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Rating Action:

Moody's upgrades four Hungarian banks' ratings

26 Jul 2016

London, 26 July 2016 -- Moody's Investors Service has today upgraded the ratings of four Hungarian banks. This concludes the review for upgrade initiated on 29 June 2016. For further information on this rating action, please refer to Moody's press release (https://www.moodys.com/research/Moodys-places-four-Hungarian-banks-ratings-on-review-for-upgrade--PR_351304). The review was prompted by the rating agency's change of its Macro Profile for Hungary to "Moderate-" from "Weak+". The strengthening of the Macro Profile is driven by the improvement in the Hungarian banks' operating environment, in particular the gradual recovery in credit demand which should support banks' lending growth and revenues after several years of loan book contraction.

For a detailed analysis of Hungary's Macro Profile please click on the following link: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1029023

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

- Kereskedelmi & Hitel Bank Rt.'s long-term local-currency deposit rating was upgraded to Ba1 from Ba3, its long-term foreign-currency deposit rating was upgraded to Ba2 from Ba3, the baseline credit assessment (BCA) was upgraded to b1 from b2 and the adjusted BCA was upgraded to ba2 from ba3; the outlook on the long-term local-currency deposit rating is stable while the outlook on the long-term foreign-currency deposit rating is positive. The bank's long-term Counterparty Risk Assessment (CRA) was affirmed at Baa3(cr).

- Erste Bank Hungary Zrt.'s long-term local and foreign-currency deposit ratings were upgraded to Ba2 from B2, the long-term CRA was upgraded to Ba1(cr) from Ba2(cr), the BCA was upgraded to b3 from caa1 and the adjusted BCA was upgraded to b1 from b2; the outlook on the long-term deposit ratings is positive;

- Budapest Bank Rt.'s long-term local and foreign-currency deposit ratings were upgraded to Ba2 from B2, the long-term CRA was upgraded to Ba1(cr) from Ba3(cr), the BCA and adjusted BCA were upgraded to b1 from b2; the outlook on the long-term deposit ratings is stable;

- MKB Bank Zrt.'s long-term local and foreign-currency deposit ratings were upgraded to B3 from Caa2 with a stable outlook. The bank's long-term CRA was affirmed at B2(cr).

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

RATINGS RATIONALE

(1) CHANGED MACRO PROFILE REFLECTS IMPROVING OPERATING ENVIRONEMENT IN HUNGARY AND BENEFITS BANK'S CREDIT PROFILES

Moody's change of Hungary's Macro Profile to "Moderate-" from "Weak+" positively affects most rated Hungarian banks' BCAs and the outcomes of Moody's Advanced Loss Given Failure (LGF) analysis. The Macro Profile constitutes an assessment of the macroeconomic environment in which a bank operates.

The change of the Macro Profile illustrates Moody's assessment of the improvement in Hungarian banks' operating environment, in particular in the gradual recovery in credit demand. Moody's says that after contracting by more than 20% over the past five years, Hungarian banks' loan books are likely to grow by about 5% annually over the next 12 to 18 months, supporting their revenue generation. The improving operating environment benefits Hungarian banks' standalone BCAs by helping to reduce the high level of problem loans, restoring their profitability after several years of losses, and strengthening capitalisation.

The loss rate Moody's uses for banks with a Macro Profile of "Moderate-" and higher is 8% of tangible banking assets, as opposed to 13% for banks with a lower Macro Profile. This has resulted in increased rating uplift due to lower severity of loss faced by the different liability classes in resolution.

(2) BANK-SPECIFIC CONSIDERATIONS

Kereskedelmi & Hitel Bank Rt. (K&H)

According to Moody's, the two-notch upgrade of K&H's long-term local-currency deposit rating to Ba1 from Ba3 was driven by: (1) the upgrade of the bank's BCA to b1 from b2; (2) unchanged high affiliate support assumptions from its parent, Belgium's KBC Bank N.V. (A1 stable/A1 stable; baa1), resulting in a two-notch rating uplift; and (3) one notch of rating uplift from Moody's Advanced LGF analysis (no uplift previously).

K&H's Ba2 long-term foreign-currency deposit rating was upgraded by one notch and is constrained by Hungary's foreign-currency deposit ceiling and carries a positive outlook in line with the positive outlook on Hungary's Ba1 government debt rating.

The rating agency added that the upgrade of K&H's BCA to b1 from b2 reflects the improved Moderate- Macro Profile combined with improvements in the bank's asset quality and profitability, as well as its maintaining satisfactory capital adequacy. In 2015 K&H returned to profitability recording net income of HUF37.9 billion, which translates to a return on assets (RoA) of 1.5%. This improvement drove an increase in the bank's Tier 1 ratio to 12.1% as at year-end 2015 from 11.0% for 2014. K&H's reported NPL ratio declined modestly to 13.3% as at year-end 2015, from 14.7% as of year-end 2014, owing mainly to a reduction in corporate NPLs.

The application of the Moderate- Macro Profile in Moody's Advanced LGF analysis, including a lower 8% loss at failure assumption, has resulted in lower loss-given failure and higher rating uplift for deposit ratings. This, combined with the upgrade of the BCA has resulted in two notches of upgrade for the bank's long-term local-currency deposit ratings. These factors, however, have no impact on the uplift for K&H's long-term CRA which was therefore affirmed at Baa3(cr).

Erste Bank Hungary Zrt. (EBH)

The three-notch upgrade of EBH's long-term deposit ratings to Ba2 from B2 was driven by: (1) the upgrade of the bank's BCA to b3 from caa1; (2) the rating agency's unchanged high affiliate support assumption from its parent, Austria's Erste Group Bank AG (Erste; Baa1 stable/Baa1 stable; baa3), resulting in a two-notch rating uplift; and (3) two notches of rating uplift from Moody's Advanced LGF analysis (no uplift previously).

The upgrade of EBH's BCA to b3 from caa1 reflects the improved Moderate- Macro Profile combined with improvements in asset quality and capital adequacy, as well as reduced pressure on profitability. EBH reported a loss of HUF22 billion in 2015, driven by high loan loss provisions and weaker revenues. In July 2016 Erste Group increased EBH's capital by nearly 50% before completing the sale of 15% stakes in the bank to both the Hungarian government and the European Bank for Reconstruction and Development (Aaa stable). After the recapitalisation, Moody's estimates that EBH's Tier 1 ratio will rise to about 17% from 11.1% as of year-end 2015. Such capital increase benefits EBH's overall loss absorption capacity and credit profile, underpinning the positive outlook assigned to the deposit ratings.

The application of the Moderate- Macro Profile in Moody's Advanced LGF analysis, including a lower 8% loss at failure assumption, has resulted in lower loss-given failure and higher rating uplift, which combined with an upgrade of the BCA has resulted in three and one notches of upgrade, respectively, for the bank's long-term deposit ratings and CRA.

Budapest Bank Rt. (Budapest Bank)

The three-notch upgrade of Budapest Bank's long-term deposit ratings to Ba2 from B2 was driven by: (1) the upgrade of the bank's BCA to b1 from b2; and (2) two notches of rating uplift from Moody's Advanced LGF analysis (no uplift previously).

The upgrade of Budapest Bank's BCA to b1 from b2 reflects the improved Moderate- Macro Profile combined with expected improvements in asset quality and profitability, as well as good capital adequacy and liquidity. The bank's NPL ratio has stabilised at a high 17.2% as of year-end 2015. Moody's however expects this to improve moderately in the next 12 to 18 months, benefiting from the growing economy and the bank's work-out procedures. Risks stemming from the large stock of NPLs are mitigated by a high level of coverage, with loan loss reserves standing at 96% as of year-end 2015. Budapest Bank reported a net income of HUF14.8 billion in 2015, translating to a return on average assets (RoAA) of 1.59%.

The application of the Moderate- Macro Profile in Moody's Advanced LGF analysis, including a lower 8% loss at failure assumption, has resulted in lower loss-given failure and higher rating uplift, which combined with the upgrade of the BCA has resulted in three and two notches of upgrade, respectively, for the bank's long-term deposit ratings and CRA.

MKB Bank Zrt. (MKB)

The two-notch upgrade of MKB's long-term deposit ratings to B3 from Caa2 was driven by two notches of rating uplift from Moody's Advanced LGF analysis (no uplift previously).

The application of the Moderate- Macro Profile in Moody's Advanced LGF analysis, including a lower 8% loss at failure assumption, has resulted in lower loss-given failure and higher rating uplift, which has led to two notches of upgrade for the bank's long-term deposit ratings. The updated Advanced LGF analysis, however, has led to an affirmation of the bank's B2(cr) CRA, three notches above MKB's caa2 adjusted BCA.

-- WHAT COULD MOVE THE RATINGS UP/DOWN

A further improvement in the operating environment for Hungarian banks leading to a considerable reduction in problem loans and stronger capital ratios, could have positive rating implications.

A deterioration in the country's Macro Profile and/or in individual banks' standalone financial metrics may have negative rating implications.

Furthermore, alterations in the bank's liability structure may change the amount of uplift provided by Moody's Advanced LGF analysis and lead to a higher or lower notching from the banks' adjusted BCAs, thereby affecting deposit ratings and CRAs.

LIST OF AFFECTED CREDIT RATINGS

Upgrades:

Issuer: Erste Bank Hungary Zrt.

....LT Bank Deposits (Local), Upgraded to Ba2 Positive from B2 Rating Under Review

....LT Bank Deposits (Foreign), Upgraded to Ba2 Positive from B2 Rating Under Review

.... Adjusted Baseline Credit Assessment, Upgraded to b1 from b2

.... Baseline Credit Assessment, Upgraded to b3 from caa1

.... Counterparty Risk Assessment, Upgraded to Ba1(cr) from Ba2(cr)

Issuer: MKB Bank Zrt.

....LT Bank Deposits (Local), Upgraded to B3 Stable from Caa2 Rating Under Review

....LT Bank Deposits (Foreign), Upgraded to B3 Stable from Caa2 Rating Under Review

Issuer: Budapest Bank Rt.

....LT Bank Deposits (Local), Upgraded to Ba2 Stable from B2 Rating Under Review

....LT Bank Deposits (Foreign), Upgraded to Ba2 Stable from B2 Rating Under Review

.... Adjusted Baseline Credit Assessment, Upgraded to b1 from b2

.... Baseline Credit Assessment, Upgraded to b1 from b2

.... Counterparty Risk Assessment, Upgraded to Ba1(cr) from Ba3(cr)

Issuer: Kereskedelmi & Hitel Bank Rt.

.... LT Bank Deposits (Local), Upgraded to Ba1 Stable from Ba3 Rating Under Review

.... LT Bank Deposits (Foreign), Upgraded to Ba2 Positive from Ba3 Rating Under Review

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

.... Baseline Credit Assessment, Upgraded to b1 from b2

Affirmations:

Issuer: MKB Bank Zrt.

.... Counterparty Risk Assessment, Affirmed B2(cr)

Issuer: Kereskedelmi & Hitel Bank Rt.

.... Counterparty Risk Assessment, Affirmed Baa3(cr)

Outlook Actions:

Issuer: Erste Bank Hungary Zrt.

....Outlook, Changed To Positive From Rating Under Review

Issuer: MKB Bank Zrt.

....Outlook, Changed To Stable From Rating Under Review

Issuer: Budapest Bank Rt.

....Outlook, Changed To Stable From Rating Under Review

Issuer: Kereskedelmi & Hitel Bank Rt.

....Outlook, Changed To Positive(m) From Rating Under Review

All other ratings and rating assessments of the banks captured by today's rating actions remain unaffected.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

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.

The ratings of rated entity MKB Bank Zrt. 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, MKB Bank Zrt. or their agents are considered to be non-participating entities. These rated entities or their agents generally do not provide Moody's with information for the purposes of their ratings process.

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

Carola Schuler
MD - Banking
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
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