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Moody's downgrades ratings of seven Hungarian banks

Moody's Investors Service on Tuesday downgraded the standalone bank financial strength ratings of five Hungarian banks and local-currency deposit ratings of other two banks.

It lowered standalone bank financial strength ratings of K&H Bank, Budapest Bank, FHB Mortgage Bank, Erste Bank Hungary and MKB Bank, which resulted in the downgrade of those banks' deposit and debt ratings.

For two other banks, namely OTP Bank and OTP Mortgage Bank - the rating agency downgraded the local-currency deposit ratings, and downgraded the foreign-currency debt ratings for OTP Bank.

Moody's says that overall, the rating actions reflect two major concerns for the Hungarian banking system, namely sustained deterioration in asset quality, driven by the foreign-currency exposures in retail mortgage and commercial real-estate portfolios; and declining net profits.

Asset quality declines, due to foreign-currency exposures, mortgage moratorium and macroeconomic challenges

The rating agency noted that a key driver of the rating actions is the banks' high level of foreign-currency lending especially loans originated in Swiss francs. Moody's also notes that the Hungarian Government introduced a ban on foreign-currency lending in 2010. However, in Moody's view, the event risks imbedded in the system that stem from the foreign-currency exposures will remain for several years, given the long-dated maturity of the existing mortgage portfolios of the banks. In addition, the moratorium on evictions relating to home-collateralised loans contributes to a further weakening of the banks' debtors payment discipline.

Net profits under pressure from diminishing business volumes, heightened risk costs and new banking tax

In 2010, the Hungarian banking system recorded a significantly lower level of profitability compared with 2009, with several banks reporting losses. Also, extraordinary banking tax was introduced in 2010, accounted for about 25% of the pre-provision income of the system and will remain in place at least until 2012.

Moody's acknowledges that in this environment, it is becoming more challenging for the Hungarian banks to sustain profitability and support economic growth. The economic outlook for 2011 is more promising, with Moody's forecasting GDP growth of about 3% and a decline in unemployment. However, the rating agency maintains the view that macroeconomic challenges will persist for the medium term.

Moody's believes that a major stabilising factor for the banking system has been its high level of foreign ownership, representing about 80% of capital at year-end 2010. Financially stronger parents have so far provided support in terms of capital and liquidity throughout the recent financial crisis.

Moody's believes that this support is likely to continue, also considering the wider CEE strategy of the Western European parent banks. Of the seven banks included in this rating action, four are foreign-owned (K&H Bank, Budapest Bank, Erste Bank Hungary and MKB Bank).

Moody's has taken the following rating actions:

OTP Bank

Moody's has affirmed OTP Bank's standalone BFSR at D+ (mapping to Baa3 on the long-term scale) given that the bank has proved itself resilient in the face of the crisis and showed the benefits of the diversification.

However, Moody's has lowered the bank's local currency long-term and short-term deposit ratings to Baa3/Prime-3 from Baa2/Prime-2. Moody's also lowered OTP's foreign currency senior debt rating to Baa3 from Baa2, its subordinated debt rating to Ba1 from Baa3 and its junior subordinated debt rating to Ba2 (hyb) from Ba1 (hyb). The bank's foreign-currency deposit ratings were affirmed at Baa3/Prime-3 given that they were already constrained by the foreign-currency deposit ceiling for the country.

OTP Mortgage Bank

Moody's has affirmed OTP Mortgage Bank's standalone BFSR at D+ (mapping to Baa3 on the long-term scale) and its foreign-currency deposit ratings at Baa3/Prime-3. The bank's ratings are the same as its parent's ratings. In addition, Moody's lowered the local-currency deposit ratings of the bank to Baa3/Prime-3 from Baa2/Prime-2, which are at the same level of its parent. The outlook on the ratings is negative, except the BFSR which carries a stable outlook.

Moody's expects that OTP Mortgage Bank's ratings will continue to follow the movement of its parent's ratings.

K&H Bank

Moody's downgraded K&H Bank's standalone BFSR to D (mapping to Ba2 on the long-term scale) from D+ (mapping to Baa3 on the long-term scale) and its local-currency long-term and short-term deposit ratings to Baa3/Prime-3 from Baa2/Prime-2. Moody's says that the downgrades reflect the rapid deterioration in non-performing loans and the potential pressure on the profitability of the bank from increasing provisioning needs.

Budapest Bank

Moody's downgraded Budapest Bank's standalone BFSR to D- (mapping to Ba3 one the long-term scale) from D (mapping to Ba2 on the long-term scale) and its local-currency long-term and short-term deposit ratings to Baa3/Prime-3 from Baa2/Prime-2. Moody's says that the downgrades reflect the rapid deterioration in non-performing loans and the potential pressure on the profitability of the bank from increased provisioning needs. Although Moody's notes that so far the bank has managed to sustain its financial performance, due to the difficult operating conditions Moody's believes that Budapest Bank's BFSR is better positioned at D-.

FHB Mortgage Bank

Moody's downgraded FHB Mortgage Bank's standalone BFSR to D (mapping to Ba2 on the long-term scale) from D+ (mapping to Ba1 on the long-term scale) and its local-currency and foreign-currency long-term and short-term deposit ratings to Ba1/Not Prime from Baa3/Prime-3. Moody's considers that the bank faces significant challenges (as discussed above), and as such, the outlook on the ratings remains negative. Erste Bank Hungary Moody's downgraded Erste Bank Hungary's standalone BFSR to D- (mapping to Ba3 on the long-term scale) from D (mapping to Ba2 on the long-term scale) and its local-currency and foreign-currency long-term and short-term deposit ratings to Ba1/Not Prime from Baa3/Prime-3. Moody's maintains a negative outlook on the BFSR. The outlook on the long-term local-currency and foreign-currency ratings is stable and reflects Moody's expectations of external support, especially from its parent, Erste Group Bank (A1/P-1/C- (BCA of Baa1), stable outlook).

MKB Bank

Moody's downgraded MKB Bank's standalone BFSR to E+ (mapping to B1 on the long-term scale) from D (mapping to Ba2 on the long-term) and its local-currency and foreign-currency long-term and short-term deposit ratings to Ba2/Not Prime from Baa3/Prime-3. As such, Moody's also lowered MKB's foreign currency senior debt rating to Ba2 from Baa3 and its foreign-currency subordinated debt rating to B1 from Ba1.