March 1, 2012 / 11:31 AM / 5 years ago

UPDATE 1-Hungary faces dismal lending conditions -cbank

* Deteriorating funding weakens banks' lending capacity -cbank

* Credit conditions for companies are tightening further

* Competition for external funding becoming more difficult (Adds detail, analyst comment)

By Gergely Szakacs

BUDAPEST, March 1 (Reuters) - Hungarian banks' lending capacity has deteriorated to an extent not seen since the 2008 financial crisis, the central bank said on Thursday, warning of a further tightening of credit in an economy already teetering on the brink of recession.

In its quarterly survey on lending practices the bank said the trend was not unique to Hungary as credit conditions in the private sector have tightened across the euro zone and the central European region in the fourth quarter.

But in Hungary, that was compounded by Europe's highest bank tax to plug holes in the government budget, as well as a foreign currency mortgage relief scheme for households, which inflicted about 300 billion forints ($1.39 billion) of losses on banks.

The central bank announced new measures last month, including a two-year collateralised credit facility and a mortgage bond purchase programme, to aid lending to a moribund economy hit by domestic austerity and slowing exports.

But in its quarterly survey the National Bank of Hungary (NBH) said even these measures could only "mitigate" the deterioration in lending capacity.

"In the corporate segment, credit conditions were reported to have tightened as well, and a significant portion of the banking sector is planning further tightening in the next half year," the survey said.

It said the main problems were a shrinkage of external funding and rising foreign currency funding costs as major euro zone banks are strengthening their balance sheets, which also made regional competition for funding harder for domestic banks.

"The deterioration in lending capacity was last reported by such proportion of banks upon the outbreak of the September 2008 crisis," it said.

The survey said demand for long-term loans, mainly for investment, was not rebounding and based on banks' replies, lenders do not expect a rebound in investment loans in the first half of the year.

That is in stark contrast to nearby Poland, the region's biggest economy, where bullish investment growth lifted annual economic growth to 4.3 percent in the fourth quarter, more than triple the 1.4 percent pace seen in Hungary over that period.

"The danger is that with banks being forced to make hard decisions about where they deploy capital they don't need an excuse to more aggressively deleverage in economies like Hungary where credit/policy risk and the growth outlook is weak," said analyst Tim Ash at RBS.

The government, which is seeking a multi-billion-euro funding deal from the International Monetary Fund and the EU to cut borrowing costs and retain market access, is also in talks with banks on ways to revive weak lending and help the economy.

"The NBH has been proactive in trying to kick start credit - as equally important will be real efforts by the government to quickly close a new financing agreement with the EC/IMF," Ash said.

A dispute between the government and its lenders over controversial legislation has prevented a new funding deal from being signed-off.

The survey said banks also expected to keep lending to the local government sector, which they now see as "very risky", strongly restrained. Banks also expected to tighten borrowing conditions further for households over the next six months. ($1 = 215.23 Hungarian forints) (Reporting by Gergely Szakacs)

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