Tuesday, 8 May 2012

Credit Hunger in Hungary

"An important lever for sustained action in tackling poverty and reducing hunger is money." - Gro Harlem Brundtland

As a follow up to our pet subject Hungary ("Hungarian Dances") which we discussed in more details a couple of days ago ("Hungarian Borscht"), we argued that a credit crunch in Hungary would happen no matter what.

A recent article from Bloomberg confirmed our fears related to Erste Banks results:
"Hungary Loan Growth Non-Existent at Erste Amid Uncertain Outlook:
Lending at Erste, owner of the second-biggest bank in Hungary, shrank in 1Q as downsizing continued. Customer loans fell 13% from 1H11 to $9 billion, as interest rates on local currency loans remained high and forex retail lending was abandoned altogether. Erste does not expect an improvement in the economy until an IMF-EU bailout package is agreed."
Source Erste Bank - Q1 2012 results presentation - 30th of April 2012.

While Customer loans by currency are falling by overall remain at elevated levels:
Source Erste Bank - Q1 2012 results presentation - 30th of April 2012.

We noticed as well a significant rise in Erste Bank Hungary Non-performing loans as well:

Source Erste Bank - Q1 2012 results presentation - 30th of April 2012.

As a reminder from our conversation "Modicum of relief":
"It is not a surprise to see how impaired its lending capacity is given its:
-loan-to-deposit ratio of 192%, the highest in the sector.
-the proportion of non-performing loans in the bank's portfolio rose to 20.5% in 2011 from 11.7% in 2010 (The rate in the retail portfolio increased to 16.3% from 11.4%, while the rate in the corporate portfolio climbed to 29% from 12.5%)."

We also said in this conversation:
"Rising non-performing loans is a cause for concern as well as rising loan-to-deposit ratios."

Risk costs at Erste Bank Hungary increased on additional extraordinary provisions (EUR 75.5 mios) relating to the interest subsidy scheme for performing FX loans imposed by legislation.
-NPL ratio increased to 23.5%
-NPL coverage declined as expected from 70.3% at YE 11 to 68.4% at March 2012.

Risk provisions are well increasing for the corporate segment, with NPL ratio increasing to 14.1% as of March 2012 compared to 12.8% at YE 11.

On a final note, Slovenia reveals risk in smaller Euro Nations (as Hungary does) as indicated by Bloomberg:
"The CHART OF THE DAY shows the International Monetary Fund cut its forecast for Slovenian economic growth by the most among the 14 euro sharing nations whose generic 10-year yield indexes are compiled by Bloomberg. The former Yugoslav republic’s borrowing costs have surged the most since the 17-member euro area’s debt crisis began threatening Italy and Spain in November.
Slovenia’s public debt is “on an unsustainable footing,” said William Jackson, an emerging-markets economist at Capital Economics in London. “We still shouldn’t overlook the growing risks in the smaller peripheral euro zone economies.” Like Spain, Slovenia is trapped by spending cuts that reduce economic growth, making it harder to stabilize its debt burden. Austerity measures have put Slovenia into a second recession in three years, and the slowdown in key export markets such as Italy is weighing on the growth outlook, Jackson said.
The country’s public debt has more than doubled since it adopted the euro in 2007, reaching 47.4 percent of gross domestic product last year. The government, which came to power in February, pledged to cut spending by 800 million euros ($1.04 billion) and reduce the budget deficit to below the EU’s limit of 3 percent of GDP by the end of the year."

Risks in these smaller European countries should not be overlooked.

"Nationalism is power hunger tempered by self-deception." - George Orwell

Stay tuned!

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