Hungary PM Proposes Home Mortgage Loans Only In Forint

The PM has not disclosed when the measure would be put into effect.

Portfolio.hu viewpoint:

Although Orbán has not disclosed the details of this particular plan, i.e. when and how the ban on FX lending will be implemented, the objective is clear: to make forint lending the only available option. While the proposal appears quite radical at first sight and it is certain to trigger heated debates, we should ponder about the following:

1. Local lenders hardly extend CHF-based mortgage loans anymore (AXA Bank is the last to cancel CHF lending as a result of the strict regulations brought to the market in March. A government decree capped the loan-to-value (LTV) ratio at 75% on forint loans, 60% at euro loans and 45% at Swiss franc loans as of 1 March 2010.)

2. As CHF-based lending has practically dried up, households first started to seek EUR loans, but as forint interest rates gradually declined - HUF loans cannot really compete with CHF loan terms, but it has an easier job versus EUR loans - forint loans became more popular thi year and 70% of mortgage loans were taken out by households in HUF in April.

3. Most of the banks firmly believe that the future lies in HUF-based lending; they boast high forint liquidity. While difficulties to pay the monthly installments is generally not related to exchange rate risks, we need to note that in a persistently low interest rate environment the quality of forint loan portfolios could improve and the banks’ FX loan losses could decrease.

The majority of the players in the banking sector presumably penciled in a proliferation in HUF lending for this year (with regard to their ratio to total lending, not in absolute volume terms), therefore a possibly smaller interest rate margin on HUF loans than planned may not cause a dramatic decline in their net interest income.

4. The weakest point in the radical-looking proposal is the interest rate on HUF loans. If the new government fails to pursue a disciplined economic policy or the global environment worsens dramatically again, interest rate risks will become a bigger danger than exchange rate risks would be. OTP Bank Chairman-CEO Sándor Csányi has recently estimated that two percentage points worth of interest rate risk in OTP’s portfolio equals an exchange rate risk of 10%.

Presently, if a customer deems HUF loan interest rates too high, he could always choose an EUR-based loan instead, although stricter LTV restrictions apply (60% vs. 75% at HUF loans). If the government makes an extraordinarily bad move and its credibility is hit again, interest rates on HUF loans will rise and this option will be no more. Then the cabinet may be forced to re-implement interest rates subsidies to boost local borrowing. In that case EUR-based lending - as an emergency exit - may prove to be a cheaper solution.

5. Those receiving regular payments in euro could feel cheated and punished, as they are covered naturally. Subsequently, it should be worth considering keeping the door open for them for EUR-based mortgage loans. Of course, this exception can still be embedded in the relevant law to be made.

6. While the whole proposal to ban FX lending may lead to harsh consequences, in fact it fits into current trends due to the risks listed in the 4th point (botched economic policy) and could lead to a faster-than-expected disappearance of FX mortgage loans. The idea, however, shows that the Orbán cabinet feels that the aforementioned government decree (that enters into force in two stages, on 1 March and 11 June) is insufficient. Meanwhile, that regulation seemed good enough to force banks to pursue disciplined lending policies.

"The banning of FX loans is a bit of a surprise and it is unclear how this will be implemented, but it will help reduce some of the risks in the Hungarian financial system. However, the market impact of this is unclear as we still don’t know how this will be introduced," commented Lars Christensen, chief analyst at Danske Bank in Copenhagen.

"Furthermore, it will probably be hard to execute in any meaningful way and there will undoubtedly be several loopholes to get around such a ban. In addition, an outright ban might be in conflict with EU rules. A ban on FX loans combined with the new bank tax is likely to hammer credit growth significantly in Hungary in a situation where credit growth is already very lacklustre," he added.

"The ban on FX-lending practically solidifies a situation that has already become reality, but the outright ban, coupled with the bank tax, could suppress loan dynamics, thereby representing a downside risk to growth," said György Barta, research analyst at CIB Bank in Budapest.

Gyula Tóth, analyst at UniCredit in Vienna, believes that the announced measures could have a "very negative impact" on lending activity in the future.

"The complete ban of FX mortgages (which probably will not work properly anyway inside the EU as banks have the ability to provide loans directly from abroad) and the significant amount of bank tax means we see upward risk to HUF denominated loan rates which could partially offset the positive impact of the recent NBH rate cuts," Tóth said."

Source: Portfolio Online Financial Journal