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Rating Action:

Moody's takes rating actions on six Hungarian banks

11 Nov 2015

London, 11 November 2015 -- Moody's Investors Service has today taken rating actions on six Hungarian banks, prompted by the outlook change to positive from stable on the Hungarian government's Ba1 debt rating. For further information on the sovereign rating action, please refer to Moody's press release dated 6 November 2015. (https://www.moodys.com/research/--PR_337832).

Furthermore, Moody's changed Hungary's Macro Profile to "Weak+" from "Weak", driven by the improvement in the Hungarian banks' operating environment, in particular in the country's economic strength. The strengthening of the Macro Profile has led Moody's to review all Hungarian banks' financial factors and standalone credit profiles, reflected in rating actions on selected banks' standalone baseline credit assessment (BCA) and ratings.

The following banks are affected by today's rating actions:

- Affirmation with a positive outlook (previously stable) of MFB Hungarian Development Bank Private Limited Company's (MFB) long-term foreign currency debt and deposit ratings at Ba1 and Ba2, respectively;

- Affirmation with a positive outlook (previously stable) of the Ba2 long-term foreign currency deposit ratings of OTP Bank NyRt (OTP) and OTP Jelzálogbank Zrt. (OTP Mortgage Bank Ltd.);

- Upgrade by one notch of Erste Bank Hungary Zrt.'s long-term deposit ratings to B2, long-term Counterparty Risk Assessment (CRA) to Ba2(cr), the baseline credit assessment to caa1 and the adjusted BCA to b2; the outlook on the long-term deposit ratings remains stable;

- Affirmation with a stable outlook of Kereskedelmi & Hitel Bank Rt.'s Ba3 long-term deposit ratings, its long-term and short-term CRA at Baa3(cr)/Prime-3(cr), and its BCA and adjusted BCA at b2 and ba3, respectively; and

- Affirmation with a stable outlook of Budapest Bank Rt.'s B2 long-term deposit ratings, its long- and short-term CRA at Ba3(cr/Not-Prime(cr), and its BCA and adjusted BCA at b2, respectively.

All other ratings and rating inputs 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 MKB Bank Zrt. and FHB Mortgage Bank Co. Plc. -- are unaffected by today's actions.

The full list of the affected ratings can be found at the end of this press release.

RATINGS RATIONALE

-- POSITIVE OUTLOOK DRIVEN BY CHANGE OF OUTLOOK ON GOVERNMENT DEBT RATING

The change of the outlook on the Hungarian government's Ba1 debt rating has led to the affirmation with a positive outlook of the Ba2 long-term foreign-currency deposit ratings of MFB Hungarian Development Bank Private Limited Company (MFB), OTP Bank NyRt (OTP), and OTP Jelzálogbank Zrt. (OTP Mortgage Bank Ltd.). These ratings, which are constrained by Hungary's Ba2 foreign-currency deposit ceiling, could be upgraded in the event of the government's debt rating upgrade and increase of the aforementioned ceiling.

Furthermore, the positive outlook on the government's debt rating has led to the affirmation with a positive outlook on MFB's Ba1 foreign-currency debt rating. MFB is a development bank that is owned and guaranteed by the Hungarian government, and it plays a vital role in the government's policy to support domestic economic development. Moody's continues to assume a very high probability of support from the Hungarian government for MFB, reflected in the framework of explicit and irrevocable state guarantees for the bank's liabilities.

-- IMPROVEMENT OF HUNGARY'S MACRO PROFILE REFLECTED IN RATING ACTIONS OF SELECTED BANKS

The strengthening of Hungary's Macro Profile to "Weak+" from "Weak" was driven by the improvement in the Hungarian banks' operating environment, in particular the country's economic strength.

The more benign macroeconomic environment helps Hungarian banks to stabilise their credit fundamentals. However, it is unlikely to lead to material improvements in the banks' credit profiles. Credit conditions remain challenging as loan demand is weak and banks are burdened with high levels of problem loans. Therefore, the Macro Profile improvement has only limited impact on the Hungarian banks' ratings and has affected only the following banks.

Erste Bank Hungary

The upgrade of Erste Bank Hungary Zrt.'s (EBH) long-term deposit ratings to B2 with a stable outlook from B3 (stable) was driven by: (1) The upgrade of the bank's standalone baseline credit assessment (BCA) to caa1 from caa2; (2) unchanged assumption of high parental support from the bank's parent, Austria's Erste Group Bank (Baa2 Positive /P-2, BCA ba1), resulting in two notches of uplift from the BCA and an adjusted BCA of b2 (from b3); and (3) no additional rating uplift from Moody's Advanced Loss-Given-Failure (LGF) analysis and assumptions of low government support.

The upgrade of EBH's BCA reflects its weak asset quality and profitability, but also reduced pressure on capital adequacy and good liquidity. EBH reported a loss of HUF101.4 billion in 2014, largely driven by HUF105.5 billion of compensation charges to retail borrowers. Despite a decline in the volume of problem loans in 2014, the share of such loans rose to 27.2% of gross loans at year-end 2014 from 26% at year-end 2013, as the bank's loan book continued to contract.

The pressure on capital adequacy stemming from loan loss charges and compensation provisions for retail borrowers was eased following a HUF95 billion capital increase in 2014. As a result, the bank's reported Tier 1 ratio stood at 11.8% at year-end 2014. EBH's liquidity remains stable with liquid assets accounting for around a third of the total assets at year-end 2014.

Kereskedelmi & Hitel Bank Rt.

The affirmation of Kereskedelmi & Hitel Bank Rt.'s (K&H) Ba3 long-term deposit ratings with a stable outlook are based on: (1) The affirmation of its b2 BCA; (2) Moody's assumption of high parental support from the bank's parent, Belgium's KBC Bank N.V. (A2 Positive/P-1, BCA baa2), resulting in two notches of uplift from the BCA; and (3) no additional rating uplift from Moody's Advanced LGF analysis and assumptions of low government support.

The affirmation of K&H's b2 BCA reflects the bank's satisfactory profitability and capitalisation, good liquidity and weak asset quality.

In H1 2015, the bank reported a return on average assets (RoAA) of 0.73% following a negative RoAA of 1.15% in 2014, that was driven by large provisions against compensation payments to retail borrowers. Asset risk receded modestly during 2014, as the reported non-performing loan (NPL) ratio declined to 15.85% as of end of December, down from 18% at the previous year-end. The loss reported in 2014 negatively affected K&H's capitalisation, with the bank's reported Tier 1 ratio declining to 11.7% as of December 2014 from 13.3% as of December 2013. The bank's return to profitability, supported by modest growth in lending, should lead to a moderate improvement in capital adequacy over the next 12 to 18 months. K&H's liquidity remains stable with liquid assets accounting for 29.82% of the total assets at end-H1 2015.

Budapest Bank

The affirmation of Budapest Bank's B2 long-term deposit ratings with a stable outlook are based on (1) the affirmation of its b2 BCA and (2) no further rating uplift from Moody's Advanced LGF analysis and assumption of low government support.

The affirmed b2 BCA reflects the bank's high asset risk, as well as moderate capital adequacy, profitability and liquidity.

Loan book quality has stabilised and will likely improve modestly in the next 12 to 18 months benefiting from the growing economy, completion of settlements with the retail borrowers and conversion of FX mortgages into Hungarian forints. The loss reported in 2014 negatively affected Budapest Bank's capitalisation, with the bank's Tier 1 ratio declining to 12.9% as of December 2014 from 18.6% as of December 2013. The bank's return to profitability and only modest lending growth will likely result in a moderate improvement in the capital adequacy over the next 12 to 18 months. Budapest Bank is mainly funded by customer deposits, which accounted for 75% of its non-equity funding as of year-end 2014. The bank's liquidity cushion is satisfactory at 28% of the total assets.

-- WHAT COULD MOVE THE RATINGS UP/DOWN

An upgrade of Hungary's sovereign ratings and/or improvements in the country's Macro Profile and the affected banks' asset quality, profitability and capitalisation, could have positive rating implications.

The ratings will experience a negative pressure if the outlook on the sovereign ratings is changed to stable and/or there is a deterioration the country's Macro Profile and/or the banks' asset quality, capitalisation and profitability.

LIST OF AFFECTED CREDIT RATINGS

MFB Hungarian Development Bank Private Limited Company

- Ba2 long-term foreign-currency deposit rating affirmed with a positive outlook (from stable)

- Ba1 long-term foreign-currency senior unsecured debt rating affirmed with a positive outlook (from stable)

OTP Bank NyRt

- Ba2 long-term foreign-currency deposit rating affirmed with a positive outlook (from stable)

OTP Jelzálogbank Zrt. (OTP Mortgage Bank Ltd.)

- Ba2 long-term foreign-currency deposit rating affirmed with a positive outlook (from stable)

Erste Bank Hungary Zrt.

- Long-term local and foreign-currency deposit ratings upgraded to B2 with stable outlook from B3 (stable)

- Baseline Credit Assessment upgraded to caa1 from caa2

- Adjusted Baseline Credit Assessment upgraded to b2 from b3

- Long-term Counterparty Risk Assessment upgraded to Ba2(cr) from Ba3(cr)

- Not-Prime(cr) short-term CR Assessment affirmed

Kereskedelmi & Hitel Bank Rt.

- Ba3 long-term local and foreign-currency deposit ratings affirmed with stable outlook

- b2 Baseline Credit Assessment affirmed

- ba3 Adjusted Baseline Credit Assessment affirmed

- Counterparty Risk Assessment of Baa3(cr) / P-3(cr) affirmed

Budapest Bank Rt.

- B2 long-term local and foreign-currency deposit ratings affirmed with stable outlook

- b2 Baseline Credit Assessment and Adjusted Baseline Credit Assessment affirmed

- Counterparty Risk Assessment of Ba3(cr) / Not-Prime(cr) affirmed

PRINCIPAL METHODOLOGY

The principal methodology used in rating Budapest Bank Rt., Kereskedelmi & Hitel Bank Rt., OTP Bank NyRt, OTP Jelzálogbank Zrt. (OTP Mortgage Bank Ltd.) and Erste Bank Hungary Zrt. was Banks published in March 2015.

The principal methodology used in rating MFB Hungarian Development Bank Private Limited Company was Government-Related Issuers published in October 2014.

Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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 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 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

Yves Lemay
MD-Banking & Sovereign
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 takes rating actions on six Hungarian banks
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