BUDAPEST: Hungary's central bank said on Monday that a dearth of corporate lending risks slowing economic recovery and that its latest stress tests had shown banks were in a good position to withstand financial shocks.
The central bank has been urging commerical lenders to take on more corporate debt since they started deleveraging in the 2008-2009 financial crisis. Banks say demand from eligible corporate borrowers has remained weak.
In its twice-yearly financial stability report, the central bank said Hungary's commercial lenders' capital and liquidity position was "currently adequate" and for the first time since the start of the crisis all banks had passed a stress test.
That scenario is for a significant economic downturn as well as an exchange rate and interest rate shock due to a number of adverse external and internal developments.
Hungary is one of central Europe's most indebted nations and the central bank - whose governor, Gyorgy Matolcsy, is a close ally of Prime Minister Viktor Orban - projects 2016 growth of just 2.5 percent after 3.2 percent expected this year.
The bank has pledged to keep its record-low base rate at 1.35 percent for years and has extended its Funding-for-Growth Scheme to support corporate lending and flagged unconventional monetary easing to boost the slowing economy.
"There is still a risk of a creditless recovery," it said in its report. "Therefore, at present it is extremely important that banks and other institutions of the financial intermediary system be able to finance the economic upswing."
The central bank plans to extend its low-cost loans scheme into 2016 with an extra 600 billion forints ($2.05 billion) of cheaper funding and to launch measures to boost market-based lending to small and medium-sized businesses.
"The general upswing in market lending continues to be hindered by supply constraints," it said, noting that corporate lending remained below the 6-7 percent expansion that would be needed to support sustainable economic growth.
The central bank said lending to companies may grow 5-6 percent next year thanks to its stimulus programmes and could contribute to stronger lending in 2017.
"Taken together, we expect an expansion in corporate credit along the entire forecast horizon," it said, adding that weakness in corporate loan demand was also a problem.
It also said that in the future it would monitor the development of any "excessive concentration" of lending defined as a 50-percent market share of the three most active banks in services provided to retail and corporate clients.
The bank said commerical banks' profitability could improve over the next two years but remain low. This could be helped by further steps to improve cost efficiency as well as through more consolidation, the central bank said.
"The MNB (central bank) sees room for the consolidation of the Hungarian banking market through mergers so that potential profitability and economies of scale can increase," it said.
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