Fundamental credit support and the quality of Hungarian cover pools are on a par with international markets and could support top ratings, Scope Ratings says, adding that once the framework is aligned with the EU, the ratings agency expects Hungarian issuers to re-enter the international stage.
Hungarian issuers initially entered the international market in the run-up to the Global Financial Crisis, Scope notes, arguing that a combination of the financial crisis and the fall of the sovereign into the non-investment grade category curtailed international appetite for Hungarian covered bonds. The mandatory conversion of foreign-currency mortgages in 2014 further decreased the appeal of the market with international investors. The last euro issue was in 2015.
However, investor concerns about the quality of Hungarian covered bonds during this period were unfounded, the agency argues
"It was only the first recourse – to the banks – not the credit quality of cover pools that suffered," said Karlo Fuchs, head of covered bonds at Scope Ratings and co-author of the agencyʼs report about Hungarian covered bonds. "Today, most Hungarian banks have stronger balance sheets compared to when they were last seen in international covered bond markets. FX mortgages are no longer a negative risk factor while the structure of the Hungarian mortgage market and borrowersʼ resilience against shocks has improved."
For both mortgage and covered bond markets, regulators have been pivotal to the positive changes, laying the groundwork for a successfully covered bond revival, the report argues.
The most important from a covered bond perspective is the Mortgage Funding Adequacy Ratio (MFAR), a macroprudential tool that says 25% of HUF-denominated residential mortgages must be refinanced with longer-dated covered bonds. MAFR goals have been achieved: almost 30% of residential mortgages are now financed with covered bonds, the agency notes.
From a high of EUR 7.7 billion in 2009, outstanding volumes had fallen to EUR 2.2 bln in 2016, but by the end of June 2020, they had ticked up to EUR 3.9 bln equivalent.
"We view the MFAR as credit positive for banks and covered bonds in particular," said Reber Acar, an analyst in Scopeʼs covered bonds team and co-author of the report. "The regulatory-driven refinancing requirement speaks strongly to a high likelihood that a covered bond will not be placed in passive wind down but will remain a going-concern funding instrument. Covered bonds are highly likely to retain recourse to a supportive issuer – even if the latter is bailed in. The existence of the MFAR is therefore a supportive element in our rating, in particular the fundamental credit support analysis for covered bonds."
As another factor supporting a re-entry of Hungarian covered bonds, the agency highlights the preferential risk-weighting for green mortgages. To support the notion that energy-efficient buildings will improve affordability and stabilize the value of housing collateral, MNB started a four-year project this year where banks receive capital discounts for private, energy efficiency improving renovations. Green financings receive a 5%-7% risk-weight discount for eligible mortgage loans; capital benefits are limited to 1% of a bankʼs risk-weighted assets.
"High demand for housing and financings, combined with the MAFR as well as the green program, will allow the Hungarian covered bond market to further grow and attract new investors," said Fuchs. "Comparing with the European covered bond directive, we expect harmonization to improve the framework with regard to market and liquidity risk containment."