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04 Nov 2008
Moody's says Hungary's IMF package unlikely to have positive impact on bank ratings
New York, November 04, 2008 -- Moody's Investors Service said today that it expects the EUR20 billion
package made available to Hungary by the International Monetary Fund (IMF),
the European Union and the World Bank to support the government's
efforts to alleviate the stress experienced in the Hungarian financial
markets and strengthen the financial sector. In Moody's view,
the financial package -- which reinforces the recent efforts
of the Hungarian authorities and the European Central Bank to support
liquidity on the country's financial markets -- should
ease the pressure experienced by the Hungarian banking sector in October
2008. Yet some of its expected benefits are likely to materialize
gradually and positive rating actions are not envisaged as a direct result
of this package.
"The growth of the Hungarian banking system has been driven in recent
years by strong foreign currency lending to both corporates and retail
clients. At end-2007, more than 60% of all
outstanding loans were denominated in foreign currencies, this percentage
amounting to more than 90% for mortgage and home equity loans originated
in recent years (mainly Swiss francs denominated loans). The significant
weakening of the forint in October 2008 increased banks' credit
risk, while it became more difficult and expensive for them to hedge
open FX positions on their balance sheets," explained Gabriel
Kadasi, lead analyst at Moody's for Hungarian banks.
The financial package is aimed not only at providing budget support but
at securing adequate domestic and foreign currency liquidity, as
well as strong levels of capital for the banking system. Moody's
expects the package will help restore the confidence in Hungary and improve
the liquidity and access of Hungarian banks' to foreign currency
Although uncertain at this stage, if direct support will be provided
to individual banks as part of the agreed package, such support
is unlikely to result in a positive rating action primarily as i) all
rated banks in Hungary already benefit from a certain level of systemic
support and ii) a governmental intervention might reveal fundamental weaknesses
that had not been identified and reflected in the bank's rating.
"We continue to view the outlook for the direction of fundamental
credit conditions in the banking system for the next 12 to 18 months as
negative," Mr Kadasi added.
The principal factors underpinning Moody's view are as follows:
(i) the fiscal measures planned by the government and the decline in lending
activity will translate into a further slowdown in economic growth;
(ii) as a result, the Hungarian banks may experience a deterioration
in asset quality in both their retail and corporate loan portfolios,
which will weigh on their profitability and capital-generating
ability; (iii) growth in revenue generation might be sluggish given
the worsening operating environment and stricter lending criteria;
and (iv) the banks will face higher costs of funding and tight liquidity.
The potential volatility of the forint going forward also remains a risk
The anticipated slowdown in Hungarian banks' lending will also be
driven by expected changes in their foreign currency lending. During
the recent market turbulence, many banks suspended or significantly
limited their foreign currency loans, especially those in Swiss
francs and Japanese yen. However, Moody's does not
expect foreign currency lending to disappear in Hungary, as it is
significantly cheaper for banks' customers to borrow in foreign
currency than in forint.
In Moody's view, the slower growth of the banking sector is
not necessarily a negative factor in itself after the rapid growth of
recent years, as it will allow the banks to fine-tune their
risk management systems and clean up their seasoning loan portfolios.
However, some banks may face downward rating pressure if their financial
fundamentals deteriorate rapidly or their market position weakens substantially.
Moody's also cautions that most Hungarian banks are foreign-owned
and their high reliance on parental funding makes them vulnerable to developments
affecting their parent. Thus, possible changes to the parent's
ratings could have also negative implications for the debt and deposit
ratings of Hungarian banks, as most of these banks benefit from
parental support as per Moody's methodology.
Reynold R. Leegerstee
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
No Related Data.
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