Moody's Investors Service said late Tuesday it put seven Hungarian banks under review for downgrade because of possible losses resulting from an early forex loan repayment scheme.
The government scheme, launched at the end of September, allows early repayment of foreign currency-based mortgages at a discounted exchange rate. Lenders are covering the difference between the discounted exchange rate and the market rate. Borrowers must declare intent to participate in the scheme by the end of 2011 and make full repayment within 60 days after that.
Moody's placed on review for downgrade the standalone bank financial strength ratings (BFSR) of six Hungarian banks and the debt and deposit ratings of seven Hungarian banks. The banks are: OTP Bank, OTP Mortgage Bank, K and H Bank, Budapest Bank, FHB Mortgage Bank, Erste Bank Hungary and MKB Bank.
If 30% of borrowers with forex loans avail of the scheme, Moody's estimates losses could add up to three percentage points of the banking system's capital adequacy ratio, which was 13.8% in June 2011. Moody's noted that the potential impact "varies significantly" among the rated banks.
Moody's said the number of Hungarians who take advantage of the scheme was "highly uncertain" as borrowers' savings may be insufficient to cover the repayment and banks may be unwilling to lend to such borrowers. Interest rates on forint loans are still well over those for forex loans, it added.
Moody's said the scheme "adds stress to a banking system already under significant pressure". It warned the program could exert negative pressure on banks' standalone credit profiles and constrain the banking sector's capacity to contribute to economic growth.
The scheme "represents a sizeable move away from the principles of contract law", Moody's said. Government decisions to introduce a bank levy and regulations that restrict foreclosures "are creating increasing uncertainty on the likelihood of systemic support for Hungarian banks", it added.
Foreign owners of rated Hungarian banks are not expected to "immediately alter their commitment to Hungary", Moody's said. But "these banks' strategic priorities and cost-benefit rationales are being increasingly affected by government policy decisions that are making the business environment in Hungary more difficult and less attractive to international investors", it added.
The average, asset-weighted deposit rating for Hungarian banks is Baa3. The support of foreign parents adds an average two notches to many Hungarian banks' ratings, Moody's said. The ratings of two banks are lifted one notch because of "systemic support assumptions", it added.