December 18, 2017 / 1:40 PM / a year ago

Resurgent consumer puts Hungary's banks in good shape

* Low interest rates, pent-up demand drive hefty borrowing

* Moody’s sees “ample room” for credit expansion in CEE region

* Top lender OTP Bank sees further strong increases next year

* Central bank sees no risk of credit bubble in consumer segment

By Gergely Szakacs

BUDAPEST, Dec 18 (Reuters) - Resurgent household spending is helping Hungary’s banks mitigate a squeeze from record low interest rates as consumer lending soars to levels not seen since the 2008 financial crisis, a Reuters survey shows.

No longer weighed down by toxic foreign currency loans, and with large chunks of distressed assets purged from their books thanks to a buoyant economy, banks’ current pace of loan growth could signal the arrival of a new credit boom.

Yet, while loan growth has surged this year, by more than 50 percent at some banks, total household lending still falls short of pre-crisis levels, making the central bank reasonably confident the country is not risking a credit bubble.

With record low unemployment and the economy set to grow by about 4 percent this year and next, Hungarians no longer seem reluctant to borrow as double-digit wage rises over the past year has made them confident of their ability to repay.

K&H, the local unit of Belgian bank KBC, estimates total issuance of personal loans by the banking sector will reach 300 billion forints ($1.1 billion) this year, rising by nearly half from last year’s level.

Hungary’s biggest lender OTP said consumer lending next year could even surpass levels seen in 2007 - the last credit boom before the crisis - both in terms of its own loan book and across the market as a whole.

Despite such heady growth, the central bank says tighter borrowing requirements imposed after the financial crisis, such as on loan payments relative to income, will help keep loan growth within healthy bounds.

“The National Bank of Hungary sees no significant risk in the consumer loan segment either right now or looking ahead,” it said in an emailed response to Reuters. However, it said it continued to monitor market developments for risks.

While major central banks have started to tighten monetary policy, Hungary’s central bank has pledged to keep its base rate at a record low 0.9 percent for the foreseeable future and plans further measures in the 2018 election year to curb the costs of mortgage loans.

SCOPE FOR EXPANSION

Consumer confidence in Hungary hit a 15-year-high in December, just off record highs.

Eastern Europe’s robust economic growth, fuelled to a growing degree by higher consumption and relatively low levels of private sector debt, allow “ample room” for credit expansion, credit rating agency Moody’s said in a survey last week.

CIB Bank, the Hungarian unit of Italy’s Intesa Sanpaolo expects its volume of personal loans in 2017 to double compared to last year. State-owned Budapest Bank said its stock of personal loans surged 70 percent in January-November.

Moody’s said banks aimed to ease the squeeze on margins from record low interest rates by stepping up higher risk lending, to small businesses and consumer segments such as car loans, which carry higher interest rates.

Strong lending helped Hungary’s banks report a $1.9 billion net profit for January-September, the highest for the nine-month period since the financial crisis.

Mihaly Patai, head of the Hungarian Banking Association, told Reuters last month that retail lending could expand in the double digits for at least 2-3 years, helping banks achieve a 7-8 percent return on equity.

Banks say Hungarians are forking out more on delayed spending such as home renovations and car purchases, with new car registrations rising by an annual 21.4 percent in January-November, one of the fastest growth rates in the European Union.

“We can also see stronger demand in car financing and private buyers again resorting to financing options for low or medium-category vehicles, whereas these segments were previously dominated by cash buyers,” CIB told Reuters.

Rising imports of cars and other goods have started to eat into Hungary’s hefty foreign trade surplus, which has missed analyst forecasts every month but one since July, according to Reuters data.

“In our view, in parallel with the increase in consumption and investments, the import bill will increase further. Therefore, the monthly foreign trade surpluses will be lower than before,” Erste Bank analyst Orsolya Nyeste said in a note.

Combined with the central bank’s loose policy, that could make the Hungarian forint more volatile, she said.

Still, analysts in a recent Reuters poll expect the currency to make gains in 2018, regaining the ground it lost this year due to monetary easing.

$1 = 265.95 forints Reporting by Gergely Szakacs; Editing by Susan Fenton

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