Fitch Warn On Swiss Franc Loans

Fitch Ratings has said on 13 May 2008 that foreign currency lending in Swiss francs and Japanese yen remains an important additional risk to the Hungarian banking sector's financial stability and is unlikely to disappear in the near future.

In a special report published today, Fitch noted that “full-cycle credit costs of foreign currency loans are hard to estimate, given the still adequate credit environment and overall favourable movements in foreign currency. In particular, foreign currency lending to retail borrowers is risky as these customers have typically no foreign currency income sources and are therefore unhedged."

“The asset quality of retail loan portfolios at Hungarian banks has not deteriorated materially to date. However, this needs to be seen in the light of a banking sector that, like in other CEE countries, has not yet been subject to a full economic cycle, irrespective of the economic slowdown since 2007," said Michael Steinbarth, Director in Fitch's Financial Institutions team.

“In addition, the HUF weakening has only been temporary so far and is not sufficiently long to pose serious asset quality problems for the banks," he added.

“The mostly favourable currency and interest rate movements so far have left borrowers and lenders with a perspective of limited downside risks," Fitch said, adding that it understands that while the National Bank of Hungary (NBH) has reacted to inflationary pressures stemming from a softer HUF to date, “it may prove risky to rely on the central bank to continue hiking rates if the HUF weakens further".

“In addition, the re-emergence of global inflationary pressures is also likely to pose another additional risk factor as potential global interest rates hikes could affect the asset quality of foreign currency loans extended by Hungarian banks."

Foreign currency loans have grown continuously over the last four-to-five years as interest rates on them are substantially lower compared to loans in HUF.

At end-2007, around 90% of new retail lending was in foreign currency, in particular in Swiss francs, Fitch noted, adding that retail loans in foreign currency totalled around HUF 3,216 billion or about a fifth of the banks' gross loan books.

At present “the banking sector is sufficiently capitalised and can withstand some external shocks," Fitch said, adding, however, that “this could change if there were to be multiple shocks, including a prolonged weakening of the HUF and a sharp correction of real estate prices".