Moody’s upgrades Hungary’s banking system outlook to positive

Ratings

Ratings agency Moody’s Investors Service upgraded the outlook of Hungary’s banking system to positive, the rating agency said today in a report entitled “Banking System Outlook - Hungary”. Moodyʼs noted, however, that government support for banks in the EU, including Hungary, is less certain under the provisions of the EUʼs Bank Recovery and Resolution Directive.

“Hungaryʼs improving operating environment will likely benefit banksʼ asset quality and capital, as well as restore profitability,” Moody’s said in the report. The rating agencyʼs report is an update to the markets and does not constitute a rating action, Moody’s said. 

“The positive outlook on Hungaryʼs banking system reflects lendersʼ improving loan quality and capital. A shift in the governmentʼs policy stance towards banks should also support their financial fundamentals and capacity to grow,” said Armen Dallakyan, vice President and a senior analyst at Moodyʼs. “Credit growth has improved, although it will continue to be modest, held in check by still weak demand for corporate loans,” he added.

According to Moody’s expectations, the loan quality of banks will continue to improve this year and next, benefiting from rising household income and from the banksʼ efforts to restructure and sell their problem loans, the press statement accompanying the upgrade said.

Sector-wide, the rating agency projects that non-performing loans (NPLs) will decline to about 12% of total gross loans by year-end 2016, from 13.1% at the end of 2015, Moody’s added.

A government initiative, which took effect in late 2014 and 2015, mandated the conversion, at market rates, of banksʼ FX-denominated retail loans into Hungarian forints, thereby removing significant asset quality risks stemming from possible local currency depreciation, the press statement added.

Banks also substantially increased their loan-loss reserves in 2015, Moody’s assessed. Although these reserves vary across banks, average coverage of problem loans for the system stood at about 77% for corporate loans (66% in 2014) and 59% for retail loans (59% in 2014) as of year-end 2015, the press statement added.

The rating agency also expects the capital buffers of Hungarian banks to improve moderately this year and next, driven by banksʼ restored profitability and only modest growth in their Risk Weighted Assets. Profitability will likely improve in 2016, supported by lower loan-loss provisions and a 40% reduction in the bank levy in 2016 from its 2015 level, Moody’s added in the press statement.

Additionally, the deleveraging of the banking system since 2009 has considerably reduced risks stemming from banksʼ significant reliance on wholesale funding in the past, especially in foreign currency, Moodyʼs says.

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