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Rating Action:

Moody's places four Hungarian banks' ratings on review for upgrade

29 Jun 2016

Positive outlook assigned to two banks

Note: On July 1, 2016, the list of affected credit ratings accessible via hyperlink from this press release was republished to correct the methodology disclosure.

London, 29 June 2016 -- Moody's Investors Service has today taken rating actions on five Hungarian banking groups, prompted by the rating agency's change of Hungary's Macro Profile to "Moderate-" from "Weak+". The strengthening of the Macro Profile is driven by the improvement in the Hungarian banks' operating environment, in particular the gradual recovery in credit demand which should support banks' lending growth and revenues after several years of loan book contraction. For a detailed analysis of Hungary's Macro Profile please click on the following link: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1029023

As a result of the change in the Macro Profile, the ratings of one banking group affected by today's rating action have been affirmed while those of four other banks have been placed on review for upgrade.

The following banks' ratings were placed on review for upgrade:

- The long-term ratings and rating inputs of Kereskedelmi & Hitel Bank Rt. were placed on review for upgrade, while its Counterparty Risk Assessments (CRA) of Baa3(cr)/Prime 3(cr) were affirmed;

- All long-term ratings and rating inputs of Erste Bank Hungary Zrt. were placed on review for upgrade;

- All long-term ratings and rating inputs of Budapest Bank Rt. were placed on review for upgrade;

- The long-term ratings of MKB Bank Zrt.'s were placed on review for upgrade, while the bank's caa2 baseline credit assessment (BCA) and adjusted BCA and its B2(cr) long-term CRA were affirmed;

During the review, Moody's will assess the impact of improved operating conditions and of the change in the Macro Profile of Hungary on these banks' credit fundamentals, which would likely lead to upgrades of the banks' long-term ratings of one to three notches. The rating agency strives to conclude the rating reviews within two months.

The following banking group's ratings have been affirmed:

- All long-term ratings and rating inputs of OTP Bank NyRt have been affirmed. The outlook on its Baa3 long-term local currency deposit rating was changed to positive from stable, while the positive outlook on its Ba2 foreign-currency deposit rating was maintained. At the same time, a Ba1 local currency issuer rating was assigned to OTP Jelzalogbank Zrt. while its deposit ratings were withdrawn.

All other ratings of the banks captured by today's rating actions remain unaffected.

In addition, the ratings and outlook of other Moody's rated Hungarian banks -- such as MFB Hungarian Development Bank Private Limited Company's (MFB) and FHB Mortgage Bank Co. Plc. -- are unaffected by today's actions.

Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_190774 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

(1) CHANGED MACRO PROFILE REFLECTS IMPROVING OPERATING ENVIRONEMENT IN HUNGARY AND EXERTS UPWARDS PRESSURE ON RATINGS

The change of Hungary's Macro Profile to "Moderate-" from "Weak+" will positively affect most rated Hungarian banks' BCAs and the outcomes of Moody's Advanced Loss Given Failure (LGF) analysis. The Macro Profile constitutes an assessment of the macroeconomic environment in which a bank operates.

The change of the Macro Profile illustrates Moody's assessment of the improvement in Hungarian banks' operating environment, in particular in the gradual recovery in credit demand, which should support banks' lending growth and revenues after several years of loan book contraction. The improving operating environment will benefit Hungarian banks' credit profiles by helping to reduce the high level of problem loans, restoring their profitability after several years of losses, and strengthening capitalisation.

The application of a lower loss rate in Moody's Advanced LGF analysis of Hungarian banks has the potential to result in increased rating uplifts due to lower severity of loss faced by the different liability classes in resolution. In combination with a number of parameters in its Advanced LGF analysis, Moody's applies a certain loss rate on banks' tangible banking assets at failure. The loss rate used for banks with a Macro Profile of "Moderate-" and higher is 8% of tangible banking assets, as opposed to 13% for banks with a lower Macro Profile.

Consequently, the combination of potentially higher BCAs and/or increased rating uplifts from Moody's Advanced LGF analysis will likely result in upgrades of one to three notches upon completion of the review of those banks' ratings affected by a review for upgrade placement today.

(2) BANK-SPECIFIC CONSIDERATIONS

OTP Bank NyRt (OTP Bank)

Moody's affirmed OTP Bank's Baa3 long-term local-currency deposit rating and changed the outlook on the rating to positive from stable. The action was driven by: (1) the affirmation of the bank's ba2 BCA; and (2) the results of Moody's Advanced LGF analysis. Moody's continues to consider a moderate likelihood of government support which does not result in ratings uplift at the level of Hungary's government rating (Ba1 positive).

By affirming OTP Bank's ba2 BCA, Moody's takes into account the improvement of the bank's applicable Macro Profile to Moderate- from Weak+ as well as its improving credit profile while also considering remaining tail risks from the bank's operations in Russia and Ukraine. OTP Bank operates in a number of neighbouring countries some of which have considerably weaker Macro Profiles than Hungary. Nonetheless, given that domestic operations constitute 58%, OTP Bank's average weighted Macro Profile has improved to Moderate-. The ba2 BCA reflects improvements in asset quality and profitability, as well as the maintaining of satisfactory capital adequacy (13.3% CET1 ratio as of year-end 2015) and strong liquidity. OTP's non-performing loan (NPL) ratio declined to 17.0% of gross loans as of year-end 2015, from 19.3% as of year-end 2014, owing largely to a significant reduction in problem loans in its core Hungarian operation. Problem loan coverage remains at a good level of 93.4% as of year-end 2015.

The affirmation of OTP Bank's Baa3 local-currency deposit rating reflects upcoming changes in the liability structure due to the maturity of subordinated debt instruments, largely offset by the application of a lower 8% loss rate at failure (Macro Profile Moderate-) under Moody's Advanced LGF analysis. The updated LGF analysis therefore indicates a continued very low loss-given failure for deposits and two notches of uplift from the bank's ba2 adjusted BCA.

The outlook change to positive from stable on OTP Bank's long-term local-currency deposit rating reflects Moody's expectation of a further gradual strengthening of the bank's standalone risk profile. Better economic conditions in Central and Eastern Europe (CEE) and stabilisation, albeit at weak levels, in Russia and Ukraine will likely result in a further gradual reduction of the bank's NPLs. Improving asset quality will help reduce loan loss provisions significantly, which together with a lower bank levy in Hungary from 2016 should underpin stronger profitability over the next 12 to 18 months.

OTP Jelzalogbank Zrt. (OTP Mortgage Bank)

Moody's assigned a Ba1 local-currency issuer rating to OTP Mortgage Bank with a positive outlook, reflecting the high level of integration, the full ownership and the guarantee from its parent. OTP Bank fully, irrevocably and unconditionally guarantees all of OTP Mortgage Bank's unsubordinated obligations. Consequently, the rating is aligned to the rating level that would have been assigned to OTP Bank's senior unsecured debt based on Moody's Advanced LGF analysis.

The withdrawal of OTP Mortgage Bank's BCA/adjusted BCA and deposit ratings reflects the following considerations: (1) the bank is an integral part of the parent's franchise and operations as its fully owned mortgage division, and Moody's believes that a separate standalone analysis of the subsidiary will not result in a meaningful BCA; and (2) OTP Mortgage Bank is not a deposit-taking entity.

Kereskedelmi & Hitel Bank Rt. (K&H)

The review for upgrade of K&H's Ba3 long-term deposit ratings was driven by: (1) upward pressure on the bank's b2 BCA; (2) unchanged high parental support assumptions from Belgium's KBC Bank N.V. (A1 Stable/P-1, BCA baa1), reflected in the ba3 adjusted BCA; and (3) likely rating uplift from Moody's Advanced LGF analysis (no uplift currently).

The review for upgrade of K&H's b2 BCA reflects the improved Moderate- Macro Profile combined with improvements in asset quality and profitability, as well as the maintaining of satisfactory capital adequacy. In 2015 K&H returned to profitability recording a net income of HUF37.9 billion, which translates to a return on assets (RoA) of 1.5%. This improvement drove an increase in the bank's Tier 1 ratio to 12.1% as of year-end 2015 from 11.0% as of year-end 2014. K&H's reported NPL ratio declined modestly to 13.3% as of year-end 2015, from 14.7% as of year-end 2014, owing mainly to a reduction in corporate NPLs.

The application of the Moderate- Macro Profile in Moody's Advanced LGF analysis, including a lower 8% loss at failure assumption, has the potential to result in lower loss-given failure and higher rating uplift for deposit ratings, which combined with a likely upgrade of the BCA could result in up to two notches of upgrade for the bank's long-term deposit ratings. These factors, however, have no impact on the uplift for K&H's CRA which was therefore affirmed at Baa3(cr)/Prime-3(cr).

Erste Bank Hungary Zrt. (EBH)

The review for upgrade of EBH's B2 long-term deposit ratings and its Ba2(cr) long-term CRA was driven by: (1) the upward pressure on the bank's caa1 BCA; (2) unchanged high parental support assumption from Austria's Erste Group Bank AG (Erste; Baa1 Stable/P-2, BCA baa3), reflected in the b2 adjusted BCA; and (2) likely rating uplift from Moody's Advanced LGF analysis (no uplift currently).

The review for upgrade of EBH's caa1 BCA reflects the improved Moderate- Macro Profile combined with improvements in asset quality and capital adequacy, as well as reduced pressure on profitability. Further, Erste announced on 20 June 2016 plans to increase EBH's capital by nearly 50% before selling a 15% stakes in the bank to both the Hungarian government and the European Bank for Reconstruction and Development (Aaa stable). Such capital increase will further benefit EBH's overall loss absorption capacity and credit profile. EBH reported a loss of HUF22 billion in 2015 (a loss of HUF101.4 billion in 2014), driven by high loan loss provisions and weaker revenues.

The application of the Moderate- Macro Profile in Moody's Advanced LGF analysis, including a lower 8% loss at failure assumption, has the potential to result in lower loss-given failure and higher rating uplift, which combined with a likely upgrade of the BCA could result in between one to three notches of upgrade for the bank's long-term deposit ratings and CRA.

Budapest Bank Rt. (Budapest Bank)

The review for upgrade of Budapest Bank's B2 long-term deposit ratings and its Ba3(cr) long-term CRA was driven by: (1) upward pressure on the bank's b2 BCA and adjusted BCA; and (2) likely rating uplift from Moody's Advanced LGF analysis (no uplift currently).

The review for upgrade of Budapest Bank's b2 BCA reflects the improved Moderate- Macro Profile combined with expected improvements in asset quality and profitability, as well as good capital adequacy and liquidity. The bank's NPL ratio has stabilised at a high 17.2% as of year-end 2015 and will likely improve moderately in the next 12 to 18 months, benefiting from the growing economy and the bank's work-out procedures. Risks stemming from the large stock of NPLs are mitigated by a high level of coverage, with loan loss reserves standing at 96% as of year-end 2015. Budapest Bank reported a net income of HUF14.8 billion in 2015, translating to a return on average assets (RoAA) of 1.59%.

The application of the Moderate- Macro Profile in Moody's Advanced LGF analysis, including a lower 8% loss at failure assumption, has the potential to result in lower loss-given failure and higher rating uplift, which combined with a likely upgrade of the BCA could result in two or three notches of upgrade for the bank's long-term deposit ratings and CRA.

MKB Bank Zrt. (MKB)

The review for upgrade of MKB's Caa2 long-term deposit ratings was driven by: (1) the affirmation of its caa2 BCA and adjusted BCA; and (2) likely rating uplift from Moody's Advanced LGF analysis (no uplift currently).

The affirmation of MKB's caa2 BCA reflects the impact of the Moderate-- Macro Profile as well as still considerable challenges related to asset quality and solvency, but also the bank's adequate funding and liquidity profile. Moody's expects that the ongoing clean-up of the bank's loan portfolio and the more benign operating environment in Hungary compared to the past six years will gradually benefit MKB's financial fundamentals, albeit at very weak levels.

The application of the Moderate- Macro Profile in Moody's Advanced LGF analysis, including a lower 8% loss at failure assumption, has the potential to result in to lower loss-given failure and higher rating uplift, which could result in up to two notches of upgrade for the bank's long-term deposit ratings. The updated Advanced LGF analysis, however, has led to an affirmation of the bank's B2(cr) CRA, three notches above MKB's caa2 adjusted BCA.

-- WHAT COULD MOVE THE RATINGS UP/DOWN

During the review, Moody's will assess the impact of improved operating conditions and of the change in the Macro Profile of Hungary on these banks' credit fundamentals, which would likely lead to upgrades of the banks' long-term ratings of one to three notches.

The improving operating environment as reflected in the stronger Macro Profile of Moderate-- for Hungary will benefit banks' asset quality, profitability and capitalisation as well as impact our assumption of 8% loss at failure (versus 13% previously) and is therefore considered a key driver for potential ratings upgrade.

Ratings downgrades are unlikely in the short-term given the upward pressure on the ratings of the affected banks. However, a deterioration in the country's Macro Profile and/or in individual banks' standalone financial metrics may have negative rating implications.

Furthermore, alterations in the bank's liability structure may change the amount of uplift provided by Moody's LGF analysis and lead to a higher or lower notching from the banks' adjusted BCAs, thereby affecting debt/issuer and deposit ratings.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_190774 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

• Releasing Office

• Person Approving the Credit Rating

• Methodologies Used

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings of rated entity MKB Bank Zrt. were not initiated or not maintained at the request of the rated entity.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. On this basis, MKB Bank Zrt. or their agents are considered to be non-participating entities. These rated entities or their agents generally do not provide Moody's with information for the purposes of their ratings process.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. On this basis Kereskedelmi & Hitel Bank Rt. or their agents are considered to be participating entities. These rated entities or their agents generally provide Moody's with information for their ratings process.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Armen L. Dallakyan
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's places four Hungarian banks' ratings on review for upgrade
No Related Data.
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