FX mortgage ruling said to hurt credit ratings of banks

MNB

The Hungarian Supreme Court's ruling last week, that unilateral changes by banks to foreign-currency mortgage interest rates were unfair in some cases, means Hungarian banks are slightly less credit worthy in the short term, but the ruling could also lift these banks' long-term credit outlook, Moody's Investors Service said today.

In its weekly Credit Outlook report released in London, the rating agency said it views the verdict as a negative for Hungarian banks because it increases the possibility that banks will have to give mortgage holders compensation payments of around €1 bln, or about 11% of the banking system's total capital, "according to our initial estimates".

"Our estimates are based on the total volume of foreign-currency mortgages and average changes in the mortgage interest rates introduced by the banks since 2008," Moody said.

Based on the share of foreign-currency mortgages in the loan books of commercial banks with Moody's ratings, the banks that risk paying the largest amounts in compensation are OTP Mortgage Bank, FHB Mortgage Bank, Erste Bank Hungary and K&H Bank, the report says.

"We expect that the Hungarian government will introduce in the third or fourth quarter of this year new measures to ease the debt burden of the foreign-currency mortgage borrowers".

Although a comprehensive solution to the problem of foreign-currency mortgages will impose considerable costs on banks, it will also reduce the risks of continued punitive measures by the government, and remove the moral hazard that has prompted many borrowers to fall behind on their repayments in anticipation of improved terms for their mortgages.

Such a solution would help constrain the ongoing rise in non-performing loans in Hungarian banks' foreign-currency mortgage portfolios, which reached 23.7% at the end of the first quarter of 2014, Moody's said.

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