Fitch Ratings on Wednesday said an early repayment scheme approved by Hungary's Parliament a week earlier could "put pressure on some banks' credit profiles" and "impede the long-term development of the banking system".
Under the scheme, to start Thursday, Hungarians may repay their foreign currency-denominated mortgage loans in full at an exchange rate discounted from the market rate. Banks are to cover the cost of the discount.
Assuming one-quarter of borrowers participates in the scheme, the conversion would absorb about 1.5 percentage points of the banking sector's Tier 1 capital ratio, Fitch said.
"Most banks should be able to absorb the immediate financial impact through their capital. However, there are considerable differences in Tier 1 ratios and exposure to foreign currency mortgages between banks, and so some institutions could take larger hits to capital than this aggregate calculation suggests," it added.
The scheme, together with a bank levy introduced in 2010 and "Hungarian authorities' generally quite aggressive policy stance with respect to the banking system" could lessen the likelihood of parent banks putting more capital and funding into their Hungarian units, Fitch said.
"This could restrict future credit and economic growth, and also, in Fitch's view, sets a dangerous precedent for other Central and Eastern European countries with high foreign currency lending," it added.
Foreign currency-based loans slowly became the most popular lending product in Hungary after their introduction a decade ago, outpacing growth of forint loans, which had much higher interest rates, by the mid-2000s. Since then, the weakening forint has left many Hungarians with higher repayments they cannot afford to pay.