offers banks the opportunity to get rid of their problematic loans that emerged in the aftermath of the financial crisis.

According to the latest analysis prepared by Fitch Ratings (www.fitchratings.com/site/fitch-home/pressrelease?id=1002480): the most significant improvements were in the corporate loan books in 2015, but the conversion of foreign currency denominated mortgages into local currency also provided some relief to retail borrowers. The credit rating company expects this trend to continue because a supportive operating environment is stalling the inflow of new NPLs, and legacy loan books are already well seasoned. The company points out that the Hungarian regulators also introduced incentives for banks to clean up their impaired commercial real estate (CRE) exposures. NPL ratios are nevertheless still high, representing 11.7% of total banking sector gross loans. Within this ratio retail and corporate loans account for 17.5% and 7.9%, respectively. The latter ratio is mostly linked to CRE-backed loans. In 2015, corporate NPLs fell by HUF 371billion, equivalent to 35% of the stock of non-performing corporate loans. This reflects accelerated efforts by the banks to sell their NPLs.

This trend may continue, spurred, in part, by regulatory measures. In October 2015, the Central Bank of Hungary (MNB) announced the introduction of a systemic risk capital buffer. Effective from 2017, this will affect banks that do not clean their balance sheets from CRE-backed loans. Fitch believes that this will provide a strong incentive for banks to continue to sell or write off non-performing exposures over the coming months. Similarly, MARK Zrt. can "provide a useful mechanism through which banks can shift NPLs off their balance sheets". MARK has a capacity to acquire NPLs worth HUF 300 billion, which equals around 40% of non-performing corporate loans (according to MNB figures, the ratio is over 50% - editor’s remark). However, MARK's ultimate success will depend on whether an agreement can be reached with the banks on NPL values.

The European Commission approved MARK’s pricing methodology at the beginning of February in the form of a decision, and confirmed that it was free from any forbidden state aid. The registration period for the banks will last until 21 June, after which the parties will have a year to conclude the concrete deals.

Source: fitchratings.com, portfolio.hu