1. Financial Stability Report – May 2014 Balázs Vonnák 22 May 2014

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 2

3. Commitment of parent banks plays an important role in the improvement 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 even under stress scenario Liquidity Stress Index, and banks' liquidity surplus or deficit relative to the regulatory level in the stress scenario Source: MNB. 6

7. Decreasing vulnerability, 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 the number 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 the FGS 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 Source: MNB. 14 Utilization of new investment loans in terms of time proportionality

15. But rebound in market-based lending is needed as well for supporting sustainable economic growth 15 Changes in credit conditions and factors contributing to the changes in the corporate segment Source: MNB, based on banks' responses. Note: Net percentage balance of respondents tightening/easing credit conditions weighted by market share.

16. Increase in Household lending, which may be prudent by regulating LTV/PTI standards 16 Source: MNB. New disbursements in the Household segment

17. Measures of the MNB are aimed at mitigating vulnerability 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 sluggish portfolio cleaning of corporate loans is a significant macroprudential risk 18

19. In the case of corporate loans, quality improvement and portfolio cleaning decreased the NPL ratio 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. The corporate NPL ratio is expected to stagnate Ratio of non-performing loans and the cost of provisioning in the corporate segment Source: MNB. 21

22. Share of defaulted loans stuck for years within the non-performing portfolio is significant... 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 25 Released capital Decreasing funding costs Potential for increased loan loss provisioning on the remaining stock Improved liquidity Decreasing risk of future losses Released human resources Improving maturity mismatch Improving portfolio quaility Growing risk appetite Released liquidity Increasing lending activity Improving profitability

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

27. Domestic banking sector continues to be characterised by weak profitability Return on equity in an international comparison Source: EKB CBD. 27

28. Persistently weak profitability hampers lending in support of sustainable growth Deterioration in asset quality and weak profitability are endogenous. Weak profitability Deleveraging Subdued portfolio quality Deteriorating ability to attract funds and capital Decreasing net incomes Reluctance to realize further losses Higher funding costs External vulnerability 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 low profitability may lead to consolidation and a higher concentration 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