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Rating Action:

Moody's upgrades Erste Bank Hungary's local currency deposit rating to Baa1

18 Jun 2019

Outlook on the local currency deposit changed to stable from positive

Limassol, June 18, 2019 -- Moody's Investors Service, ("Moody's") has today upgraded the long-term local currency deposit rating of Erste Bank Hungary Zrt. (EBH) to Baa1 from Baa2 and changed its outlook to stable from positive. The bank's Baa3 long-term and its Prime-3 short-term foreign currency deposit ratings, its Prime-2 short-term local currency deposit rating, its Baa1 long-term local and foreign currency Counterparty Risk Ratings (CRR), its Baa2(cr) long-term Counterparty Risk Assessment (CRA), as well as its Prime- 2 short term CRRs and Prime-2(cr) short term CRA were affirmed. The bank's Baseline Credit Assessment (BCA) was also upgraded to ba2 from ba3 while its adjusted BCA was upgraded to baa3 from ba1.

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

RATINGS RATIONALE

- BALANCE SHEET STRENGTHENING DRIVES THE UPGRADE OF THE LOCAL-CURRENCY DEPOSIT RATING

Moody's said that the upgrade of EBH's local deposit rating was driven by (1) the ongoing balance sheet strengthening in line with Moody's expectations; (2) the unchanged view of a high likelihood of support from the bank's foreign parent Erste Group Bank AG (deposits A2 positive, BCA baa1) and (3) the two notches of rating uplift following the application of Moody's Advanced Loss Given Failure (LGF) analysis being maintained.

The upgrade of the bank's BCA reflects the continued strengthening of its balance sheet mainly through lowering problem loans further while maintaining strong loss absorption buffers. EBH's problem loans continued to decline to 5.1% of gross loans as of year-end 2018 from 5.6% as of December 2017 (Dec 2014: 27%) owing to write-offs, problem loan sales and loan work outs. While the coverage ratio declined to 64% as of December 2018 from a strong 87% as of December 2017, it remains broadly in line with rated domestic peers. The rating agency anticipates modest further improvement in the bank's asset quality supported by the positive although slowing macroeconomic environment. Moody's forecasts 3.8% real GDP growth for 2019 down from 4.9% achieved in 2018.

With a reported Tier 1 ratio of 18.2% as of December 2018 from 15.9% as of year-end 2017, capital buffers have solidified mainly due the bank's strong profitability and moderate asset growth. However, the rating agency expects EBH's capital buffers to soften as the bank continues to pay large dividends and profitability moderates. EBH reported a strong Moody's adjusted 2.1% return on assets as of December 2018 owing to a high, although declining 2.93% net interest margin, a positive contribution to profitability from a reversal of provisions owing to recoveries of previously provisioned amounts and moderate efficiency with the cost to income ratio at 63%.

Overall, Moody's believes that EBH's stronger solvency will allow the bank to further benefit from the positive macroeconomic environment in Hungary and continue to grow its loan book to support its core profitability. However, the rating agency anticipates the bank's profitability to weaken somewhat from strong levels, owing to strong competition and higher operational and credit costs.

- AFFIRMATION OF THE FOREIGN-CURRENCY DEPOSIT RATING, CRRs AND CRA

The affirmation of the long-term foreign currency deposit rating, the CRRs and CRA mainly reflects Moody's opinion about the significant risk correlations between a bank and the country it operates in owing to the limitations a government can impose on domestic entities.

As a result, EBH's long-term foreign currency deposit rating of Baa3 has been affirmed at the level of the Baa3 foreign currency deposit ceiling for Hungary, which constrains the bank's foreign currency ratings. The Baa3 foreign currency deposit ceiling captures the risk that the Hungarian government would interfere with a domestic bank's repayment of foreign currency deposits.

Similarly, the bank's long-term Baa2(cr) CRA and Baa1 CRRs have been affirmed, because under Moody's Banks methodology, the CRA will typically not exceed the sovereign's own rating by more than one notch while banks' deposit and debt ratings cannot exceed the government rating by more than two notches. Without these constraints, both rating classes would have benefited from a three notch uplift from EBH's baa3 adjusted BCA based on Moody's Advanced LGF analysis which incorporates the cushion against default provided to these senior obligations by subordinated liabilities.

- OUTLOOK CHANGE TO STABLE FROM POSITIVE

The change of outlook on the long-term local currency deposit rating to stable from positive reflects Moody's expectation that the bank's financial fundamentals, mainly its asset quality, capital and funding will remain broadly stable over the next 12-18 months.

-- WHAT CAN CHANGE THE RATINGS UP/DOWN

The bank's BCA could be upgraded following further improvement in its asset quality, loan loss reserves and capital buffers while demonstrating resilient core profitability and maintaining its strong funding and liquidity profile. A change in EBH's liability structure resulting in a larger loss absorbing cushion for depositors will not result in an upgrade of the local currency deposit rating, since the bank's local currency deposit rating, which is already at the same level as the local currency deposit ceiling, cannot exceed the ceiling.

The bank's Baa3 foreign currency deposit rating is constrained by the foreign currency deposit ceiling and can only be upgraded if the ceiling is raised. EBH's Baa1 foreign and local currency CRRs are at the same level as the foreign and local currency bond ceilings and two notches above the government of Hungary's Baa3 bond rating and can only be upgraded if the government rating is upgraded and the ceilings raised. The bank's Baa2(cr) CRA is constrained at one notch above the government rating and can only be upgraded if the government bond rating is upgraded.

The bank's ratings could be downgraded owing to substantial weakening in its asset quality, capital buffers or liquidity buffers. EBH's adjusted BCA could also be downgraded following a lower support assumption or a weaker credit profile of its foreign parent. The bank's local currency deposit rating could also be downgraded owing to changes in its liability structure reducing the loss absorption buffers for depositors. The bank's foreign-currency deposit ratings, which are constrained by the foreign currency deposit ceiling, will not be affected by a two-notch downgrade of the local currency deposit ratings.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

AFFECTED RATINGS

Issuer: Erste Bank Hungary Zrt.

..Upgrades:

.... Adjusted Baseline Credit Assessment, Upgraded to baa3 from ba1

.... Baseline Credit Assessment, Upgraded to ba2 from ba3

.... Long-term Bank Deposits (Local Currency), Upgraded to Baa1 from Baa2, Outlook Changed To Stable From Positive

..Affirmations:

.... Long-term Counterparty Risk Assessment, Affirmed Baa2(cr)

.... Short-term Counterparty Risk Assessment, Affirmed P-2(cr)

.... Long-term Counterparty Risk Ratings (Local and Foreign Currency), Affirmed Baa1

.... Short-term Counterparty Risk Ratings (Local and Foreign Currency), Affirmed P-2

.... Long-term Bank Deposits (Foreign Currency), Affirmed Baa3, Outlook Remains Stable

.... Short-term Bank Deposits (Local Currency), Affirmed P-2

.... Short-term Bank Deposits (Foreign Currency), Affirmed P-3

..Outlook Action:

....Outlook Changed To Stable From Stable(m)

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 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.

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.

Melina Skouridou, CFA
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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