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S&P maintains Hungary’s BICRA at group 7

Standard and Poor’s Ratings Services on Wednesday said it is maintaining its Banking Industry Country Risk Assessment (BICRA) on Hungary at group ‘7’.

S&P also said it is maintaining the economic risk score at ‘7’ and assigning an industry risk score of ‘7’.

"Our economic risk score of ‘7’ reflects our opinion that Hungary has ‘high risk’ in ‘economic resilience’ and ‘economic imbalances’, and ‘very high risk’ in ‘credit risk in the economy’, as our criteria define those terms," S&P said.

Other countries in BICRA group ‘7’ include Bulgaria, Russia, Lithuania, and Morocco.

S&P noted that private consumption remains weak in Hungary and that exports continue to be the engine of economic growth. A decline in global trade or a slowdown in Germany, Hungary’s biggest trade partner, could have a negative impact on the economy, he added.

Hungary’s political environment is "generally stable", S&P said, but added that a levy on banks and a government scheme allowing full repayment of foreign currency-denominated loans at a discounted exchange rate have been "detrimental" to the banking sector.

S&P expects demand for credit - adjusted for exchange rate changes - to fall in the next two years as the banking system is deleveraged and local banks face greater difficulty getting resources to lend to the local economy. This could "impair" the banking system’s profitability, S&P said.

"Our industry risk score of ‘7’ reflects our view that the country faces ‘high risk’ in its ‘institutional framework’, ‘intermediate risk’ in ‘competitive dynamics’, and ‘very high risk’ in ‘system-wide funding’, as our criteria define those terms," S&P said. "Our assessment of the institutional framework as ‘high risk’ essentially reflects our view that Hungarian regulators failed to detect and prevent imbalances building up before 2008, notably the excessive recourse to foreign-exchange loans and insufficient analysis of borrowers’ servicing capacities in the underwriting process," it added, while acknowledging steps by regulators to remedy these issues.

S&P said Hungary’s banking system is "stable", as the main players have steady market shares, which help to avoid excessive competition that could squeeze margins, there are few state-owned banks that could distort competition, and banks have largely moved away from moderately risky practices that prevailed in the past.

S&P said Hungarian banks’ funding profiles are "unbalanced" because of a low deposit-to-loan ratio.

S&P classified the Hungarian government as "supportive" toward the domestic banking system and acknowledged extraordinary support it provided the system in periods of stress in the past.