MOODY'S ASSIGNS RATINGS TO MAGYAR HITEL BANK FOR LONG- AND SHORT-TERM DEPOSITS AT Ba3/NOT PRIME; BANK FINANCIAL STRENGTH RATING ASSIGNED AT E+
Limassol, 04-01-96 -- Moody's Investors Service assigned to Magyar Hitel Bank Rt. (MHB) ratings of Ba3 for long-term deposits, Not Prime for short-term deposits, and E+ for bank financial strength. Moody's said that the ratings of MHB are based on its large share of the banking market in Hungary, on its recent recapitalization, and on its improved prospects for the future as a result of its stabilization and restructuring program. The ratings also reflect its burden of problem loans, its moderate profitability, and its falling market share through the first half of 1995. In addition, the ratings take into account the transitional state of the markets in which the bank operates.
The deposit ratings, which are opinions of an institution's overall credit risk, consider external credit factors (such as foreign-currency transfer risk) as well as external credit supports 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 as such, exclude external credit factors.
MHB has been able to reestablish its capital adequacy as a result of government assistance received under the bank consolidation program. The bank had earlier received assistance under Hungary's loan consolidation program. New management has been appointed that introduced a stabilization and restructuring program. The restructuring entails simplifying the organization, improving control procedures, solidifying MHB's current position in the corporate market, and extending business in the retail and investment banking sectors.
MHB was, at the time, the largest of the three banks spun out of the National Bank of Hungary in 1987 as part of the economic restructuring that reestablished a two-tier banking system in Hungary. Operating under a commercial banking license, initially it was excluded from the retail market. In 1989, this bank, along with the other commercial banks, was given the right to offer services to individuals as well as companies. The bank's problems, stemming both from loans inherited from the National Bank of Hungary and new problem credits related to the post-Communist transition, caused MHB to lose competitive ground and it has lost market share over the last few years.
MHB retains a significant share of the Hungarian banking markets with about 10% of total assets. The bank also has one of the largest distribution networks in Hungary, with about 80 branches. The bank has recently begun to develop a retail deposit base, but at this point it is modest in scale. After declining through mid-year 1995, it appears that the level of MHB's loans and deposits have stabilized.
The bank has a very high level of classified loans. These loans have been substantially reserved according to Hungarian banking standards, but further provisions may be necessary because of the rapid change still occurring in the market. The bank transferred problem loans and investments to a new subsidiary -- Risk Kft. -- and expects to complete the work-out or sale of most of the loans by the end of 1996. Some of the work-out portfolio has already been sold. Although the current loss reserve may not be adequate to cover the portfolio, in mid-March 1996, MHB received a state guarantee for HUF 11 billion for recently issued bonds that fund Risk Kft. and which mature in 1997. It is believed that this should cover additional losses arising from the work-out portfolio. Management has filed a plan to bring it in compliance with the Hungarian Banking Act's limitations on single loan and investment size, and on the amount of owned real-estate for non-banking purposes.
The bank reported a loss in 1994, and in each of the three prior years. It expects to report a moderate profit for 1995, after restoring the required regulatory general reserve. The bank has cut overhead, but its overhead ratio remains high and will require the bank to generate higher levels of revenue to lift returns.
Consolidation bonds still represent over 25% of MHB's balance sheet despite the reduction that took place in 1995. The bonds cause the bank to be liability sensitive, and reduce its liquidity. It is likely that MHB will negotiate the further reduction of the bonds with the state as a condition of its privatization.
MHB has been able to meet the minimum capital adequacy standards set by Hungarian law; however, it remains light on Tier 1 capital. It expects to raise additional capital as a result of a two-staged privatization with the first stage in 1996, and the second in the 1997-98 time frame. At the moment the Hungarian State owns about 90% of the bank. It is expected that the bank will be partially privatized in 1996.
Magyar Hitel Bank, with assets of HUF 254 billion (approximately US$ 1.9 billion) at September 30, 1995, is headquartered in Budapest.
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