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Rating Action:

Moody's takes multiple rating actions on Hungarian banks

16 Dec 2011

Rating actions conclude the review for downgrade on all the banks' ratings

Milan, December 16, 2011 -- Moody's Investors Service has today downgraded the standalone ratings of four Hungarian banks - K&H Bank, FHB Mortgage Bank, Erste Bank Hungary and MKB Bank - and lowered the parental support uplift in the deposit ratings for two foreign-owned banks - K&H Bank and Budapest Bank; both factors have, in turn, resulted in the downgrade of the following banks' deposit and debt ratings: Budapest Bank, K&H Bank, FHB Mortgage Bank, Erste Bank Hungary and MKB Bank. All the banks' ratings carry a negative outlook.

The rating actions reflect three major issues (i) asset quality has deteriorated quicker than initially expected, which will likely continue throughout 2012; (ii) increasing pressure on profitability and capital, partly due to the early repayment of foreign currencies (FX) mortgages; and (iii) a risk of a weakening in the parent banks' commitment to their Hungarian operations.

For two other banks -- OTP Bank Nyrt and OTP Mortgage Bank -- Moody's has confirmed the local-currency and foreign-currency deposit ratings, as well as the foreign-currency debt ratings of OTP Bank Nyrt, with a negative outlook assigned to all the ratings.

Full details of the rating actions for each bank and their rationale are provided below.

Today's rating actions conclude the review for downgrade on the banks' ratings initiated on 4 October 2011.

RATINGS RATIONALE

-- RAPID DETERIORATION IN ASSET QUALITY

The rating agency notes that exposure to foreign-currency loans is a major credit risk inherent in the Hungarian banking system -- about 70% of Hungarian mortgages are denominated in FX of which more than 90% are denominated in Swiss francs. The Hungarian forint relative to the Swiss franc has weakened by about 50% compared with the average 2005-08 exchange rate. This devaluation has contributed to a significant growth of problem loans in the household sector. Moody's notes that most of the borrowers have no FX revenue and are therefore vulnerable to a depreciation of the local currency.

In September 2011, the Hungarian government approved a law that gives foreign-currency mortgage borrowers the option to repay the full outstanding amount at exchange rates below market rates. This law will likely trigger losses for the banks and affect their capital positions, depending on the total take-up rate. We also believe that FX lending in the system will remain significant, and that the relatively high leverage of Hungarian households represents an acute problem in the banking system.

In addition, corporate loans are being negatively affected by the weak performance of the commercial real estate and small and medium enterprises (SME) sectors. The municipal sector is also now facing greater debt repayment problems, which is exacerbating the banks' already weak asset quality.

Moody's notes that the level of non-performing loans (NPLs) in the banks' portfolios rose to 15.7% in Q3 2011 from 13% at year-end 2010; Moody's expects that NPLs will continue to rise throughout 2012, due to the turbulent economic conditions and the significant loan restructuring in the system, which both pose risks for the future.

Moody's acknowledges the increasingly constrained economic growth trajectory in Hungary due to difficult domestic and external conditions. Last November the rating agency revised down its growth forecast for 2011 to 1.5% (from 2.7%) and expects a further decline to 0.5% in 2012. Unemployment is expected to remain above 10%, and the housing market will remain under significant pressure.

-- INCREASING PRESSURE ON PROFITABILITY AND CAPITAL

Moody's notes that profitability and capital levels among the rated banks vary. However, the rating agency expects overall profitability to remain weak this year and next, with several banks reporting losses. The continued weak profitability is due to (i) higher funding costs; (ii) high risk costs; (iii) shrinking business volumes due to the difficult operating environment; and (iv) an onerous banking tax. Although the banks' net interest margins are relatively high when compared with international peers, these are in most cases not sufficient to offset these pressures.

Moody's says that the rating actions also consider the implications of the FX mortgage early repayment scheme on the banks' financial fundamentals, which vary depending on each bank's (i) exposure to foreign-currency mortgages; (ii) profitability levels; and (iii) capital buffers. The rating agency has built its analysis based on assumptions around early repayment scenarios of about 20% for the rated banks, considering that (i) only a small portion of borrowers will have enough cash savings to repay their mortgages in one lump sum; (ii) banks will not compete significantly for those borrowers with payment in arrears; and (iii) remortgaging in the local currency will carry a significantly higher interest-rate cost.

Moody's notes that both the Hungarian government and the Hungarian banking association have reached a new agreement on foreign-currency mortgages. The net implications of this new arrangement will become more visible in the medium term, but is likely to entail both positive and negative implications for the banking system.

Considering Moody's scenario analysis for stress tests, and the potential implications of the FX mortgage early repayments, the resulting capital position of the rated banks varies from (i) more capitalised banks that have absorption capacity to severe stress scenarios (Tier1 capital ratio after stress ranging from 6% to 7%); to (ii) banks that would see their capital position compromised under the severe stress scenarios, and would have to rely on external support to return to the minimum regulatory Tier1 capital ratio of 4%.

-- RISK OF WEAKENING OF PARENT BANKS' COMMITMMENT TO THEIR SUBSIDIARIES RISING

Foreign-owned banks -- which represent more than 80% of the total capital in the system -- face an increasing likelihood that their foreign parent banks will limit their operations in the country. This could affect the banks' capital positions, profitability and suppress lending growth. Deleveraging could be further exacerbated by the banks' significant reliance on funding from their parent banks for their foreign-currency loans. Some foreign parent banks have already started reducing their operations in Hungary and shortening the maturity of the FX funding provided to their Hungarian subsidiaries.

Moody's believes that the foreign parents' strategic priorities and cost-benefit rationales of operating in Hungary are increasingly affected by the (i) highly stressed operating environment in Europe; and (ii) the difficult business climate in Hungary. As such, Moody's has lowered the parental support uplift by one notch in the deposit ratings for two foreign-owned banks - K&H Bank and Budapest Bank, but still believes that there is a moderate probability that support would be forthcoming if required. For the other two rated foreign-owned banks - Erste Bank Hungary and MKB Bank -- the rating uplift deriving from Moody's assumptions of the likelihood of support was already limited and therefore remained unchanged.

RATING ACTIONS IN DETAIL

-- OTP BANK NYRT

Moody's has confirmed OTP Bank Nyrt's standalone BFSR at D+ (mapping to Ba1 on the long-term scale), its long-term local-currency deposit rating at Ba1, its long-term foreign-currency deposit rating at Ba2, its foreign-currency senior debt rating at Ba1, its foreign-currency subordinated debt rating at Ba2, and its foreign-currency junior subordinated debt rating at Ba3 (hyb). The outcome reflects the bank's relative resilience in the face of the euro-area crisis and the benefits of its international diversification. The outlook on all the ratings is negative.

Overall, Moody's said that the negative outlook on the ratings reflects (i) the pressures in the Hungarian operating environment; (ii) the fact that increased non-performing loans and provisioning needs exert pressure on the group's profitability; and (iii) the turbulent market conditions which make FX funding more difficult and costly.

-- OTP MORTGAGE BANK

Moody's has confirmed OTP Mortgage Bank's standalone BFSR at D+ (mapping to Ba1 on the long-term scale), its long-term local-currency deposit rating at Ba1 and its long-term foreign-currency deposit rating at Ba2. The outlook on all the ratings is negative. The ratings are the same as its parent's ratings, given that the bank is 100% owned and fully guaranteed by OTP Bank Nyrt, it is an integral part of OTP franchise, and it operates as the mortgage division of OTP Bank Nyrt.

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 Ba3 on the long-term scale) from D (mapping to Ba2 on the long-term scale), as well as the local-currency deposit ratings to Ba2/Not-Prime from Baa3/Prime-3. The long-term foreign-currency deposit rating was confirmed at Ba2. The outlook on all the ratings is negative. The rating actions primarily reflect pressure on the bank's profitability from (i) the FX mortgage early repayment scheme; (ii) its shrinking business volumes; and (iii) its continuing increase in non-performing loans, which may require higher provisioning needs. In addition, Moody's considers the bank's current capital buffer -- with a Tier1 capital ratio of 9.9% under IRB foundation at Q3 2011 -- as only adequate in the currently difficult operating environment. Furthermore, the rating agency says 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.

In addition, Moody's considers that there is increased uncertainty surrounding the likelihood of KBC Bank's support to K&H. This is partly because KBC Group has to repay, by the end of 2013 (the period agreed upon with the EU Commission in 2009), the whole amount of the core capital securities subscribed by the Belgian Federal and Flemish Regional Governments, whilst at the same time achieving a Basel III pro-forma core Tier1 capital ratio of 8%. Moody's considers that KBC Bank's historically good support for K&H may diminish as a result of pressures at group level. Indeed, the limited availability of resources to channel into K&H may over time negatively affect the business and the financial fundamentals of the bank.

-- BUDAPEST BANK

Moody's has confirmed Budapest Bank's BFSR at D- (mapping to Ba3 on the long-term scale), as well as its long-term foreign-currency deposit rating at Ba2, given that the bank is showing some resilience to the FX mortgage early repayment scheme. Its resilience to the scheme is supported by its good financial fundamentals, especially its earnings and capitalisation.

However, Moody's has lowered the bank's local-currency deposit ratings to Ba1/Not-Prime from Baa3/Prime-3 to reflect its recalibrated assumptions of probability of support from the bank's parent, GE Capital, given the difficult operating environment in Hungary. The outlook on all the ratings is negative and reflects (i) the weakening asset quality of the bank, mitigated by the high non-performing loan coverage ratio; and (ii) the pressures in the Hungarian operating environment.

-- FHB MORTGAGE BANK

Moody's downgraded FHB Mortgage Bank's standalone BFSR to E+ (mapping to B1 on the long-term scale) from D (mapping to Ba2 on the long-term scale), as well as the local-currency and foreign-currency deposit ratings to Ba3/Not-Prime from Ba2/Not-Prime. The outlook on all the ratings is negative. The rating actions reflect the bank's pressured profitability, which is also being affected by the FX mortgage early repayment scheme, the increasing cost of funding, the deterioration in non-performing loans and the subsequent pressure on increasing provisioning needs. The capital level is modest when measured against the difficult operating environment in Hungary, especially given the bank's focus on the difficult mortgage business and on the problematic property market. The rating actions also capture the bank's significant exposure to the wholesale funding market. The bank is funded mainly through covered bonds, and senior unsecured bonds. Wholesale funding is currently accessible only in the local market, due to the turbulent international market conditions. This, in turn, makes FX funding for the bank more difficult and costly, and investor demand is limited.

The deposit ratings of the bank incorporate one notch of rating uplift, deriving from Moody's view of a moderate probability of systemic support given the nature and the specialised role of this institution in the Hungarian market, and the historical evidence of support that the bank received from the Hungarian government.

-- ERSTE BANK HUNGARY

Moody's downgraded Erste Banks Hungary's standalone BFSR to E+ (mapping to B2 on the long-term scale ) from D- (mapping to Ba3 on the long-term scale), its local-currency deposit ratings to Ba3/Not-prime from Ba1/Not-Prime, and its foreign-currency deposit ratings to Ba3/Not-Prime from Ba2/Not-Prime. The outlook on all the ratings, except the BFSR, is negative. The rating actions reflect (i) the bank's vulnerability to the potential losses deriving from the FX mortgage early repayment scheme; (ii) the impact of the generally weakening economic environment (which will likely result in large losses in the corporate and commercial real estate portfolios); and (iii) the increasing pressure on provisioning needs, reflected in the increasing trend of non-performing loans. The bank is forecasting a large loss in 2011, which required an immediate, pre-emptive capital injection of EUR600 million by the parent in November 2011.

The rating actions also consider the bank's potentially weakening market position in the Hungarian market given the recently announced strategy by the parent to sharply deleverage its operations in Hungary.

-- MKB Bank

Moody's confirmed MKB Bank's standalone BFSR at E+ -- but lowered the mapping to B3 from B1 on the long-term scale -- and downgraded the deposit and senior debt ratings to B2/Not-Prime from Ba3/Not-Prime. Moody's has also lowered MKB's foreign-currency subordinated debt (Lower Tier2) rating to Caa2 from B1, to reflect the increasing risk of the subordinated debt being converted into equity as a means of recapitalisation. The outlook on all the ratings is negative.

Moody's says that the downgrades reflect (i) the bank's vulnerability to the potential losses from the FX mortgage early repayment scheme; (ii) its rising NPLs and the subsequent pressure on provisioning needs; (iii) its recurring loss-making profile, since 2010; (iv) its impaired business model, with high concentrations to the weak SME and commercial real estate sectors, and limited retail franchise; and (iv) weak capitalisation.

The bank could breach its minimum regulatory capital adequacy requirement due to its forecast 2011 losses, including the likely impact of the FX mortgage early repayments. The parent, BayernLB, and the local regulator are therefore exploring ways to strengthen the capital position of the bank.

In addition, given the difficult operating environment and the ongoing bank's reorganisation and business refocusing, MKB is sharply deleveraging and the parent intends to see if potential sell opportunities will arise in the future.

Moody's has taken the following rating actions:

OTP Bank Nyrt

- Long-term local-currency deposit rating confirmed at Ba1

- Long-term foreign-currency deposit rating confirmed at Ba2

- Foreign-currency senior unsecured debt rating confirmed at Ba1

- Foreign-currency subordinated debt rating (Lower Tier 2) confirmed at Ba2

- Foreign-currency junior subordinated debt rating (Upper Tier 2) confirmed at Ba3 (hyb)

- BFSR confirmed at D+, and corresponding to a standalone rating of Ba1 on the long-term scale

All the above ratings are on negative outlook

OTP Mortgage Bank

- Long-term local-currency deposit rating confirmed at Ba1

- Long-term foreign-currency deposit rating confirmed at Ba2

- BFSR confirmed at D+, and corresponding to a standalone rating of Ba1 on the long-term scale

All the above ratings are on negative outlook

K&H Bank

- Long-term foreign-currency deposit rating confirmed at Ba2

- Local-currency deposit ratings downgrade to Ba2/Not-Prime from Baa3/Prime-3

- BFSR downgraded to D- (mapping to Ba3 on the long-term scale) from D (mapping to Ba2 on the long-term scale)

All the above ratings are on negative outlook

Budapest Bank

- Long-term foreign-currency deposit rating confirmed at Ba2

- Local-currency deposit ratings downgraded to Ba1/Not-Prime from Baa3/Prime-3

- BFSR confirmed at D-, and corresponding to a standalone rating of Ba3 on the long-term scale

All the above ratings are on negative outlook

FHB Mortgage Bank

- Local-currency deposit ratings downgraded to Ba3/Not-Prime from Ba2/Not-Prime

- Foreign-currency deposit ratings downgraded to Ba3/Not-Prime from Ba2/Not-Prime

- BFSR downgraded to E+ (mapping to B1 on the long-term scale) from D (mapping to Ba2 on the long-term scale)

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

Erste Bank Hungary

- Foreign-currency deposit ratings downgraded to Ba3/Not-Prime from Ba2/Not-Prime

- Local-currency deposit ratings downgraded to Ba3/Not-Prime from Ba1/Not-Prime

- BFSR downgraded to E+ (mapping to B2 on the long-term scale) from D- (mapping to Ba3 on the long-term scale)

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

MKB Bank

- Local-currency deposit ratings downgraded to B2/Not-Prime from Ba3/Not-Prime

- Foreign-currency deposit ratings downgraded to B2/Not-Prime from Ba3/Not-Prime

- Foreign-currency senior unsecured debt rating downgraded to B2 from Ba3

- Foreign-currency subordinated debt rating (Lower Tier 2) downgraded to Caa2 from B1

- BFSR confirmed at E+, but the corresponding standalone rating was lowered to B3 from B1

All the above ratings are on negative outlook

PRINCIPAL METHODOLOGIES

The methodologies used in rating OTP Mortgage Bank, K&H Bank, Budapest Bank, FHB Mortgage Bank, and Erste Bank Hungary 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. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

The methodologies used in rating OTP Bank Nyrt and MKB Bank were Bank Financial Strength Ratings: Global Methodology published in February 2007, 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. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Budapest, Hungary, OTP Bank Nyrt reported consolidated total assets of HUF9,712 billion (EUR36.3 billion) as of 30 June 2011.

Headquartered in Budapest, Hungary, OTP Mortgage Bank reported consolidated total assets of HUF1,645 billion (EUR6.15 billion) as of 30 June 2011.

Headquartered in Budapest, Hungary, K&H Bank reported consolidated total assets of HUF2,922 billion (EUR10.9 billion) as of 30 June 2011.

Headquartered in Budapest, Hungary, Budapest Bank reported consolidated total assets of HUF887 billion (EUR3.31 billion) as of 30 June 2011.

Headquartered in Budapest, Hungary, FHB Mortgage Bank reported consolidated total assets of HUF839.8 billion (EUR3.14 billion) as of 30 June 2011.

Headquartered in Budapest, Hungary, Erste Bank Hungary reported consolidated total assets of HUF3,300 billion (EUR12.3 billion) as of 30 June 2011.

Headquartered in Budapest, Hungary, MKB Bank reported consolidated total assets of HUF 2,818billion (EUR10.61 billion) as of 30 June 2011.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

The deposit ratings of rated entity Kereskedelmi & Hitel Bank was initiated by Moody's and was not requested by the rated entity.

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

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, public information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 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.

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 Lemay
MD - Banking
Financial Institutions Group
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Releasing Office:
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Moody's takes multiple rating actions on Hungarian banks
No Related Data.
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Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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