MOODY'S ASSIGNS RATINGS TO FIVE MAJOR HUNGARIAN BANKS
Limassol, April 1, 1996 -- Moody's Investors Service assigned ratings for foreign currency deposits and for bank financial strength to five large banks in Hungary. Ratings assigned were the following:
Kereskedelmi & Hitel Bank Rt. (KHB. -- ratings of Ba2 for long-term deposits, Not Prime for short-term deposits, and D for bank financial strength.
Magyar Hitel Bank Rt. (MHB) -- ratings of Ba3 for long-term deposits, Not Prime for short-term deposits, and E+ for bank financial strength.
Magyar Kulkereskedelmi Bank Rt. (MKB) -- ratings of Ba2 for long-term deposits, Not Prime for short-term deposits, and D+ for bank financial strength.
Orszagos Takarekpenztar es Kereskedelmi Bank Rt. (OTP Bank) -- ratings of Ba2 for long-term deposits, Not Prime for short-term deposits, and D+ for bank financial strength.
Postabank es Takarekpenztar Rt (Postabank) -- ratings of Ba2 for long-term deposits, Not Prime for short-term deposits, and D for bank financial strength.
Moody's said that the deposit ratings of four of the banks it rated -- KHB, MKB, OTP, and Postabank -- are constrained by the sovereign ceiling for foreign currency bank deposits that Moody's has established for Hungary, at Ba2 for long-term deposits and Not Prime for short-term deposits. The deposit ratings are opinions of an institution's overall credit risk, and as such, incorporate
external credit factors (such as foreign-currency transfer risk) as well as credit supports that exist in addition to bank-specific elements. The bank financial strength ratings, on the other hand, are Moody's opinion of an institution's intrinsic safety and soundness on a stand alone basis, and these exclude external credit factors. Moody's pointed out that the five banks hold about 60% of total Hungarian bank assets.
The credit, debtor and bank consolidation measures carried out by the government from 1992 to 1994 helped to solidify the situation of the large banks. The schemes helped to relieve certain banks of their troubled lending and provided them with additional capital, enabling them to meet minimum capital-adequacy requirements. In addition to providing capital, the debtor and bank consolidation program, administered under bank specific agreements, caused some banks to streamline their organization and to restructure themselves more efficiently. Not all of the large banks received assistance under each measure of the program -- only those that required it. The most needy banks were those spun out of the National Bank of Hungary with loans to state-owned institutions from the former system, and with modest capital bases.
Like their counterparts in other Central European countries, the large Hungarian banks have made significant advances in a short time, broadening their skill base, enhancing their service capability, and beginning the installation of modern management information systems. Nevertheless, the banks have not yet attained their full development potential, and the environment in
which the banks operate is still undergoing a transition to a market-based economy. Moody's said that the banks are continuing to restructure themselves and adding services so that the competitive tenor of the market is still developing. The market is somewhat segmented, as a vestige of the former system. OTP dominates the retail sector, and the other large banks tend to be strong in particular sectors of the economy. Broad-based universal-style banking competition has not yet fully developed. The pace of competition
should pick up as local banks begin to compete more actively in the retail market, Moody's believes, and foreign and joint-venture banks continue to play an active role in the corporate market.
Moody's noted that the market share of the large domestic bank sector has eroded over the last five years as a result of major market reforms and rationalizations. Both newly established joint-venture banks and new foreign-owned banks have been the beneficiaries of the erosion, gaining ground in the large corporate sector especially. But the market situation of the large Hungarian banks has been stabilizing, and they retain major shares of their markets despite the new competition. In addition, the activity of the
joint venture banks has had some market benefits: for instance, encouraging competition, helping to establish higher service level standards, and disseminating skills.
A legislative and a regulatory framework based on EU directives has been put in place, for the most part. Hungary is phasing in harmonization with EU directives to accommodate the changes associated with its transforming economic system.
After posting losses in 1993 as a group, the profitability of the large banks improved in 1994 and the first half of 1995, although returns remained moderate particularly given the high inflation rate in Hungary. Up until 1994, the profitability of the large banks had been constrained by high provisions for loan losses. This especially affected the banks in 1992 and 1993 after the imposition of more stringent provision methodologies. Provisions should be less of a major factor going forward, Moody's believes, although there should be additional enterprise shakeouts ahead associated with the economic transition, and there could be an impact if positive macroeconomic trends falter should the government lose its deficit-cutting resolve. The net interest margins of the banks also improved significantly in 1994 and 1995. The receipt of consolidation bonds, paying a market rate of interest starting in 1994,
significantly helped the net interest margin of the banks. Improving asset/liability mixes also helped the margins of the banks. Overhead levels have fallen but remain high. Both revenue and cost issues are associated with the high overhead levels: The banks have not completed the rationalization of their services networks; and they are still bearing development costs without
yet realizing the full potential benefit of fees for new services.
There are still large interbank funding dependencies, and the use of central bank refinancing credits has fallen but remains significant. The situation should improve, Moody's said, as competition broadens and as the market grows less segmented. Consolidation bonds comprise a high percentage of the assets of certain banks -- specifically, those that required the most assistance. The bonds have a 20-year maturity, and on a limited basis, they may be used as collateral for central bank borrowings. In some instances, the National Bank of Hungary has purchased consolidation bonds or has exchanged them for government paper of shorter maturity in order to provide additional liquidity when needed.
The level of qualified loans -- loans classified as substandard, doubtful, or loss -- has fallen but remains high. The level of qualified lending ranges rather widely among the large banks. The large banks that focus on commercial lending and that were spun out of the National Bank of Hungary, in general, have a higher level of problem lending. The problems have arisen both from credit
inherited from the NBH, and from newly extended credit. Major structural changes within the economy, as well as a reorientation of Hungary's export market, have lifted the level of problem lending. The banks have already made major provisions for their current book of problem loans, according to methodologies established by local regulation. Nevertheless, Moody's expects to see declining -- but high -- levels of qualified loans until the local economic transformation is more complete. Macroeconomic circumstances -- large
balance-of-payment and public sector deficits, along with high unemployment and inflation -- also have the potential to lead to occasional reversals in the general declining trend of problem loans from time to time, Moody's added.
The capital adequacy of the banks has improved as a result of the bank consolidation program and of partial privatization of the system. Capital adequacy levels vary broadly among the largest banks. On average, the capital adequacy of the large-bank sector is moderately above minimum levels, but the banks should increase the pace at which they raise needed capital as privatization advances. The state remains a substantial shareholder in the Hungarian banking system. The bank consolidation efforts of 1992-1994, whereby the state injected additional moneys into certain banks, delayed the privatization process; however, a number of the large banks have already been partially privatized -- for example, MKB in 1994; OTP and Budapest Bank in 1995. The system is ready for privatization on a larger scale now that the government's consolidation program has helped to put the banks on better footing. The government is ready to accelerate privatization of the banks, and it plans to sell two of the largest remaining state banks -- MHB and KHB -- by the end of 1996.
Moody's said that bank financial strength ratings of the large banks are based on their substantial shares of their local markets. The ratings also reflect the inevitability of further structural adjustments in the Hungarian economy as it continues to transform to a more market-based system. KHB possesses a large services network that should grow more integrated over the next few years, according to the rating agency. The bank's capitalization has improved, problem loans have fallen, and loan loss reserve levels are higher
as a result of state assistance received in the 1992-1994 consolidation programs. The agricultural and food-processing sector in Hungary -- one of the bank's main lending segments -- appears to be stabilizing. The bank also has instituted a program to streamline the organization and improve efficiency. However, the bank's Tier 1 capitalization is not particularly strong; Moody's noted also that, the bank has only recently undergone a large number of management and organizational changes, and although the number of qualified
loans has fallen quickly, KHB still has a significant level of classified client loans.
Moody's said that the ratings of MHB are based in part on its recent recapitalization, and on its brighter future as a result of its stabilization and restructuring program. The ratings also reflect the bank's burden of problem loans, its moderate profitability, and its falling market share through the first half of 1995.
MKB plays a leading role in foreign trade finance in Hungary, and it maintains a good risk-based capitalization. Nevertheless, the rating also reflects the bank's limited non-trade-related commercial banking business and branch distribution network, as well as the likelihood that two of the bank's main businesses -- trade finance and international payments -- will be particularly subject to intensifying competition.
OTP dominates retail banking in Hungary, and it operates a large distribution network that should grow increasingly efficient -- a network, moreover, that will be difficult for competitors to duplicate in the personal market. However, the rating also reflects the further development that is still necessary, and the risks related to the transitional state of the local market. OTP has not yet attained its target service levels, and its overhead remains high. The bank is continuing the process of rationalizing its staffing and service network. Competition in the banking sector should intensify as local banks begin to compete more actively in the retail market, and as joint venture and foreign banks continue to advance in the corporate sector.
The bank financial strength rating of Postabank reflects its success at developing a major market position in a short period, as well as its presently low level of problem loans. The rating also incorporates the bank's rapid growth in a transitional economy, its moderate profitability, and its reliance on post office business. Moody's said that the bank's post office business, which has been the source of a large deposit base, could grow increasingly subject to competition as the bank has a non-exclusive agreement with the post
office, and if the popularity of electronic and full-service delivery alternatives should increase over time.
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