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Rating Action:

Moody's takes actions on four Hungarian banks

19 Mar 2013

Actions conclude review initiated in December 2012

Milan, March 19, 2013 -- Moody's Investors Service has today lowered by between two to four notches the baseline credit assessments (BCAs) of Budapest Bank (BB), K&H Bank (K&H), Erste Bank Hungary (EBH) and MKB Bank (MKB). According to Moody's, the drivers of the lower BCAs are the increasingly weak economic and operating environment in Hungary and the subsequent negative implications this has on all four banks' franchises, asset quality and profitability.

The lower BCAs have prompted the downgrades of between one and three notches of the banks' long-term local-currency and foreign-currency deposit ratings.

Please refer to the end of this press release for a list of affected ratings.

Today's actions conclude Moody's review for downgrade initiated on 12 December 2012.

RATINGS RATIONALE

-- BUDAPEST BANK

Moody's lowered BB's BCA by two notches to b2 from ba3. The lower BCA reflects the increasingly weak and uncertain economic and operating environment, the bank's ongoing asset-quality deterioration, and the expectation of further downward pressure on profitability. The negative expectation on profitability is driven by (1) decreasing net interest income; (2) very weak loan demand; (3) higher provisioning costs; and (4) the sustained large tax burden. However, BB's BCA continues to be supported by the bank's good capitalisation, with a Tier 1 ratio of 15.6% at year-end 2012 and adequate liquidity profile, which includes a large foreign-currency (FX) deposit from its parent, General Electric Capital Corporation (GECC; A1 stable).

Moody's has also downgraded BB's local and foreign-currency deposit ratings to Ba3 from Ba1 and to Ba3 from Ba2, following the lowering of the bank's BCA. Moody's maintains its view that the bank would benefit from a moderate likelihood of parental support from GECC, if needed, given (1) GECC's full ownership of BB; and (2) GECC's management control of BB. These factors provide rating uplift of two notches for BB's deposit ratings from the b2 BCA.

The bank's long-term deposit ratings carry a negative outlook, reflecting BB's ongoing business and financial challenges which could result in the b2 BCA, and accordingly the Ba3 long-term deposit ratings, becoming more lowly positioned.

-- WHAT COULD MOVE THE RATINGS UP/DOWN

Upwards pressure in the near-term is unlikely given that the long-term deposit ratings are on negative outlook. Upwards pressure could be exerted on the BCA if the bank successfully protects its franchise in the current weaker operating environment -- and is able to improve its earnings-generating ability and maintain its capital base -- while keeping a good coverage ratio of its non-performing loans.

The bank's BCA would be negatively affected by further deterioration in asset quality, leading to erosion of its capital base. Significant deterioration in the bank's franchise -- albeit unlikely -- would also have negative rating implications. In addition, a downgrade of the parent's ratings, or a change in the parent's strategy towards its operations in Hungary, could affect the bank's long-term deposit ratings.

-- K&H BANK

Moody's lowered K&H's BCA by two notches to b2 from ba3. The lower BCA reflects the increasingly weak and uncertain economic and operating environment, the bank's ongoing deterioration in asset quality -- also reflected in increasing retail loan restructuring activity -- and the expected downward pressure on the bank's profitability. The negative expectation on profitability is driven by (1) decreasing net interest income; (2) a contracting loan book; (3) still-significant provisioning costs, and (4) the sustained large tax burden.

Capitalisation, with a Tier 1 ratio of 11.9% at year-end 2012, remains only adequate and exposed to Hungary's persistent recessionary environment. However, the BCA continues to be supported by the bank's relatively good franchise in corporate and retail banking, as well as asset management, and its relatively good liquidity profile supported by deposits from its mutual funds business.

Moody's has also downgraded K&H's local and foreign-currency deposit ratings to Ba3 from Ba2, following the lowering of the bank's BCA. Moody's maintains its view that the bank would benefit from a moderate likelihood of parental support from KBC Bank N.V. (A3 stable, BFSR D+/BCA baa3 stable), given (1) KBC's full ownership of the bank; and (2) KBC's recognition that K&H is integral part of its core business in Central and Eastern Europe (CEE). This provides rating uplift of two notches for the deposit ratings for K&H from the b2 BCA.

The bank's long-term deposit ratings carry a negative outlook, reflecting K&H's ongoing business and financial challenges which could result in the b2 BCA, and accordingly the Ba3 long-term deposit ratings, becoming more lowly positioned.

-- WHAT COULD MOVE THE RATINGS UP/DOWN

Given that the long-term deposit ratings are on negative outlook, and the weak economic and operating environment in Hungary, upward movement of the BCA is unlikely in the short to medium term. In the longer term, the bank's BCA could come under upwards pressure from an improvement in the economic environment, leading to a strengthening of the bank's financial fundamentals.

A further worsening of the bank's loan portfolio could result in a rating downgrade. Moody's would also view a significant deterioration in K&H's retail or corporate franchise as credit negative; a decline in K&H's franchise could adversely affect the bank's earning generating ability. In addition, a downgrade of the parent's ratings, or a change in the parent's strategy towards Hungary, could affect the K&H's long-term deposit ratings.

-- ERSTE BANK HUNGARY

Moody's lowered EBH's BCA by two notches to caa1 from b2. The lower BCA captures the increasingly weak and uncertain economic and operating environment and the bank's ongoing asset-quality deterioration, affected by its large share of FX loans and its significant exposure to the weak real-estate and construction sectors. The lower BCA also reflects the bank's loss-making profile, driven by (1) decreasing net interest income; (2) a contracting loan book; (3) large loan-loss provisions; and (4) the sustained large tax burden. Capitalisation, with a total ratio of 11.7% at year-end 2012, is modest and the current BCA reflects Moody's view that there is a significant probability that the bank might require further capital injections from the parent -- Erste Group Bank AG (A3 negative, BFSR D+/BCA baa3 negative) -- in the next 12-18 months.

Moody's has also downgraded EBH's local and foreign-currency deposit ratings to B2 from Ba3, following the lowering of the bank's BCA. Moody's maintains its view that the bank would benefit from a moderate likelihood of parental support from Erste Group Bank, given (1) Erste's full ownership of the bank; and (2) its ongoing commitment to its Hungarian operations, due to the subsidiary's strategic fit in Erste's CEE operations and its geographical proximity. This provides rating uplift of two notches for EBH's deposit ratings from the caa1 BCA.

The bank's long-term deposit ratings carry a negative outlook, reflecting EBH's ongoing business and financial challenges which could result in the caa1 BCA, and accordingly the B2 long-term deposit ratings, becoming more lowly positioned.

-- WHAT COULD MOVE THE RATINGS UP/DOWN

Moody's believes there is little likelihood of any upwards rating pressure for EBH's long-term deposit ratings in the near-term, unless there is a material improvement in the European operating environment and a consequent easing of pressures on the parent bank. In the longer term, a potential improvement of the BCA could be driven by an improvement in the bank's financial fundamentals, especially a substantial increase in capitalisation, and by a sustainable improvement in asset quality.

A further worsening of the bank's loan portfolio could result in downward rating pressure. Moody's would also view a further deterioration in its retail or corporate franchise as credit negative, which could adversely affect the bank's earning generating ability. In addition, downward movements on the ratings of the parent, or a change in the parent's strategy towards Hungary, could affect the EBH's long-term deposit ratings.

-- MKB BANK

Moody's lowered MKB's BCA by four notches to ca from b3. The lower BCA captures the increasingly weak and uncertain economic and operating environment and the bank's ongoing deterioration in asset quality, with increasing loan restructuring activity and still-large credit concentrations in the weak real-estate and construction sectors. The lower BCA also reflects the bank's recurring loss-making profile, driven by (1) decreasing net interest income; (2) a contracting loan book; (3) large loan-loss provisions; and (4) the sustained large tax burden.

The bank's capital position is therefore weak, which has in recent years required several capital injections from the parent -- Bayerische Landesbank (Baa1 stable, BFSR D-/BCA ba3 stable) -- to cover large losses. The current BCA reflects Moody's view that the bank will very likely require further capital injections from its parent in the next 12-18 months.

Moody's has also downgraded MKB's local and foreign-currency deposit ratings to Caa2 from B2, following the lowering of the bank's BCA. Moody's maintains its view that the bank would benefit from a moderate degree of parental support from Bayerische Landesbank, given (1) BayernLB's 98.1% ownership of the bank; and (2) its ongoing and significant capital and liquidity support to MKB. This provides rating uplift of two notches for the deposit ratings for MKB from the ca BCA.

The bank's long-term deposit ratings carry a negative outlook. This reflects the likely reduction in parental support in the medium term, because the parent has agreed to sell MKB by 2015, in order to meet the European Commission's requirements.

-- WHAT COULD MOVE THE RATINGS UP/DOWN

The bank's ratings are unlikely to be upgraded in the short term given the current rating action. In the longer term, the successful implementation of a retail strategy, while maintaining a robust position in corporate banking with significantly lower exposure to the real-estate and construction sector, could exert upwards pressure on the bank's BCA. MKB would also have to improve substantially its financial fundamentals and significantly reduce its credit concentrations, resulting in sustainable profitability.

MKB's long-term deposit ratings would be negatively impacted if the ongoing and significant support from its parent were to weaken.

LIST OF AFFECTED RATINGS

Budapest Bank

- Local-currency long-term deposit rating downgraded to Ba3 from Ba1

- Foreign-currency long-term deposit rating downgraded to Ba3 from Ba2

- BFSR downgraded to E+/b2 from D-/ba3

All the above ratings are on negative outlook, except the BFSR

+++++++

K&H Bank

- Local-currency and foreign currency long-term deposit ratings downgraded to Ba3 from Ba2

- BFSR downgraded to E+/b2 from D-/ba3

All the above ratings are on negative outlook, except the BFSR

+++++++

Erste Bank Hungary

- Local-currency and foreign currency long-term deposit ratings downgraded to B2 from Ba3

- BFSR downgraded to E/caa1 from E+/b2

All the above ratings are on negative outlook, except the BFSR

+++++++

MKB Bank

- Local-currency and foreign currency long-term deposit ratings downgraded to Caa2 from B2

- Foreign-currency long-term senior unsecured MTN rating downgraded to (P)Caa2 from (P)B2

- Foreign-currency long-term subordinated MTN rating downgraded to (P)C from (P)Caa2

- Foreign-currency subordinated debt rating (Lower Tier 2) downgraded to C from Caa2

- BFSR downgraded to E/ca from E+/b3

The long-term deposit ratings are on negative outlook

The principal methodology used in these ratings was Moody's Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Budapest, Hungary, Budapest Bank reported consolidated total assets of HUF895 billion as of 30 September 2012.

Headquartered in Budapest, Hungary, K&H Bank reported consolidated total assets of HUF2,357 billion as of 30 September 2012.

Headquartered in Budapest, Hungary, Erste Bank Hungary reported consolidated total assets of HUF2,788 billion as of 31 December 2012.

Headquartered in Budapest, Hungary, MKB Bank reported consolidated total assets of HUF2,686 billion as of 30 June 2012.

REGULATORY DISCLOSURES

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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 Kereskedelmi & Hitel Bank Rt. were initiated by Moody's and were not requested by this rated entities.

Rated entity Kereskedelmi & Hitel Bank Rt or its agent(s) participated in the rating process. This rated entity or its agent(s), if any, provided Moody's - access to the books, records and other relevant internal documents of the rated entity.

Rated entity Erste Bank Hungary Rt or related third parties did not participate in the rating process. Moody's was not provided, for purposes of the rating, access to books, records and other relevant internal documents of the rated entity or related third party.

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.

Simone Zampa
Vice President - Senior Analyst
Financial Institutions Group
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
Telephone:+39-02-9148-1100

Yves J Lemay
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
Telephone:+39-02-9148-1100

Moody's takes actions on four Hungarian banks
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