(Updates with detail)
BUDAPEST, April 6 (Reuters) - Hungarian banks' profitability will fall this year and they face increasing liquidity and solvency risks but the sector as a whole has sufficient capital to handle potential losses, the central bank said on Monday.
"The economic downturn, rises in the costs of external funding and the weakening of the exchange rate have had adverse effects on domestic banks' solvency through a slowdown in lending and a deterioration in loan portfolio quality," the central bank said in a statement about its new financial stability report.
"Currently the banking sector has sufficient capital buffers to absorb losses. However, strengthening banks' capital position further could help counteract the negative effects of the worse-than-expected economic and financial market environment," it added.
The sector's crunch will cut banks' pre-tax profit to 100-200 billion forints in 2009 from 350 billion forints in 2008 but profitability is seen rising again in 2010 and banks are expected to generate a profit of 150-250 billion forints next year, the central bank said.
Return on equity is seen at 5-10 percent at the end of this year and 7-12 percent at the end of 2010.
Banks capital adequacy ratio is seen remaining above 10 percent this year after hitting 11 percent last year, the bank added.
Bank sector lending could be sluggish this year due to the economic downturn but weakness could also be amplified by two major factors:
"First, due to the higher credit risk banks may raise the costs of access to finance for firms, which, in turn, may lead to a further reduction in credit demand," the bank said.
"Second, banks' supply of credit - mainly to the corporate sector - may drop by more than expected, due to declining risk tolerance." (Reporting by Balazs Koranyi and Sandor Peto; Editing by Ron Askew)