Standard & Poor’s Ratings Services (S&P’s) has raised its estimate of the incidence of gross problematic assets (GPAs) in Hungary’s financial system to 25-40% from 15-30% under a reasonable (but not catastrophic) scenario of a protracted multi-year economic recession.
In a press release on Thursday S&P’s placed under review with a possibility of a downward revision the Banking Industry Country Risk Assessment (BICRA) on Hungary’s banking system, currently at Group 6. S&P’s expects to review the BICRA over the next few months as developments in the financial markets, including the effects of the government’s support package for the banking sector, become clearer.
BICRAs classify countries into 10 groups ranging from the strongest banking systems (Group 1) to the weakest (Group 10) from the perspective of country risk. Other countries included in Group 6 are Bulgaria, Croatia, Estonia, China, Cyprus, India, and Thailand. Comparable countries in the same 25%-50% GPA range are Poland, Bulgaria, Croatia, India, Lithuania, Romania, and Turkey.
The upward revision of the GPA estimate for the banking system of Hungary, along with the placement of the BICRA under review, reflects S&P’s expectation of asset quality and liquidity weakening because of an expected economic contraction in 2009, which is putting pressure on private- and public-sector balance sheets, coupled with high unhedged foreign currency lending, the rating.
Hungary’s high dependence on external financing inflows and high stock of government debt make it particularly vulnerable to a weakening risk appetite. A €20 billion emergency package from the International Monetary Fund (IMF) and the EU and a €2.3 billion government rescue package for the banking system, provided in November 2008, should help stabilize, but not normalize, the situation, S and P said in the press statement.
The main challenge to the creditworthiness of the Hungarian banking sector is to maintain adequate asset quality. S&P’s expects Hungarian banks to come under increasing pressure from the more challenging macroeconomic and operating environment and deems the banks’ credit risk to increase after several years of rapid loan growth, with a large share of foreign currency lending.
The proportion of foreign currency loans, mainly in Swiss francs, stood at 65% of total loans at the end of September. Current levels of nonperforming loans (90 days overdue ) -3.9% for corporate and 3.3% for retail customers as of September 30 - are unsustainable over the medium term as the rapidly built up credit portfolios mature in a deteriorating operating environment and the Hungarian forint becomes significantly more volatile.
Positively, the creditworthiness of the Hungarian banking system benefits from high foreign ownership by Western European banking groups with well-defined Central European strategies. The parent banks remain largely committed to their Hungarian subsidiaries, many of which they regard as strategically important for their long-term regional growth strategies, S&P’s said. (MTI-Eco, NG 2)