Bangkok--20 May--Asian Banker
Moody's Investors Service took rating actions on nine Hungarian banks. The ratings of the following institutions were downgraded: OTP Bank, OTP Mortgage Bank, CIB Bank, K&H Bank, MKB Bank, Erste Bank Hungary, Budapest Bank and MFB Hungarian Development Bank. The ratings of FHB Mortgage Bank were confirmed, but the outlook was changed to negative from stable. The full list of rating actions can be found below.
Today's downgrades, in many cases of several notches, reflect Moody's view that the rapid deterioration of the Hungarian operating environment, which has resulted in the rating agency downgrading the Hungarian government bond rating by two notches to Baa1 (negative outlook) since November 2008, is putting significant pressure on the banks' standalone creditworthiness, as measured by their bank financial strength ratings (BFSRs).
Additionally, Moody's says that it has reviewed the probability of systemic support for the rated banks, as outlined in the Special Comment entitled "Financial Crisis More Closely Aligns Bank Credit Risk and Government Ratings in Non-Aaa Countries", which was published in May 2009.
WEAKENING CAPITAL POSITIONS
Moody's explains that, with the Hungarian economy entering recession, the likelihood of corporate defaults is rising and that this will lead to increased losses on banks' corporate loan portfolios. The rating agency adds that the worsening situation in the job market, forint volatility and potential decline in house prices are also likely to result in increased losses on retail portfolios. "We believe that these losses are likely to significantly weaken the capital position of most Hungarian banks over the next two years," says Gabriel Kadasi, Moody's lead analyst for the Hungarian banks.
Moody's has incorporated expected losses on bank loan portfolios into its ratings for some time, but the weight that it attaches to certain rating considerations, particularly capital and future earnings prospects, has been increased to better reflect the present conditions. This is discussed in a Special Comment entitled "Calibrating Bank Ratings in the Context of the Global Financial Crisis", which was published in February 2009. The BFSRs of all the Hungarian rated banks now carry negative outlooks, reflecting the still rapidly worsening operating environment, which may result in a further and significant deterioration in the banks' financial fundamentals.
REFINED SYSTEMIC SUPPORT ASSESSMENT
Moody's has also refined its assessment of the probability of systemic support available from the Hungarian state as the erosion in the local economy's underlying credit fundamentals and the resulting reduced policy flexibility has adversely affected the government's ability to support the banking sector.
Moody's previously used the local currency deposit ceiling (LCDC; Aaa in the case of Hungary) as the main input for its assessment of the ability of the national government to support the banks. Although anchoring the probability of support at the LCDC is appropriate in most circumstances -- regarding the provision of liquidity to a selected number of institutions over a short period of time -- this might overestimate the capacity, and even willingness, of a central bank to support financial institutions in the event of a banking crisis becoming both truly systemic and protracted.
Moody's therefore believes that the government's local currency debt rating (usually adjusted by no more than two notches of uplift due to the array of tools available to the central bank to support the banking system) should have a greater weight when considering the probability of systemic support.
Thus, the anchor used for measuring the influence of the probability of systemic support on banks' ratings is now Hungary's government bond rating of Baa1 (negative outlook) plus one notch of uplift, resulting in an A3 input. Although the refined approach allows two notches of uplift from the government bond rating, given the difficult economic and fiscal situation Hungary is facing, Moody's says that one notch is more appropriate, reflecting its view that the probability of the risk that systemic banking losses in the system will eventuate is medium to high.
Moody's views Hungary as one of the riskier banking systems in Central and Eastern Europe (CEE), given the large share of foreign currency lending in total lending (more than 60%), which has been driven by fast growth in wholesale funding, primarily in foreign currency. With increased forint volatility and with the economy shrinking by as much as 5% in 2009, the credit risks for the banking sector have increased rapidly.
The one notch of uplift from the government bond rating also reflects Moody's view of the state's willingness to support the banking system. Since the escalation of the crisis in Hungary in H2 2008, the government and the central bank have taken steps to ease pressure on banks' by supporting the liquidity of the banking system in both local and foreign currency, channelling part of the IMF package into the banking system and approving a law that allowing banks to strengthen their capital.
TODAY'S RATING ACTIONS
Moody's has taken the following rating actions on the Hungarian banks:
OTP BANK
Moody's downgraded OTP Bank's BFSR to D+ (mapping to baseline credit assessment -- BCA -- of Baa3) from C+ (A2). The downgrade of the bank's BFSR was driven by Moody's expectation that potential losses on the bank's portfolio, especially given its significant exposure to less developed markets in the CEE region such as Ukraine and Russia but also due to rapid weakening of its domestic operating environment, will exert significant pressure on its profitability and capitalisation.
Due to the downgrade of the BFSR and Moody's refinement of its assessment of the probability of systemic support, OTP Bank's long-term local currency deposit and foreign currency debt ratings were downgraded to Baa1 (negative) from Aa3 and the long-term foreign currency subordinated debt rating was downgraded to Baa2 (negative) from A1. The short-term local currency deposit and foreign currency debt ratings were downgraded to Prime-2 from Prime-1. The foreign currency deposit ratings were affirmed at Baa1 (negative)/Prime-2 as the long-term rating was already capped by the Baa1 ceiling for foreign currency deposits in Hungary.
The bank's debt and deposit ratings continue to benefit from two notches of uplift from the BCA due to Moody's assessment of the very high probability of systemic support, which is based on the bank's very strong retail and significant corporate franchise in Hungary, but also incorporates the bank's increasing exposure to foreign markets, which account for nearly 47% of its assets. The negative outlook on the long-term debt and deposit ratings reflects the negative outlook on the BFSR.
OTP MORTGAGE BANK
Moody's downgraded OTP Mortgage Bank's BFSR to D+ (Baa3) from C+ (A2) and the local currency deposit ratings to Baa1 (negative)/Prime-2 from Aa3/Prime-1. The foreign currency deposit ratings were affirmed at Baa1 (negative)/Prime-2 as the long-term rating was already capped by the Baa1 ceiling for foreign currency deposits in Hungary.
Moody's downgrade of OTP Mortgage Bank's ratings was driven solely by the downgrade of its parent as this entity is fully integrated into OTP Bank and operates as an independent legal entity only for legislative reasons. The negative outlook on OTP Mortgage Bank's ratings reflects Moody's expectation that OTP Mortgage Bank's ratings will continue to follow the movements of its parent's.
CIB BANK
Moody's downgraded CIB Bank's BFSR to D (Ba2) from C- (Baa2), reflecting the rating agency's view that potential losses in the bank's loan portfolio (more than 40% of total lending represents exposure to leasing and commercial real estate, which are seen as being relatively risky asset classes) and its relatively modest capitalisation in comparison with that of some of its peers could result in an increased need for new capital. However, the rating also reflects that the bank's capital base is managed by its parent, Intesa SanPaolo Spa (Aa2/P-1/B-), regarding which Moody's assesses a very high probability of support for CIB Bank in the event of need.
Due to the downgrade of the BFSR and Moody's refined assessment of systemic support, the bank's long-term local currency deposit and debt ratings were downgraded to Baa1 (negative) from Aa3. The short-term local currency deposit rating was downgraded to Prime-2 from Prime-1. The foreign currency deposit ratings were affirmed at Baa1 (negative)/Prime-2 as the long-term rating was already capped by the Baa1 ceiling for foreign currency deposits in Hungary. The negative outlook on the long-term debt and deposit ratings reflects the negative outlook on the BFSR.
K&H BANK
Moody's downgraded K&H Bank's BFSR to D+ (Baa3) from C- (Baa2), based on likely losses resulting from the structure of the bank's loan portfolio, which in the case of K&H Bank reflects its focus on retail lending and its less prominent position in lending to commercial real estate. The rating is, however, supported by the bank's strong pre-crisis profitability, particularly its retail franchise.
Due to the downgrade of the BFSR and Moody's refined assessment of systemic support, the bank's local currency deposit ratings were downgraded to A3 (negative)/Prime-2 from Aa3/Prime-1. The bank's rating remain above the Baa1 government bond rating as it is not capped by the LCDC and benefit from uplift from the BCA as a result of Moody's assessment of a very high probability of both systemic and parental support, from KBC Bank N.V. (rated Aa3/Prime-1/C+).
The foreign currency deposit ratings were affirmed at Baa1 (negative)/Prime-2 as the long-term rating was already capped by the Baa1 ceiling for foreign currency deposits in Hungary. The negative outlook on the bank's long-term deposit ratings reflects (i) the negative outlook on its own BFSR and (ii) the negative outlook on its parent's C+ BFSR, which is used as the anchor for the assessment of the probability of parental support.
MKB BANK
Moody's downgraded MKB Bank's BFSR to D (Ba2) from C- (Baa2), reflecting the rating agency's view that potential losses in the bank's loan portfolio (which includes a large share of lending to commercial real estate) and modest profitability (due to its focus on large corporates) in comparison with some of its peers could result in substantial pressure on the bank's financial fundamentals. Moody's takes into account the capital injection that the bank received this year from its parent, Bayerische Landesbank (rated A1/P-1/D-).
Due to the downgrade of the BFSR and the downgrade of the BFSR of MKB Bank's parent, Bayerische Landesbank, to D- from C- on 13 May 2009, as well as the refined assessment of systemic support, the bank's local currency deposit and foreign currency debt ratings were downgraded to Baa2 (negative)/Prime-2 from A1/Prime-1. The subordinated debt rating was downgraded to Baa3 (negative) from A2 and the foreign currency deposit ratings to Baa2 (negative) from Baa1. The negative outlook on the long-term debt and deposit ratings reflects the negative outlook on MKB Bank's BFSR.
ERSTE BANK HUNGARY
Moody's downgraded Erste Bank Hungary's BFSR to D (Ba2) from D+ (Ba1). The rating action, a downgrade of just one notch, was driven by Moody's view that potential losses in the bank's more retail-focused portfolio, although significant, are likely to be lower than in the case of banks with mostly corporate franchises. The rating agency says that it has taken into consideration that the bank's capital base is managed by its parent, Erste Group Bank (Aa3/P-1/C-), regarding which Moody's assesses a very high probability of support for Erste Bank Hungary in the event of need.
Due to the downgrade of the BFSR and the refined assessment of systemic support, the bank's deposit ratings were downgraded to Baa2 (negative)/Prime-2 from A3/Prime-2 for local currency and Baa1/Prime-2 for foreign currency. The negative outlook on the long-term deposit ratings reflects the negative outlooks on Erste Bank Hungary's D BFSR and Erste Group Bank's C- BFSR, which is used as the anchor for the assessment of the probability of parental support.
BUDAPEST BANK
Moody's downgraded Budapest Bank's BFSR to D (Ba2) from D+ (Baa3), reflecting the likely losses resulting from the bank's focus on consumer lending and auto finance, which are seen as being more risky than the mortgage lending that dominates the retail portfolios of most of its peers. On the positive side, the bank has not been involved in commercial real estate lending and its capitalisation is robust.
Due to the downgrade of the BFSR and the refined assessment of systemic support, the bank's deposit ratings were downgraded to Baa2 (negative)/Prime-2 from A1/Prime-1 for the local currency and Baa1/Prime-2 for the foreign currency deposit ratings. The long-term deposit ratings carry a stable outlook, as they benefit from uplift from the BCA due to Moody's assessment of a very high probability of parental support from GE Capital (rated Aa2 with stable outlook) and it would take a significant downgrade of either Budapest Bank's or its parent's BFSR for its deposit ratings to be affected.
FHB MORTGAGE BANK
Moody's affirmed the D+ BFSR (Ba1) and confirmed the Baa3/Prime-3 deposit ratings of FHB Mortgage Bank. Moody's changed the outlook to negative from stable on all the ratings. FHB Mortgage Bank's D+ BFSR is underpinned by the bank's good capitalisation (which was boosted by a capital injection from the state) and likely low losses on its portfolio, which mainly consists of refinancing loans and retail mortgages. The negative outlook reflects the rapidly deteriorating operating environment, which might drive a more dramatic deterioration in the bank's financial fundamentals.
MFB HUNGARIAN DEVELOPMENT BANK
Moody's downgraded MFB Hungarian Development Bank's long-term foreign currency debt rating to Baa1 (negative) from Aa2 reflecting Moody's view that the ability and the willingness of the Hungarian State to support the development bank in foreign currency is reflected in the government's bond ratings, which also carry a negative outlook, as shown by the rating agency's application of its refined assessment of systemic support. The Baa1 (negative)/Prime-2 foreign currency deposit ratings, which were already capped by the ceiling for foreign currency deposits in Hungary, were affirmed.
PREVIOUS RATING ACTIONS AND METHODOLOGIES
(Please note that this press release does not deal with possible implications for the covered bond ratings of Hungarian banks.)
The principal methodologies used in rating the issuers mentioned in this press release are "Bank Financial Strength Ratings: Global Methodology" and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology", which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies sub-directory. Other methodologies and factors that may have been considered can also be found in the Credit Policy & Methodologies directory.
Moody's last rating action on OTP Bank was on 31 March 2009 when its long-term foreign currency deposit rating was downgraded to Baa1 with negative outlook from A3 with negative outlook following a sovereign rating action. Moody's also placed OTP Bank's Prime-1 short-term local currency deposit and foreign currency debt ratings on review for possible downgrade.
Headquartered in Budapest, Hungary, OTP Bank reported consolidated IFRS net income of HUF240.4 billion (EUR903 million) in 2008 and total assets of HUF9.379 trillion (EUR35.27 billion) as of 31 December 2008.
Moody's last rating action on OTP Mortgage Bank was on 31 March 2009 when its long-term foreign currency deposit rating was downgraded to Baa1 with negative outlook from A3 with negative outlook following a sovereign rating action. Moody's also placed OTP Mortgage Bank's Prime-1 short-term local currency deposit rating on review for possible downgrade.
Headquartered in Budapest, Hungary, OTP Mortgage Bank reported audited IFRS net income of HUF5.3 billion (EUR21 million) in 2007 and total assets of HUF1.239 trillion (EUR4.9 billion) as of 31 December 2007.
Moody's last rating action on CIB Bank was on 31 March 2009 when its long-term foreign currency deposit rating was downgraded to Baa1 with negative outlook from A3 with negative outlook following a sovereign rating action. Moody's also placed CIB Bank's Prime-1 short-term local currency deposit rating on review for possible downgrade.
Headquartered in Budapest, Hungary, CIB Bank reported IFRS consolidated net income of HUF28.162 billion (EUR105.9 million) in 2008 and total assets of HUF3.038 trillion (EUR11.42 billion) as of 31 December 2008.
Moody's last rating action on K&H Bank was on 31 March 2009 when its long-term foreign currency deposit rating was downgraded to Baa1 with negative outlook from A3 with negative outlook following a sovereign rating action. Moody's also placed the bank's Aa3/Prime-1 local currency deposit ratings on review for possible downgrade.
Headquartered in Budapest, Hungary, K&H Bank reported IFRS consolidated net income of HUF25.89 billion (EUR97 million) in 2008 and total assets of HUF3.182 trillion (EUR11.9 billion) as of 31 December 2008.
Moody's last rating action on MKB Bank was on 31 March 2009 when its long-term foreign currency deposit rating was downgraded to Baa1 with negative outlook from A3 with negative outlook following a sovereign rating action. Moody's also placed MKB's Prime-1 short-term local currency deposit and foreign currency debt ratings on review for possible downgrade.
Headquartered in Budapest, Hungary, MKB Bank reported IFRS consolidated 2008 net income of HUF7.16 billion (EUR27.04 million) and total assets of HUF2.885 trillion (EUR10.9 billion) as of 31 December 2008.
Moody's last rating action on Erste Bank Hungary was on 1 April 2009 when its local currency deposit ratings were downgraded to A3/Prime-2 from A2/Prime-1 following a rating action on the parent. The ratings were placed on review for further possible downgrade.
Headquartered in Budapest, Hungary, Erste Bank Hungary reported IFRS consolidated net income of HUF32.36 billion (EUR121.7 million) in 2008 and total assets of HUF2.63 trillion (EUR9.88 billion) as of 31 December 2008.
Moody's last rating action on Budapest Bank was on 31 March 2009 when its long-term foreign currency deposit rating was downgraded to Baa1 with negative outlook from A3 with negative outlook following a sovereign rating action. Moody's also placed Budapest Bank's A1/Prime-1 local currency deposit ratings and Baa1/Prime-2 foreign currency deposit ratings on review for possible downgrade.
Headquartered in Budapest, Hungary, Budapest Bank reported consolidated net income of HUF12.3 billion (EUR46 million) and total assets of HUF938 billion (EUR3.5 billion) as of 31 December 2008.
Moody's last rating action on FHB Mortgage Bank was on 31 March 2009 when its Baa3/Prime-3 local and foreign currency deposit ratings were placed on review for possible downgrade.
Headquartered in Budapest, Hungary, FHB Mortgage Bank reported consolidated IFRS net income of HUF6.7 billion (EUR25.2 million) in 2008 and total assets of HUF689 billion (EUR2.59 billion) as of 31 December 2008.
Moody's last rating action on MFB was on 31 March 2009 when its long-term foreign currency deposit rating was downgraded to Baa1 with negative outlook from A3 with negative outlook following a sovereign rating action. Moody's also placed MFB Hungarian Development Bank's Aa2 foreign currency debt rating on review for possible downgrade of following its downgrade from Aa1 after the ceiling for foreign currency debt was downgraded to Aa2.
Headquartered in Budapest, Hungary, MFB reported unconsolidated IFRS 2008 net income of HUF5.77 billion (EUR21.7 million) and total assets of HUF1.026 trillion (EUR3.85 billion) as of 31 December 2008.
--www.theasianbanker.com (May 20 2009)--