Note: On September 14, 2011, the press release was revised as follows: Corrected the releasing office to Moody's Italia S.r.l. from Moody's Investors Service Ltd.
Revised release follows:
Milan, 05 April 2011 -- Moody's Investors Service has today downgraded the standalone bank
financial strength ratings (BFSRs) of five Hungarian banks, which
has resulted in the downgrade of those banks' deposit and debt ratings.
These banks are: K&H Bank, Budapest Bank, FHB Mortgage
Bank, Erste Bank Hungary and MKB Bank.
For two other banks -- OTP Bank and OTP Mortgage Bank --
Moody's has downgraded the local-currency deposit ratings,
and downgraded the foreign-currency debt ratings for OTP Bank.
Full details of the rating actions for each bank and their rationale are
provided below.
Today's rating actions reflect the impact of the challenging operating
environment on the banks' financial fundamentals.
RATINGS RATIONALE
Moody's says that overall, the rating actions reflect two major
concerns for the Hungarian banking system, namely (i) sustained
deterioration in asset quality, driven by the foreign-currency
exposures in retail mortgage and commercial real-estate portfolios;
and (ii) declining net profits.
ASSET QUALITY DECLINES, DUE TO FOREIGN-CURRENCY EXPOSURES,
MORTGAGE MORATORIUM, AND MACROECONOMIC CHALLENGES
The rating agency noted that a key driver of the rating actions is the
banks' high level of foreign-currency lending --
70% of total loans are foreign-currency denominated --
especially loans originated in Swiss francs. "Many borrowers,
particularly in the retail sector, are unhedged with regards to
the currency risk on these loans. As a result, there is significant
vulnerability to either a depreciation of the Hungarian Forint,
or an increase in interest rates linked to these foreign currencies,"
says Simone Zampa, a Moody's Vice President and senior analyst.
Moody's notes that the Hungarian Government introduced a ban on
foreign-currency lending in 2010. However, in Moody's
view, the event risks imbedded in the system that stem from the
foreign-currency exposures will remain for several years,
given the long-dated maturity of the existing mortgage portfolios
of the banks.
In addition, the moratorium on evictions relating to home-collateralised
loans contributes to a further weakening of the banks' debtors payment
discipline. The government introduced the moratorium in August
2010 on a temporary basis, aimed at protecting delinquent payers
from being evicted. Moody's notes that the government recently
extended the moratorium to July 2011 for home mortgages, although
it was removed for home-equity loans. These loans represent
about one-third of the home-collateralised loans within
the system.
"The residential Hungarian real-estate market remains under
pressure, with prices declining since 2008 and low liquidity in
the secondary market. However, Moody's acknowledges
that the gross debt-to-income ratio of households still
remains below the EU average, which mitigates repayment pressures
for borrowers," adds Mr Zampa.
NET PROFITS UNDER PRESSURE FROM DIMINISHING BUSINESS VOLUMES, HEIGHTENED
RISK COSTS, AND NEW BANKING TAX
In 2010, the Hungarian banking system recorded a significantly lower
level of profitability compared with 2009, with several banks reporting
losses. Margins are maintained at solid levels compared with international
peers, also due to the high interest-rate environment.
However, the internal capital generation of the system has been
significantly eroded by (i) the rapidly growing cost of risk; (ii)
shrinking business volumes; (iii) more modest efficiency for some
banks; and (iv) the tax on banks' assets. This extraordinary
banking tax was introduced in 2010, accounted for about 25%
of the pre-provision income of the system and will remain in place
at least until 2012.
"These credit negative factors are affecting the ability of the
less well-capitalised banks to maintain a sufficient capital buffer
in the current uncertain macroeconomic environment. This may lead
to further shrinking of risk-weighted assets and require retrenchment
by some of the weaker entities," explains Mr Zampa.
Moody's acknowledges that in this environment, it is becoming
more challenging for the Hungarian banks to sustain profitability and
support economic growth. The economic outlook for 2011 is more
promising, with Moody's forecasting GDP growth of about 3%
and a decline in unemployment. However, the rating agency
maintains the view that macroeconomic challenges will persist for the
medium term.
Moody's believes that a major stabilising factor for the banking
system has been its high level of foreign ownership, representing
about 80% of capital at year-end 2010. Financially
stronger parents have so far provided support in terms of capital and
liquidity throughout the recent financial crisis. Moody's
believes that this support is likely to continue, also considering
the wider CEE strategy of the Western European parent banks. Of
the seven banks included in this rating action, four are foreign-owned
(K&H Bank, Budapest Bank, Erste Bank Hungary and MKB Bank),
Moody's has taken the following rating actions:
OTP BANK
Moody's has affirmed OTP Bank's standalone BFSR at D+
(mapping to Baa3 on the long-term scale) given that the bank has
proved itself resilient in the face of the crisis and showed the benefits
of the diversification.
However, Moody's has lowered the bank's local currency
long-term and short-term deposit ratings to Baa3/Prime-3
from Baa2/Prime-2, mainly reflecting the fact that Moody's
views OTP's operations as predominantly in Hungary, which
represents its core market, and its risk profile and access to funding
as closely interlinked with the Hungarian government. As such,
Moody's also lowered OTP's foreign currency senior debt rating
to Baa3 from Baa2, its subordinated debt rating to Ba1 from Baa3
and its junior subordinated debt rating to Ba2 (hyb) from Ba1 (hyb).
The bank's foreign-currency deposit ratings were affirmed
at Baa3/Prime-3 given that they were already constrained by the
foreign-currency deposit ceiling for the country.
OTP's liquidity and funding strategy have been cautious and the
bank has progressively reduced its leverage and increased its capital
ratios, with a Tier 1 ratio at 14% at year-end 2010.
Non- performing loans increased substantially in 2010; however,
there is a very high provisioning coverage and the bank benefits from
a high margin income in Hungary and other selected countries (Russia,
Bulgaria, Ukraine). OTP also has exposure to foreign-currency
mortgages, although this is lower compared with its peer group in
Hungary.
Overall, Moody's said that the negative outlook on the ratings
-- except the BFSR which carries a stable outlook --
reflects (i) the pressures in the Hungarian economic environment;
and (ii) the fact that increased non-performing loans and provisioning
needs may exert further pressure on the group's medium-term
profitability. While the outlook on the BFSR is stable, the
bank could become more weakly positioned in this category, resulting
in its BFSR being mapped to Ba1 rather than Baa3 on the long-term
scale.
OTP MORTGAGE BANK
Moody's has affirmed OTP Mortgage Bank's standalone BFSR at
D+ (mapping to Baa3 on the long-term scale) and its foreign-currency
deposit ratings at Baa3/Prime-3. The bank's ratings
are the same as its parent's ratings, given that the bank is 100%
owned and fully guaranteed by OTP Bank and it is an integral part of OTP
Bank's franchise, and operates as the mortgage division of OTP Bank.
In addition, Moody's lowered the local-currency deposit
ratings of the bank to Baa3/Prime-3 from Baa2/Prime-2,
which are at the same level of its parent. The outlook on the ratings
is negative, except the BFSR which carries a stable outlook.
Moody's expects that OTP Mortgage Bank's ratings will continue
to follow the movement of its parent's ratings.
K&H BANK
Moody's downgraded K&H Bank's standalone BFSR to D (mapping
to Ba2 on the long-term scale) from D+ (mapping to Baa3 on
the long-term scale) and its local-currency long-term
and short-term deposit ratings to Baa3/Prime-3 from Baa2/Prime-2.
Moody's says that the downgrades reflect the rapid deterioration
in non-performing loans and the potential pressure on the profitability
of the bank from increasing provisioning needs. In addition,
Moody's considers the bank's current capital buffer --
with a preliminary Tier1 ratio of 8.6% under IRB foundation
at year-end 2010 -- as just adequate in the currently
difficult operating environment. Furthermore, the rating
agency says that it considers that the significant exposure of the bank
to Hungarian government securities, especially in the trading book,
makes it more vulnerable in an adverse economic scenario for the country.
The bank's foreign-currency long-term and short-term
ratings were affirmed at Baa3/Prime-3. The outlook on the
ratings remains negative.
Moody's also acknowledges that (i) K&H Bank has a strong position
in the Hungarian market in both corporate and retail businesses;
(ii) its liquidity profile is better than most of its rated peers in the
country; (iii) it has a less prominent position in lending to the
problematic commercial real estate; and (iv) in 2010, the bank
recorded a satisfactory level of profitability.
BUDAPEST BANK
Moody's downgraded Budapest Bank's standalone BFSR to D-
(mapping to Ba3 one the long-term scale) from D (mapping to Ba2
on the long-term scale) and its local-currency long-term
and short-term deposit ratings to Baa3/Prime-3 from Baa2/Prime-2.
Moody's says that the downgrades reflect the rapid deterioration
in non-performing loans and the potential pressure on the profitability
of the bank from increased provisioning needs. Although Moody's
notes that so far the bank has managed to sustain its financial performance,
due to the difficult operating conditions Moody's believes that
Budapest Bank's BFSR is better positioned at D-.
Moody's adds that the bank's high level of capitalisation,
with a Tier 1 ratio of 12.8%, gives more comfort that
it would be able to withstand a more adverse scenario, which is
reflected by the stable outlook on the BFSR and the long-term local-currency
deposit rating. However, the long-term foreign-currency
deposit rating carries a negative outlook, in line with the foreign-currency
deposit ceiling for the country.
FHB MORTGAGE BANK
Moody's downgraded FHB Mortgage Bank's standalone BFSR to
D (mapping to Ba2 on the long-term scale) from D+ (mapping
to Ba1 on the long-term scale) and its local-currency and
foreign-currency long-term and short-term deposit
ratings to Ba1/Not Prime from Baa3/Prime-3. Moody's
says that the downgrades reflect the deterioration in non-performing
loans, the bank's main focus on the difficult mortgage market
and its significant exposure to wholesale funding. The capital
buffer is satisfactory, with a Tier1 ratio at 11.3%.
However, Moody's considers that the bank faces significant challenges
(as discussed above), and as such, the outlook on the ratings
remains negative.
FHB is among the three mortgage banks in Hungary with a license to issue
covered bonds and has a robust market position in mortgage-loan
refinancing, to other banks. Profitability in 2010 --
when excluding one off items -- was lower than in 2009.
The bank has managed to maintain relatively good margins, due to
(i) its capacity to pass higher funding costs to clients; and (ii)
the high interest-rate environment. However, its non-performing
loans and exposure to foreign-currency lending are substantial.
The bank's market-fund ratio is high (although improving),
following the increases in the deposit base over the past one and a half
years.
ERSTE BANK HUNGARY
Moody's downgraded Erste Bank Hungary's standalone BFSR to
D- (mapping to Ba3 on the long-term scale) from D (mapping
to Ba2 on the long-term scale) and its local-currency and
foreign-currency long-term and short-term deposit
ratings to Ba1/Not Prime from Baa3/Prime-3. Moody's
says that the downgrades reflect the rapid deterioration in non-performing
loans and the significant pressure on the profitability of the bank from
increased provisioning needs and the additional government tax,
which accounted for about 17% of the bank's pre-provision
income. Given the difficult operating environment and the just
adequate capitalisation of the bank (with a Tier1 ratio at 7.6%),
Moody's maintains a negative outlook on the BFSR. The outlook
on the long-term local-currency and foreign-currency
ratings is stable and reflects Moody's expectations of external
support, especially from its parent, Erste Group Bank (A1/P-1/C-
(BCA of Baa1), stable outlook).
Erste Bank Hungary has one of the largest retail franchises in Hungary.
The bank recorded poor results in 2010, with margins remaining fairly
good, while the much higher cost of risk and the bank levy have
eroded the bank's profitability over the past year. The significant
level of foreign-currency lending, especially in Swiss francs,
has contributed to higher problem loans for the bank. The loan-to-deposit
ratio is high, although most of the wholesale funding is covered
by the parent. The bank also has some concentrations in the problematic
commercial real-estate sector, with particularly high levels
of non-performing loans.
MKB Bank
Moody's downgraded MKB Bank's standalone BFSR to E+ (mapping
to B1 on the long-term scale) from D (mapping to Ba2 on the long-term)
and its local-currency and foreign-currency long-term
and short-term deposit ratings to Ba2/Not Prime from Baa3/Prime-3.
As such, Moody's also lowered MKB's foreign currency senior
debt rating to Ba2 from Baa3 and its foreign-currency subordinated
debt rating to B1 from Ba1. Moody's says that the downgrades
reflect the rapid deterioration in non-performing loans,
the significant challenges the business model is facing also reflecting
the high concentration in the problematic commercial real estate and the
significant losses posted in 2010. The losses reflected the more
than doubled provisioning needs, lower operating income and higher
costs, which entailed capital injections from the parent banks.
Given the difficult operating environment, the modest capitalisation
(with a Tier1 at 7.5%) and the high sector concentration,
Moody's views MKB Bank as being more vulnerable in an adverse scenario,
reflected by the negative outlook on the bank's debt and deposit
ratings. This stems from the fact that the bank could become more
weakly positioned within the E+ BFSR category, leading to a
lower mapping on the long-term scale.
MKB is among the largest banks in Hungary with a relatively good corporate
franchise and with subsidiaries operating in difficult markets,
such as Romania and Bulgaria. The bank has significant problematic
commercial real-estate exposures within its loan book. The
loan-to-deposit ratio is high, with funding support
by the parent BayernLB (A1/P-1/D- (BCA of Ba3), on
review for possible downgrade on the A1 rating) having increased over
recent years. The bank also had a modest cost-to-income
ratio in 2010.
The specific rating changes implemented today are:
OTP Bank
- Local-currency deposit ratings downgraded to Baa3/Prime-3
from Baa2/Prime-2
- Foreign-currency senior unsecured debt rating downgraded
to Baa3 from Baa2
- Foreign-currency subordinated debt rating (Lower Tier
2) downgraded to Ba1 from Baa3
- Foreign-currency junior subordinated debt rating (Upper
Tier 2) downgraded to Ba2 (hyb) from Ba1 (hyb)
- Foreign-currency deposit ratings affirmed at Baa3/Prime-3
- BFSR affirmed at D+, mapping to a BCA of Baa3
The BFSR carries a stable outlook, whilst all the other ratings
-- including the BCA -- carry a negative outlook.
OTP Mortgage Bank
- Local-currency deposit rating downgraded to Baa3/Prime-3
from Baa2/Prime-2
- Foreign-currency deposit ratings affirmed at Baa3/Prime-3
- BFSR affirmed at D+, mapping to a BCA of Baa3
The BFSR carries a stable outlook, whilst all the other ratings
-- including the BCA -- carry negative outlook.
K&H Bank
- Local-currency long-term deposit rating downgraded
to Baa3/Prime-3 from Baa2/Prime-2
- BFSR downgraded to D from D+. The D BFSR maps to
a BCA of Ba2
- Foreign-currency long-term deposit ratings affirmed
at Baa3/Prime-3
All the above ratings carry a negative outlook.
Budapest Bank
- Local-currency deposit rating downgraded to Baa3/Prime-3
from Baa2/Prime-2
- Foreign-currency long-term deposit ratings affirmed
at Baa3/Prime-3
- BFSR downgraded to D- from D. The D- BFSR
maps to a BCA of Ba3.
The foreign-currency long-term deposit rating carries a
negative outlook, whilst all the other ratings carry a stable outlook.
FHB Mortgage Bank
- Local and foreign-currency deposit ratings downgraded
to Ba1/Not Prime from Baa3/Prime-3
- BFSR downgraded to D from D+. The D BFSR maps to
a BCA of Ba2.
All the above ratings carry a negative outlook.
Erste Bank Hungary
- Local and foreign-currency deposit ratings downgraded
to Ba1/Not Prime from Baa3/Prime-3
- BFSR downgraded to D- from D. The D- BFSR
maps to a BCA of Ba3.
The BFSR carries a negative outlook, whilst all the other ratings
carry a stable outlook.
MKB Bank
- Local and foreign-currency deposit ratings downgraded
to Ba2/Not Prime from Baa3/Prime-3
- Foreign-currency senior unsecured debt rating downgraded
to Ba2 from Baa3
- Foreign-currency subordinated debt rating (Lower Tier
2) downgraded to B1 from Ba1
- BFSR downgraded to E+ from D. The E+ BFSR maps
to a BCA of B1
The BFSR carries a stable outlook, whilst all the other ratings
-- including the BCA -- carry a negative outlook.
PREVIOUS RATING ACTIONS & METHODOLOGY USED
Moody's most recent rating action on OTP Bank was on 7 December 2010,
when the local-currency deposit ratings and foreign-currency
debt ratings were downgraded to Baa2 from Baa1. The foreign-currency
long and short-term deposit ratings were downgraded to Baa3/Prime-3
from Baa1/Prime-2. The foreign-currency subordinated
debt rating (Lower Tier 2) was downgraded to Baa3 from Baa2.
Moody's most recent rating action on OTP Mortgage Bank was on 7 December
2010, when the long-term local-currency deposit rating
was downgraded to Baa2 from Baa1 and the foreign-currency debt
ratings were downgraded to Baa3/Prime-3 from Baa1/Prime-2.
Moody's most recent rating action on K&H Bank was on 7 December 2010,
when the long-term local-currency deposit rating was downgraded
to Baa2 from A3 and the foreign-currency debt ratings were downgraded
to Baa3/Prime-3 from Baa1/Prime-2.
Moody's most recent rating action on Budapest Bank was on 7 December 2010,
when the foreign-currency deposit ratings were downgraded to Baa3/Prime-3
from Baa2/Prime2. The local currency deposit ratings were confirmed
at Baa2/Prime-2.
Moody's most recent rating action on FHB Bank was on 7 December 2010,
when the local and foreign-currency long and short-term
deposit ratings were confirmed at Baa3/Prime-3.
Moody's most recent rating action on Erste Bank Hungary was on 7 December
2010, when the local and foreign-currency long and short-term
deposit ratings were downgraded to Baa3/Prime-3 from Baa2/Prime-2.
Moody's most recent rating action on MKB Bank was on 7 December 2010,
when the local and foreign-currency long and short-term
deposit ratings were downgraded to Baa3/Prime-3 from Baa2/Prime-2.
The foreign-currency senior unsecured rating was downgraded to
Baa3 from Baa2 and the foreign-currency subordinated debt rating
(Lower Tier 2) was downgraded to Ba1 from Baa3.
The principal methodologies used in rating this rating were "Bank Financial
Strength Ratings: Global Methodology" published in February 2007,
and "Incorporation of Joint-Default Analysis into Moody's Bank
Ratings: A Refined Methodology" published in March 2007, and
"Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated
Debt" published in November 2009.
Headquartered in Budapest, Hungary, OTP Bank reported consolidated
total assets of HUF9,781 billion (EUR35.04 billion) as of
31 December 2010.
Headquartered in Budapest, Hungary, OTP Mortgage Bank reported
consolidated total assets of HUF1,681 billion (EUR6.02 billion)
as of 31 December 2010.
Headquartered in Budapest, Hungary, K&H Bank reported
consolidated total assets of HUF3,223 billion (EUR11.54 billion)
as of 31 December 2010.
Headquartered in Budapest, Hungary, Budapest Bank reported
consolidated total assets of HUF911 billion (EUR3.26 billion) as
of 31 December 2010.
Headquartered in Budapest, Hungary, FHB Mortgage Bank reported
consolidated total assets of HUF873.3billion (EUR3.13 billion)
as of 31 December 2010.
Headquartered in Budapest, Hungary, Erste Bank Hungary reported
consolidated total assets of HUF2,984 billion (EUR10.7 billion)
as of 31 December 2010.
Headquartered in Budapest, Hungary, MKB Bank reported consolidated
total assets of HUF2,939 billion (EUR10.53 billion) as of
31 December 2010.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, and confidential and proprietary
Moody's Investors Service information
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Milan
Simone Zampa
Vice President - Senior Analyst
Financial Institutions Group
Moody's Italia S.r.l
Telephone:+39-02-9148-1100
London
Yves Lemay
MD - Banking
Financial Institutions Group
Moody's Investors Service Ltd.
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Moody's downgrades ratings of seven Hungarian banks
