Hungary measures to curb FX lending may help banks

Moody's Investors Service believes that the measures being introduced by the Hungarian government to make foreign currency loans less accessible to the retail segment may help to improve the currency structure of the banking sector's loan portfolio. The rating agency argues that although the measures will support new forint lending, the risk related to the existing portfolios will remain.
According to Moody's, although the country's banking system as a whole closed the 2009 financial year in a relatively good shape, the underlying credit and funding risks related to the large portfolios of foreign currency loans remain. Therefore the rating agency views the recent initiatives of the government and the central bank to encourage forint-denominated lending (rather than foreign currency lending) in the retail segment to be positive for the banking system's financial stability in the long term.
The government's measures to curb foreign currency lending include introducing limitations on loan-to-value ratios (LTV) based on the currency and on clients' capacity to service their debts, while the central bank also wants to support liquidity in local currency debt markets through forint-denominated covered bond purchases.
Moody's said that the government's initiatives in particular may be able to lead to change in the currency structure of new lending towards domestic currency, although this will also depend on the continued narrowing of the interest rate differential between forint and foreign currency loans.
Stricter conditions for foreign currency loans could also, according to Moody's, result in better credit risk for new loans, as the lending limit creates an income buffer for the borrower when the forint weakens. At the same time, lower LTVs decrease the banks' potential loss in the case of default, especially when forint weakening inflates the value of the loan in comparison to the value of the collateral.
However, Moody's noted that loan-to-value and lending limits do not affect the existing foreign currency portfolio which will remain a risk factor for the Hungarian banking sector in the medium to long term. With new retail lending unlikely to grow at the same pace as in the past and long amortisation of retail loans secured by real estate, the change in the asset structure will be gradual and the risks linked to these loans are unlikely to decline substabtially in the near future or before Hungary's Eurozone entry. Moody's said that therefore this area will remain a key target for analysis.