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Fitch affirms Hungary's K&H Bank

Ratings

Fitch Ratings has today affirmed Kereskedelmi és Hitelbank's ("K&H", Hungarian Commercial and Credit Bank) ratings at Issuer Default rating ("IDR") 'A', Short-term 'F1', Individual 'D'; and Support '1'. The Outlook on the IDR is Stable. K&H's IDRs, Short-term and Support ratings are driven by the potential strong support from its 99.6% shareholder, KBC Bank ("KBC", rated 'AA-' (AA minus) Outlook Stable). However, K&H's foreign currency IDR is constrained by the 'A' Country Ceiling for Hungary; the sovereign's 'BBB+' IDR is currently on Stable Outlook. A change in Hungary's IDR could lead to a change in the Country Ceiling.

The Individual rating reflects K&H's difficult recent history. A major fraud discovered at the bank's brokerage subsidiary in 2003 continued to hurt the bank's performance in Q106, after major provisioning charges in 2004 and 2005. "At the pre-provisioning operating level, the bank's performance has been improving, and its franchise has been strengthening", said Chris Birney, a Director with Fitch Ratings. Birney further noted that "this has been balanced by the recent deterioration of the operating environment and continuing provisioning for legal claims". Additionally, K&H has expanded aggressively in retail FX lending, mostly Swiss Franc denominated personal loans and mortgages, which Fitch considers higher risk despite the bank's hedged balance sheet.

K&H was established in 1987 and privatised in 1997. It merged with ABN AMRO Magyar Bank in 2001, becoming the second largest bank in Hungary. In Q206, KBC bought ABN AMRO's 40.2% stake in the bank, increasing its stake to 99.6%. K&H was historically a corporate focused bank, but in recent years has placed increased emphasis on developing its retail operations. At end-2005, K&H had market shares of 13.6% in corporate lending and 9.7% in retail. (Bg)

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