NPL resolution: a macro view
MNB-EBRD workshop on debt Restructuring and NPL
Resolution in Hungary
Gergely Fábián
High corporate NPL has been a problem for years
Magyar Nemzeti Bank
2
Note: Banking sector does not include foreign branches , cooperative savings. Restructured loans in this decomposition is available since 2012.
Source: MNB.
Distressed corporate portfolio in the Hungarian banking sector
0 15 30 45 60 75 0 5 10 15 20 25 2 0 0 9 Q 1 Q2 Q3 Q4 2 0 1 0 Q 1 Q2 Q3 Q4 2 0 1 1 Q 1 Q2 Q3 Q4 2 0 1 2 Q 1 Q2 Q3 Q4 2 0 1 3 Q 1 Q2 Q3 Q4 2 0 1 4 Q 1 Q2 Q3 Q4 per cent per cent
NPL ratio - gross Restructured (excl. NPL)
There has not been notable portfolio
cleaning in the past 6 years
Magyar Nemzeti Bank
3Source: MNB.
Factors affecting changes in the ratio of non-performing
corporate loans in the banking sector
-3 -2 -1 0 1 2 3 4 -3 -2 -1 0 1 2 3 4 2 0 0 8 Q 1 Q4 Q3 Q2 2 0 0 9 Q 1 Q2 Q3 Q4 2 0 1 0 Q 1 Q2 Q3 Q4 2 0 1 1 Q 1 Q2 Q3 Q4 2 0 1 2 Q 1 Q2 Q3 Q4 2 0 1 3 Q 1 Q2 Q3 Q4 2 0 1 4 Q 1 Q2 Q3 Q4
Stock component Portfolio cleaning component
Portfolio impairment component Change in NPL ratio
percentage point percentage point
One-off
sales to
parent
bank
As a result, distressed loans are stuck for years
Distribution of corporate NPL according to time elapsed since
becoming non-performing
Magyar Nemzeti Bank
4Source: Central credit registry (CCR).
Lar
ger
loans
mi
gh
t
ha
ve
been
re
tsr
uc
tur
ed
in
mor
e
cases
A particular concern is commercial real estate
loans segment
Magyar Nemzeti Bank
5Source: MNB
Distressed project and other corporate loans within the banking sector
6 9 12 15 18 21 24 27 30 33 0 200 400 600 800 1 000 1 200 1 400 1 600 1 800 2 0 1 2 Q 1 Q2 Q3 Q4 2 0 1 3 Q 1 Q2 Q3 Q4 2 0 1 4 Q 1 Q2 Q3 Q4 per cent HUF Bn NPL - project financing
Restructured (excl. NPL) project financing NPL - other corporate loans
Restructured (excl. NPL) other corporate NPL ratio - project financing (right-hand scale) NPL ratio - other corporate loans (right-hand scale)
Stronger cleaning is needed in the CRE segment
Magyar Nemzeti Bank
6Source: MNB
Sales of distressed project loans in the banking sector
0 10 20 30 40 50 60 70 0 20 40 60 80 100 120 140 2010 2011 2012 2013 2014 per cent HUF bn
Total gross volume
Volume excluding sale within group
NPL weighs on lending, but not a peril to
financial stability
Corporate lending and non-performing loans
Magyar Nemzeti Bank
7Source MNB.
Uncertainty in LGD
Funding needs without
interest income
Opportunity costs as
funds and capital is tied
Resources are tied
Excessive risk aversion
Higher funding costs
Why is it not cleaned?
8
Excess supply and a lack of
demand for distressed assets
Wait-and-see strategy
by banks
Concealing losses in books
Accommodative monetary policy
helps banks procrastinating.
Sluggish legal procedures
Subdued capacity of
domestic players
Lack of concluded deals lower
interest
Not just price, but size,
proper information issue
Laissez-faire by
authorities
Pricing mismatch
High vacancy in international comparison, but
there is an improvement recently
Magyar Nemzeti Bank
9 Source: Jones Lang LaSalle.0
2
4
6
8
10
12
14
16
18
20
0
2
4
6
8
10
12
14
16
18
20
Hung
ary
Ir
ela
nd
Net
her
la
nd
s
Rus
si
a
Cz
ech
Rep.
It
al
y
(Milan)
Spa
in
P
ol
and
B
el
gi
um
Ger
ma
ny
Fr
an
ce
U
ni
ted K
ingd
om
Lux
em
bour
g
%
%
Vacancy rate (2013 Q4)
Vacancy rate (2014 Q4)
Low capacity from domestic players
Magyar Nemzeti Bank
10 Source: MNB, CCR.Non-performing corporate exposures of workout factoring companies
and the average contract size (end 2014)
0 10 20 30 40 50 60 70 80 90 0 20 40 60 80 100 120 140 160 180 1 2 3 4 HUF million HUF Bn Financial institutions
Significant heterogeneity in market prices
Magyar Nemzeti Bank
11 Source: MNB.Sale prices and net values compared to gross value of
individual distressed project loans (2010-2014)
0 10 20 30 40 50 60 70 80 90 100 110 0 10 20 30 40 50 60 70 80 90 1 0 0 1 1 0 Sa le p ri ce / Gr oss va lue (p er c en t)
Net value/ book value ( per cent)
Room for improvement in insolvency
procedure, but not at any cost
Magyar Nemzeti Bank
12 Source: World Bank Doing Business 2014.0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
0
10
20
30
40
50
60
70
80
90
100
So
uth A
si
a
La
ti
n A
mer
ic
a
OEC
D high i
nco
me
Hun
ga
ry
Slova
ki
a
Pol
an
d
It
al
y
Cz
ech
Repu
b
lic
U
ni
ted S
tat
es
Aust
ri
a
Ger
many
U
ni
ted K
ing
dom
Neth
erl
and
s
B
el
gi
um
years
per cent
Cost of insolvency procedures (as percentage of estate)
Recovery rate (percentage of debt)
Time span of insolvency procedures (right hand scale)
MNB’s approach
• Co-operation with EBRD from February 2014 on
the legal and regulatory framework
• Setting-up an AMC (MARK Zrt) to tackle the
problems in the CRE segment
• Tighter prudential rules, justified by the
uncertainties in the balance-sheets from stuck
portfolio
The established asset management company is
MARK-et tool for portfolio cleaning
• Specialized, separate commercial operator, a willing buyer
acting knowledgably
• with a sole focus on maximizing profit
• 10-year horizon with a limited enrolment window
• With professional staff
• Marked-based funding and prudent valuation based on
thorough due diligence
• Following discussions with ECB and EC the strategy is
changed – Shift to market pricing
• IMF technical assistance on operations, hence working
group with banks
• In the following months finalizations of operations
Targeted and focused solution with limited risks
15
