New NSFR-style regulation in Hungary is spurring an expansion of the country’s covered bond market that will see the number of issuers double and could encourage an eventual return to euros, after Erste Mortgage Bank ushered in the new generation with a HUF20bn debut last month.

Before Erste’s inaugural issue, only three Hungarian institutions had sold covered bonds – OTP Bank and UniCredit Bank Hungary through specialist mortgage bank subsidiaries, and FHB Mortgage Bank, a standalone issuer. However, new names are joining the market, encouraged by regulation in the vein of the Net Stable Funding Ratio (NSFR).

The Hungarian National Bank (MNB) announced in June 2015 that it would from 1 October 2016 require banks to fund at least 15% of their residential mortgage loans through long term liabilities, under the Mortgage Funding Adequacy Ratio (MFAR).

“There are quite big changes taking place in the Hungarian market, and this is the most important,” said András Botos, deputy CEO of Erste Mortgage Bank. “This is why we will have three new mortgage banks – one of them ours – alongside the three old mortgage banks.”

Erste Mortgage Bank, the issuing entity of Erste Bank Hungary, commenced operations on 1 July before launching a debut covered bond offering on 17 October. The bank printed a HUF20bn (Eu65.2m) issue comprising two HUF10bn tranches, a three year and a five year, after taking combined orders of HUF72bn.

MKB Bank, a former BayernLB subsidiary that was nationalised in 2014 before being sold to a consortium of investors this summer, is obtaining licenses for a specialist subsidiary. MKB Mortgage Bank is expected to begin operations and issue its first covered bond in early 2017, a spokesperson told The CBR.

K&H Bank, a subsidiary of KBC Bank, is also understood to be in the process of establishing an issuing entity.

The MFAR was introduced to reduce a maturity mismatch that resulted from the conversion of households’ foreign currency mortgage loans into forints last year, as such loans – mainly denominated in Swiss francs – were phased out.

The MNB said banks that did not already have specialised mortgage banks, which are required for the issuance of covered bonds under Hungarian law, would be given time to establish issuing entities. According to Botos, the central bank has informed the banking community that the mortgage financing requirement will be raised to 20% in 2018.

The MNB expects the MFAR to encourage the issuance of around HUF300bn (Eu973m) of mortgage bonds.

Botos said the requirements could also lead Hungarian issuers to consider euro-denominated issuance.

“For now this size and this volume was the right thing to do,” said Botos. “However, along with the raising of the MFAR up to 20% in 2018 and the possible pooling of partner banks’ cover assets, the investor base in Hungary might be quite narrow for us to meet the regulatory requirement.

“I would guess that Hungarian issuers will eventually have to return to the European markets again.”

The established issuers of OTP – Hungary’s largest bank – and FHB sold the country’s only euro benchmark covered bonds before the financial crisis, and issuance post-crisis has been limited to the domestic market.

Botos added that if they go back to the European market, Hungarian issuers will likely opt for benchmark-sized trades.

“We cannot properly tap the European market otherwise,” he said. “We will need large and frequent issuances.”

Photo credit: Erste Bank