At end-2015, non-performing loans amounted to €5.1 billion, equivalent to a NPL ratio of 11.7% and a NPL coverage ratio of 69.2%.
As part of the Vienna Initiative NPL workstream, EBRD supported the analysis of corporate restructuring and insolvency in Hungary to identify the key obstacles. The government also committed to best practices in resolving NPLs under a Memorandum of Understanding with the EBRD in February 2015. The results of the analysis were presented at a workshop hosted by the National Bank of Hungary (“MNB”) in March 2015.
Several measures have subsequently been taken by the Hungarian authorities, such as amending the Personal Bankruptcy Act (September 2015) and the official start of operation of the asset management company MARK (Q1 2016). Further actions are in progress, such as the amendment to the Bankruptcy Act (expected end 2016) and the development of new principles on multi-creditor out-of-court restructuring (‘Budapest Approach’). Regarding the latter, a second workshop was held in January 2016 with government officials, bank representatives and legal professionals. EBRD commissioned the production of a report and the draft MNB recommendation on out-of-court restructuring, to be presented to banks and industry professionals on 4 October 2016 in Budapest.
Hungary’s corporate sector debt is highly concentrated, with 10% of firms holding about 80% of total outstanding net debt. About 5% of firms are classified as extremely leveraged (leverage ratio exceeding 10), accounting for three-quarters of overall corporate excess debt. the 300 largest debtor firms hold 70% of overall corporate excess debt. One third of firms can be characterized as poorly performing with low or negative revenue growth rate and low return on capital.
Assessment of NPL Burden and Corporate Debt Distress
National Bank of Hungary, Financial Stability Report, November 2015
The share of corporate loans more than 90 days past due within the total corporate loans outstanding increased slightly to reach 14% at end-June 2015. This slight deterioration was the result of the considerable decline in the volume of the corporate portfolio. However, in the same period the ratio of loans overdue for 31–90 days declined considerably, to nearly one half compared to the end of the year.
At the same time, corporate portfolio quality showed an increasingly strong duality. The breakdown on NPLs shows that already more than half of the overdue loans in the corporate segment are attributable to project loans. In the case of project loans, the ratio of loans more than 90 days past due was already 27.3% at end-June 2015, while in the case of other corporate loans this ratio was 9.1%. Resolving the problem of project loans may be helped by the Hungarian Restructuring and Debt Management Private Company Limited by Shares (MARK Ltd).
IMF, Hungary -2016 Article IV Consultation Concluding Statement of the IMF Mission, February 2016
While supporting the authorities’ efforts to resolve legacy NPLs, the IMF mission in Hungary emphasizes the need to keep the operations of the asset management company for commercial real estate (MARK) fully transparent. The envisaged transfer of assets on a voluntary basis and at market-related prices, as noted by the Directorate-General for Competition of the European Commission, is welcome. Moreover, further strengthening of the governance structure would make MARK less vulnerable to market speculation about potential conflict of interests, in line with IMF technical assistance recommendations. Steps to improve financial intermediation should also entail lower state presence in the banking sector. To this end, the mission welcomes steps to privatize MKB in a transparent manner.
European Commission, Commission Staff Working Document, Country Report Hungary 2016, February 2016
The country entered the financial crisis with a relatively high level of private debt (close to 120% of GDP in 2009). This was accompanied by a high share of foreign currency denominated loans both in the corporate and household sectors (55% and 70%, respectively), resulting in a considerable currency mismatch in the economy. Uncertainties related to the regulatory and tax environment keep both country risk and banks’ risks at elevated levels. In parallel, the aggregated capital base remained adequate for most credit institutions and liquidity conditions were favourable, but net lending declined. The banking sector has been affected by low profitability and limited capacity to generate capital. Asset quality remains a major concern, with high NPL ratios in retail and corporate sectors.
European Investment Bank, CESEE Bank Lending Survey, H1 2016
Credit flows have been consistently negative since Q4 2008. NPL ratios have been perceived to improve both in the corporate and the retail sector over H1 2016. Looking ahead, NPL ratios are expected to show further pronounced improvements over H2 2016.
The restructuring and work-out of non-performing loans remain high on the agenda of Hungarian authorities. The elimination of the CHF-based mortgage portfolio represented a major first step, but a recent adjustment of the personal bankruptcy legislation, the expansion of the National Asset Management Agency for mortgage loans have also been important to incentivise portfolio cleaning in the household segment. In the corporate segment, the activity of the bad bank‘ (MARK Ltd.) may be one step towards a solution.
National reforms and support by the international organisations
Some of the recent reform measures
Electronic Sales System (EÉR): Launched on 1st January 2015 as an online platform for selling the assets of debtors in liquidation.
New Personal Insolvency Law: Amendment to the Personal Bankruptcy Act (September 2015) to simplify the existing framework and create an efficient personal bankruptcy system to provide relief to qualifying debtors and at the same time the creditor interests are taken into account. It is mainly intended for housing NPLs.
MARK Zrt sd: Created in q4-2014 to wind down part of the banks’ real estate NPLs. The design of MARK benefitted from IMF technical assistance, and was ruled free of state aid by the EU Commission in February 2016. It is expected to begin purchasing commercial real estate (“CRE”) exposure with the aim of reaching a significant drop in corporate NPL.
Report on “Analysis of Corporate Restructuring and Insolvency in Hungary”: Published in Q1 2015.
New principles on NPL out-of-court restructuring: Aim at strengthening existing guidelines (the “Budapest Approach”). Completion exp. q4 2016.
Amendments to the Bankruptcy Act: Under review by the Ministry of Justice, with amendments foreseen to be presented by the end of 2016 (estimation).
EBRD will also continue its cooperation with the Government and the Hungarian National Bank (MNB) as they take steps to enhance the legislative and institutional framework in support of NPL resolution. In this context, the Bank will continue to provide policy advice and technical assistance to enable faster and more efficient NPL resolution under the Vienna Initiative. Amongst others, EBRD will:
Seek opportunities to finance distressed assets across sectors to assist with NPL resolution and freeing up banks’ capacity for new lending.
Continue its ongoing technical assistance, under which legal and financial obstacles to corporate restructuring and NPL resolution have already been diagnosed. Based on this work, the MNB has requested EBRD assistance on a new bankruptcy law, and on private out-of-court restructuring principles. Other work with the Hungarian authorities will draw on the recommendations made by the working group of public and private sector stakeholders, using the Vienna Initiative’s platform.
Continue advising, as requested, on the governance of the AMC, and on portfolio sales and restructuring efforts by this entity. Advice would be clearly separated from any potential Bank interest in investment in portfolios sold by the AMC.
Assist with establishing a securitisation platform.
International Monetary Fund, 2016 Article IV Consultation, Press Release; Staff Report and statement by the Executive Director for Hungary, April 2016
While welcoming the beginning of operations of MARK, which would entail the transfer of assets on a voluntary basis and at market related prices, staff urged the authorities to further strengthen MARK’s governance structure in line with IMF technical assistance recommendations. To this end, staff welcomed considerations to transition to private sector funding and also, when a track record has been established, to revisit the ownership structure.
Improving financial intermediation should also entail lower state presence in the banking sector. The authorities noted that the recent expansion in state ownership of banks was necessitated by market failure as some foreign parent banks had decided to exit Hungary. They reiterated their commitment though to improve banks’ operating environment and to privatize the restructured MKB Bank and later Budapest Bank. Staff welcomed this commitment and stressed the importance of lifting uncertainty regarding the banking sector landscape, including by letting the number of credit institutions be market determined.
The new Personal Insolvency Law is a step in the right direction to reduce the uncertainty and costs of resolving debt of natural persons as well as to offer them a second chance, but its effectiveness is yet to be tested. The first phase became effective September 2, 2015, and applies to households whose dwelling would be subject to enforcement and sale, while other over-indebted persons will be covered effective October 1, 2016. This phasing is intended to give priority to those in most need and to reduce the administrative challenges. The procedures are complex and consideration is being given to streamline them and later, as experience is gained, to review the law.
Natural persons with debt between HUF 2 and 60 million (about €6,500 to almost €200,000) can under certain circumstances apply. They can initiate out-of-court debt settlement, under the coordination of the main creditor. In this case, the “Family Bankruptcy Services” check the legal conditions, and register the initiation and the settlement agreement in the official register. In the out-of-court procedure, the parties are free to reach any agreement, including in terms of repayment period. Debtors will usually be allowed to keep the ownership of their primary residence, provided it does not exceed a reasonable size and value.
Government of Hungary, National Reform Programme 2015 of Hungary,
Several barriers were identified impeding fast and efficient portfolio cleaning. On top of that a substantial impediment, particularly in the commercial real estate segment, is the subdued demand coupled with over-supply and significant frictions in the distressed debt management market. MNB is cooperating with the EBRD on possible recommendations.
As regards corporate NPL, MARK Hungarian Restructuring and Debt Management Ltd. established by the MNB in November 2014, is going to target commercial real estate exposure with the aim of reaching a significant drop in corporate NPL.
The Electronic Sales System (EÉR) was launched on 1st January 2015. EÉR provides an online platform for selling the assets of debtors in liquidation. Routine use of EÉR means to ease the administrative burden, the review of auctioned assets and the comparison of prices. Under the liquidation process, such assets (complete production units, real estate, etc.) are sold at a reasonable price that serve as a beneficial purchasing opportunity for production and service companies, which indirectly has an impact on businesses to stimulate and support them, and also to promote investment and maintain jobs. The anonymity of the application/bidding is expected to increase the price of assets, and may lead to higher return ratio of creditor claims.
European Commission, Commission Staff Working Document, Country Report Hungary 2016, February 2016
The restructuring and work-out of NPLs remain high on the agenda of Hungarian authorities but improvements in this area are not yet detectable in aggregate data. In the case of mortgage loans a recent adjustment of the personal bankruptcy legislation and the expansion of the National Asset Management Agency for mortgage loans may facilitate the resolution of some of the bad mortgage loans. Nevertheless, there still is the need for further incentives that would promote market solutions, in particular a more intense effort regarding mortgage loan restructuring. The quality of the corporate portfolio remains an unresolved issue with high impact on new lending. The activities of MARK may be one of the steps in a complex solution that could, similarly to the household segment, entail work on debt restructuring.
Central Bank of Hungary and EBRD conclude workshop on NPL resolution, March 2015
Piroska M. Nagy (EBRD) and Ádám Balog (MNB)
The Central Bank of Hungary (MNB) and the European Bank for Reconstruction and Development (EBRD) held a prominently attended workshop, on 3 March 2015, under the Vienna Initiative on ways to assist banks’ and the authorities’ efforts at the resolution of NPLs through concrete and sustainable actions. Leading bank groups operating in Hungary, potential investors and IFIs discussed the legal, tax and regulatory environment in Hungary for NPL resolution. The participants also examined in-house NPL management, including out-of-court restructuring and ways to facilitate sales of corporate NPL portfolios as well as experiences with asset management companies (“bad banks”).
Follow-up actions identified during the workshop include:
Re-examine the existing licensing requirement for NPL purchasers in line with other countries in the region.
Considering tax relief and other incentives for banks and debtors for cancellation of debt and debt for equity swaps in a restructuring context.
Greater cooperation among banks to promote early out of court restructuring and applying the Budapest corporate restructuring principles.
Considering a more significant role for banks as creditors in the bankruptcy (reorganisation) procedure as well as in the liquidation procedure and the appointment of the insolvency office holder.
Using the recently established asset management company on a fully commercial basis with strengthened governance to promote a secondary market for NPLs.
For more information on the event and its outcomes, please click on the links below.
Memorandum of Understanding between EBRD and the Government of Hungary
9 Feb 2015. Agreement aimed at strengthening the country’s financial sector, improving its level of efficiency and profitability and boosting the flow of bank credits to the private corporations and citizens.