Economy
Moody's downgrades seven Hungarian banks after sovereign debt rating cut
Further, Moody's lowered to Baa3 from Baa1 the country's ceiling on foreign currency bank deposit ratings; this has caused a more pronounced downward adjustment to the foreign currency deposit ratings of the three highest rated banks.
Moody's notes that “today's rating actions are not driven by a change in the agency's view on the Hungarian banks' intrinsic financial strength, which is captured in the banks' stand-alone bank financial strength ratings ratings, the BFSRs." These ratings remain unchanged.
The rating actions on the affected banks are as follows:
OTP Bank (the local and foreign currency deposit ratings downgraded to Baa2 and to Baa3, respectively);
OTP Mortgage Bank (the local and foreign currency deposit ratings downgraded to Baa2 and to Baa3, respectively);
K&H Bank (the local currency and foreign currency debt ratings downgraded to Baa1 and to Baa3, respectively);
MKB Bank (the local and foreign currency deposit ratings downgraded to Baa3);
Erste Bank Hungary (the local and foreign currency deposit ratings downgraded to Baa3),
MFB Development Bank (the foreign currency deposit and debt ratings downgraded to Baa3) and
Budapest Bank (the foreign currency deposit rating downgraded to Baa3).
Moody's has also confirmed the deposit ratings of FHB Mortgage Bank at Baa3/Prime-3 with a negative outlook.
Ratings rationale
“The downgrade of the Hungarian government's rating has prompted Moody's to lower its assessment of the capacity of the Hungarian government to support its banking system, consistent with the change in the sovereign debt rating. Moody's utilises a 'systemic support indicator' as the anchor to measure a country's capacity to support its banking system in case of need, and this is used by Moody's to assign the supported deposit and debt ratings of banks."
“Hungary's systemic support indicator remains positioned one notch above the national government's debt rating. The rationale for maintaining the country's support indicator above the government rating -- despite the government's weakened fiscal position -- incorporates the range of (financial and nonfinancial) tools that could be deployed by the Hungarian government and the country's central bank to assist banks in case of need."
“Moody's notes that today's rating actions are not driven by a change in the agency's view on the Hungarian banks' intrinsic financial strength, which is captured in the banks' stand-alone ratings, the BFSRs. Moody's added, however, that the BFSRs of all the Hungarian banks currently have negative outlooks, reflecting concerns regarding the development of their credit strength, in a continuing difficult operating environment. These negative outlooks have been in place since mid-2009 and will be resolved within the coming few months."
“Moody's noted that a key vulnerability influencing the current negative outlook of the Hungarian banks is their high level of foreign currency lending (70% of total loans are denominated in a foreign currency), with many borrowers, particularly in the retail sector, being unhedged with respect to the currency risk on these loans."
“As a result, there is significant vulnerability to a depreciation of the Hungarian Forint, or to an increase in interest rates linked to these foreign currencies. More generally, Moody's noted that asset quality continues to deteriorate in Hungary and said that it will assess the extent to which this trend continues."
“Conversely, Moody's acknowledged that the Hungarian banks are relatively well capitalized, providing a cushion to absorb potential losses. Further, Moody's credit assessment of the Hungarian banks also benefits from a high level of foreign ownership -- 80% of the Hungarian system, measured by assets, is foreign owned."
“The foreign owners of Hungarian banks have so far provided support in terms of both capital and foreign currency liquidity through the crisis of recent years and, at present, there is no evidence that this support would not remain forthcoming. Of the eight banks rated by Moody's in Hungary, four are foreign-owned (K&H Bank, MKB Bank, Erste Bank Hungary, Budapest Bank)."
“Despite the downward adjustment in the country's systemic support indicator, the deposit and debt ratings of these banks continue to receive significant uplift from Moody's assessment of parental support. Moody's, however, cautioned that it will continue to assess the likely level of parental support. The difficult operating environment and more modest profitability may at some point render further investment in Hungarian banks less attractive to their foreign owners."
Moody's notes that “today's rating actions are not driven by a change in the agency's view on the Hungarian banks' intrinsic financial strength, which is captured in the banks' stand-alone bank financial strength ratings ratings, the BFSRs." These ratings remain unchanged.
The rating actions on the affected banks are as follows:
OTP Bank (the local and foreign currency deposit ratings downgraded to Baa2 and to Baa3, respectively);
OTP Mortgage Bank (the local and foreign currency deposit ratings downgraded to Baa2 and to Baa3, respectively);
K&H Bank (the local currency and foreign currency debt ratings downgraded to Baa1 and to Baa3, respectively);
MKB Bank (the local and foreign currency deposit ratings downgraded to Baa3);
Erste Bank Hungary (the local and foreign currency deposit ratings downgraded to Baa3),
MFB Development Bank (the foreign currency deposit and debt ratings downgraded to Baa3) and
Budapest Bank (the foreign currency deposit rating downgraded to Baa3).
Moody's has also confirmed the deposit ratings of FHB Mortgage Bank at Baa3/Prime-3 with a negative outlook.
Ratings rationale
“The downgrade of the Hungarian government's rating has prompted Moody's to lower its assessment of the capacity of the Hungarian government to support its banking system, consistent with the change in the sovereign debt rating. Moody's utilises a 'systemic support indicator' as the anchor to measure a country's capacity to support its banking system in case of need, and this is used by Moody's to assign the supported deposit and debt ratings of banks."
“Hungary's systemic support indicator remains positioned one notch above the national government's debt rating. The rationale for maintaining the country's support indicator above the government rating -- despite the government's weakened fiscal position -- incorporates the range of (financial and nonfinancial) tools that could be deployed by the Hungarian government and the country's central bank to assist banks in case of need."
“Moody's notes that today's rating actions are not driven by a change in the agency's view on the Hungarian banks' intrinsic financial strength, which is captured in the banks' stand-alone ratings, the BFSRs. Moody's added, however, that the BFSRs of all the Hungarian banks currently have negative outlooks, reflecting concerns regarding the development of their credit strength, in a continuing difficult operating environment. These negative outlooks have been in place since mid-2009 and will be resolved within the coming few months."
“Moody's noted that a key vulnerability influencing the current negative outlook of the Hungarian banks is their high level of foreign currency lending (70% of total loans are denominated in a foreign currency), with many borrowers, particularly in the retail sector, being unhedged with respect to the currency risk on these loans."
“As a result, there is significant vulnerability to a depreciation of the Hungarian Forint, or to an increase in interest rates linked to these foreign currencies. More generally, Moody's noted that asset quality continues to deteriorate in Hungary and said that it will assess the extent to which this trend continues."
“Conversely, Moody's acknowledged that the Hungarian banks are relatively well capitalized, providing a cushion to absorb potential losses. Further, Moody's credit assessment of the Hungarian banks also benefits from a high level of foreign ownership -- 80% of the Hungarian system, measured by assets, is foreign owned."
“The foreign owners of Hungarian banks have so far provided support in terms of both capital and foreign currency liquidity through the crisis of recent years and, at present, there is no evidence that this support would not remain forthcoming. Of the eight banks rated by Moody's in Hungary, four are foreign-owned (K&H Bank, MKB Bank, Erste Bank Hungary, Budapest Bank)."
“Despite the downward adjustment in the country's systemic support indicator, the deposit and debt ratings of these banks continue to receive significant uplift from Moody's assessment of parental support. Moody's, however, cautioned that it will continue to assess the likely level of parental support. The difficult operating environment and more modest profitability may at some point render further investment in Hungarian banks less attractive to their foreign owners."
