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S&P downgrades OTP Bank, OTP Mortgage Bank ratings

Ratings agency Standard and Poor's announced that it had lowered its long-term counterparty credit ratings on Hungary-based OTP Bank and OTP Mortgage Bank to 'BB+' from 'BBB' and its short-term counterparty credit ratings to 'B' from 'A-3'.

S&P placed a negative outlook on both banks.

The downgrade of these banks follows S&P's reduction of Hungary's sovereign credit ratings to BBB-/Negative/A-3 from BBB/Negative/A-3 on Monday.

S&P Credit Analyst Harm Semder said that “In our view, rapidly worsening economic conditions in Hungary and most CEE markets make it very likely that OTP's asset quality and earnings metrics will deteriorate considerably after years of strong asset and profit growth.”

“OTP's credit risk is heightened in our opinion by rapid growth of loans, which are especially unseasoned outside the bank's domestic market, and a large amount of foreign currency lending to unhedged consumers and small and midsize enterprises that is untested in prolonged difficult conditions,” Semder added.

S&P noted that OTP's adjusted income after tax decreased by 13% to HUF 182.1 billion at the end of 2008, adding that this excludes a HUF 121.4 billion one-off gain on the sale of its insurance subsidiary, while a HUF 130.7 billion foreign-exchange gain exaggerated OTP's underlying profitability.

S&P said that that its current ratings reflect the possibility of a 6% decline in the Hungarian economy in 2009 and its view that OTP's annual profit is likely to be minimal. The ratings agency said that it believes the main cause of the pressure on OTP's performance to be accelerated credit costs, which doubled to HUF 111bn in 2008. S&P expects OTP's non-performing loan ratio (60 days overdue), which increased by about 30%, to undergo a further material increase. As a consequence, loan-loss provisions in respect of customer loans could triple to 500 basis points over the next two years. Moreover, S&P expects difficult conditions to reduce business and revenue generation and increase funding costs.

S&P said that the negative outlook mirrors that on the sovereign, adding that it also reflects concerns that OTP's financial profile could weaken more than currently anticipated in the agency's ratings if increasing economic contraction and industry risk in Hungary, and in other CEE regions where the bank has extensive operations, were to be deeper and longer than currently expected. (MTI – Econews)