The €20 billion credit line made available to Hungary by the IMF, the EU and the World Bank should ease pressure experienced by the Hungarian banking sector in October, but “positive rating actions are not envisaged as a direct result” of the package, Moody's Investor Services said in a statement on Tuesday.
The high level of foreign currency-denominated lending in Hungary – Swiss franc and euro-denominated loans account for more than 60% of banks' lending stock - has made Hungarian banks especially vulnerable to exchange rate changes. A sharp weakening of the forint in October increased banks' credit risks as it become more difficult and costly for them to hedge open FX positions.
The €20 billion financial package is aimed not only at providing budget support but at securing adequate domestic and foreign currency liquidity, as well as strong levels of capital for the banking system. Moody's expects the package will help restore confidence in Hungary and improve the liquidity and access of Hungarian banks' to foreign currency funding.
Although it is still uncertain if direct support will be provided to individual banks as part of the package, such support is unlikely to result in a positive rating action as all rated banks in Hungary already benefit from a certain level of systemic support and a governmental intervention might reveal fundamental weaknesses that had not been identified and reflected in the bank's rating, Moody's said.
“We continue to view the outlook for the direction of fundamental credit conditions in the banking system for the next 12 to 18 months as negative,” said Gabriel Kadasi, lead analyst at Moody's for Hungarian banks.
Moody's sees the fiscal measures planned by the government and the decline in lending activity translating into a further slowdown in economic growth. As a result, the Hungarian banks may experience a deterioration in asset quality in both their retail and corporate loan portfolios, which will weigh on their profitability and capital-generating ability. Growth in revenue generation might be sluggish given the worsening operating environment and stricter lending criteria; and the banks will face higher costs of funding and tight liquidity, Moody' said. The potential volatility of the forint continuing also remains a risk, it added.
Moody's does not expect foreign currency lending to disappear in Hungary, as it is significantly cheaper for banks' customers to borrow in foreign currency than in forints.
Moody's noted that the slower growth of the banking sector is not necessarily a negative factor in itself after the rapid growth of recent years, as it will allow Hungarian banks to fine-tune their risk management systems and clean up their loan portfolios. (MTI – Econews)