Moody's issued the following statement on Tuesday:
"Moody's Investors Service has today 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 NyRt, OTP Mortgage Bank, K&H Bank, Budapest Bank, FHB Mortgage Bank, Erste Bank Hungary and MKB Bank.
The review for downgrade was prompted by the recently approved law, which gives foreign-currency mortgage borrowers the option to repay the full outstanding amount at exchange rates below market rates. The review will assess the impact of the law on a bank by bank basis, taking into account: (i) the level of exposure to foreign-currency mortgages; (ii) the take-up rate by borrowers; (iii) the level of profitability; and (iv) the capital buffers available. Moody's anticipates that there are considerable differences between the rated banks with respect to these metrics.
In addition, the review will focus on Moody's assumptions of the likelihood of systemic and parental support for Hungarian banks given the overall weakening support environment.
The full list of affected ratings can be found at the end of this press release.
Moody's says that the review for downgrade was prompted by a government law, approved on 19 September, which gives foreign-currency mortgage borrowers the option to repay the full outstanding amount at exchange rates below market rates. As foreign-denominated loans account for 70% of mortgage lending, Moody's believes that the approved law will likely trigger losses for the banks and impact their capital positions. Based on a 30% total take-up rate, Moody's estimates that the conversion at the current market rates would imply a possible loss up to 300 basis points of the regulatory capital adequacy ratio of the system, which was equal to 13.8% in June 2011. However, Moody's anticipates that the potential impact varies significantly among the rated banks.
The newly approved framework allows borrowers to voluntarily repay in a lump sum (by end of February 2012) their foreign-currency mortgages. The exchange rates proposed -- HUF180 to one Swiss franc and HUF250 to one euro -- are 36% and 19% below current market rates of around HUF246 and HUF298, respectively, thereby imposing haircuts and triggering losses for the lenders.
Moody's notes that the number of borrowers who might take advantage of the option is highly uncertain, because many eligible borrowers may be unable or unwilling to convert their loans for the following reasons: (i) repayments depend on the stretched borrowers' ability to either mobilise enough cash savings, or to find banks willing to provide refinancing in forints; and (ii) the average interest rate on forint-based loans is significantly higher than for foreign-currency loans.
Moody's also acknowledges that the government's scheme adds stress to a banking system already under significant pressure, reflected by deteriorating asset quality and weak profitability. This additional scheme will exert negative pressure on the banks' standalone credit profiles and may constrain the banking sector's capacity to contribute to economic growth.
In addition, following the ongoing macroeconomic challenges and the effect of the euro-area debt crisis, the National Bank of Hungary has reduced its 2011 GDP growth expectations for Hungary to 1.6%, from 2.6% in June, and has lowered the growth estimates for 2012 to 1.5%, from 2.7% in June. Unemployment is expected to remain above 10%. This indicates continuous asset quality challenges for banks.
SYSTEMIC AND PARENTAL SUPPORT COMES UNDER INCREASING SCRUTINY
Moody's notes that the average (asset-weighted) deposit rating for Hungarian banks is Baa3, as many banks benefit by an average of two notches of uplift from their current standalone BFSR due to parental support assumptions, and two banks benefit by one notch of uplift from their standalone BFSR due to systemic support assumptions.
The newly approved government law represents a sizeable move away from the principles of contract law. This, together with a set of government policy decisions since 2010 that include a punitive banking tax and regulations that still restrict repossessions of collateral on delinquent mortgages, have been adding pressure to lenders and are creating increasing uncertainty on the likelihood of systemic support for Hungarian banks.
Around 80% of the Hungarian banking system is owned by foreign banks. For some of the parent banks, their Hungarian operations form part of a larger network in Central and Eastern Europe from which they derive a portion of their profits. Moody's does not expect the foreign parents of the rated banks to immediately alter their commitment to Hungary. However, the rating agency acknowledges that 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.
Moody's has taken the following rating actions:
- Local-currency deposit ratings Baa3/Prime-3 were placed on review for downgrade
- Foreign-currency deposit ratings Baa3/Prime-3 were placed on review for downgrade
- Foreign-currency senior unsecured debt rating Baa3 was placed on review for downgrade
- Foreign-currency subordinated debt rating (Lower Tier 2) Ba1 was placed on review for downgrade
- Foreign-currency junior subordinated debt rating (Upper Tier 2) Ba2 (hyb) was placed on review for downgrade
- D+ BFSR (mapping to Baa3 on the long-term scale) was placed on review for downgrade
- Local-currency deposit ratings Baa3/Prime-3 were placed on review for downgrade
- Foreign-currency deposit ratings Baa3/Prime-3 were placed on review for downgrade
- D+ BFSR (mapping to Baa3 on the long-term scale) was placed on review for downgrade
- Local-currency deposit ratings Baa3/Prime-3 were placed on review for downgrade
- Foreign-currency deposit ratings Baa3/Prime-3 were placed on review for downgrade
- D BFSR (mapping to Ba2 on the long-term scale) was placed on review for downgrade
- Local-currency deposit ratings Baa3/Prime-3 were placed on review for downgrade
- Foreign-currency deposit ratings Baa3/Prime-3 were placed on review for downgrade
- D- BFSR (mapping to Ba3 on the long-term scale) was placed on review for downgrade
- Local-currency long-term deposit rating of Ba1 was placed on review for downgrade
- Foreign-currency long-term deposit rating of Ba1 was placed on review for downgrade
- D BFSR (mapping to Ba2 on the long-term scale) was placed on review for downgrade
- Local-currency long-term deposit rating of Ba1 was placed on review for downgrade
- Foreign-currency long-term deposit rating of Ba1 was placed on review for downgrade
- D- BFSR (mapping to Ba3 on the long-term scale) was placed on review for downgrade
- Local-currency long-term deposit rating of Ba2 was placed on review for downgrade
- Foreign-currency long-term deposit rating of Ba2 was placed on review for downgrade
- Foreign-currency senior unsecured debt rating Ba2 was placed on review for downgrade
- Foreign-currency subordinated debt rating (Lower Tier 2) B1 was placed on review for downgrade
- E+ BFSR maintains a stable outlook, but its corresponding standalone rating of B1 was placed on review for downgrade"
