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Fitch Affirms 3 Hungarian Banks' IDRs; Upgrades 2 Viability Ratings
August 21, 2017 / 2:20 PM / 3 months ago

Fitch Affirms 3 Hungarian Banks' IDRs; Upgrades 2 Viability Ratings

(The following statement was released by the rating agency) MOSCOW, August 21 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of Kereskedelmi es Hitelbank Zrt (K&H) and Erste Bank Hungary Zrt (EBH) at 'BBB' and of CIB Bank Zrt (CIB) at 'BBB-'. The Outlooks on the Long-Term IDRs are Stable. Fitch has also upgraded the Viability Ratings (VR) of EBH to 'bb' from 'b+' and of CIB to 'b+' from 'b'. The VR of K&H has been affirmed at 'bb+'. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS AND SUPPORT RATINGS The three banks' Long- and Short-Term IDRs and Support Ratings are based on potential support available from their parents - KBC Bank (KBC; A/Stable) for K&H, Erste Group Bank AG (Erste: A-/Stable) for EBH and Intesa Sanpaolo S.p.A. (IntesaSP; BBB/Stable) for CIB. In Fitch's view, KBC, Erste and IntesaSP will continue to have a high propensity to support their Hungarian subsidiaries because the central and eastern European region remains strategically important for each of them. The minority participation of the Hungarian government and EBRD in EBH (each holding a 15% stake since July 2016) does not affect Fitch's view of Erste's propensity to support EBH as Erste's commitment to the Hungarian market remains unchanged. Fitch caps the Hungarian banks' Long-Term IDRs at one notch above the sovereign (BBB-) to reflect the country risks they face. In case of a sovereign default these risks could limit the banks' ability to service their debt or their parents' propensity to continue providing support, or both. K&H and EBH could be rated within one notch of their parents, if country risks allowed. The Stable Outlooks on both banks reflect that for the Hungarian sovereign. CIB is notched once from IntesaSP and its Stable Outlook is in line with that on the parent. EBH's and K&H's Short-Term IDR of 'F2' - the higher of two options corresponding to a Long-Term IDR of 'BBB' - reflects potential support from their respective higher-rated parents. VRs The upgrades of the VRs of EBH and CIB reflect continued progress with balance sheet clean-up (more advanced at EBH, as captured by its 'bb' VR), supported by the recovering local property market and growing economy. The VRs also factor in both banks' strengthened capital position following capital injections in 2016, which should provide a solid buffer against potential recurring pressures on asset quality. At the same time, both banks have kept reserve coverage for impaired loans at reasonable levels following write-offs and sell-downs of bad debt. The lower VR of CIB (b+) reflects that despite significant progress achieved with balance sheet clean-up, asset quality is weaker than at peers' due to a still sizeable stock of legacy impaired loans. It also reflects only modest core profitability. The affirmation of K&H's VR reflects limited changes in the bank's credit profile since the last rating action in September 2016. The VRs of all three banks also reflect their comfortable funding and liquidity. Impaired loans at end-1Q17 were equal to about 7.1% of total gross loans at K&H (end-2015: 10.1%) and about 7.3% at EBH (end-2015: 18.3%). They remained markedly higher at CIB at 15.6% at end-1H17 (end-2015: 28:6%) after bad debt sales concluded in 1H17. Impaired loan portfolios largely consist of legacy retail mortgages (originally disbursed mainly in Swiss franc and converted into Hungarian forint (HUF) in 2015) and, in the case of CIB, also commercial real-estate exposures (CRE). We expect continued improvement in asset quality in 2017-2018, driven by the banks' bad debt sales and healthy new loan origination in view of the banks' moderate risk appetites, favourable macro trends and stricter regulatory standards for retail lending. K&H's loan book quality has been better than peers' due to the bank's more conservative and stable risk appetite, including limited financing of the vulnerable CRE segment. EBH has reduced its impaired loans ratio to single-digit levels, following write-off and sales of distressed CRE exposures as well as retail mortgages. CIB's high impaired loans ratio reflects significant loan book contraction to date and a somewhat more extended portfolio clean-up process than peers'. Reserve coverage of impaired loans remained moderate at K&H at 49% (end-1Q17) and stronger at EBH at 74% (end-1Q17) and CIB at 62% (end-2016). K&H's performance has been more resilient through the cycle, due to the bank's more stable revenue generation and lower impairment charges. EBH and CIB, after several years of losses, reported positive results at the operating level in 2016. The recovery is, to a significant extent, underpinned by the net reversals of impairment provisions and a lower bank tax. Low market interest rates are puting pressure on net interest margins for all banks. In such an environment increasing business volumes remains key to profitability improvements (in particular for CIB). Credit demand in Hungary is recovering and new lending has accelerated both in the corporate and retail segments. Fitch Core Capital (FCC) ratios were about 14% at K&H (end-1Q17, adjusted by full 2016 profit distribution), 15.6% at EBH (end-1Q17) and 20.8% at CIB (end-2016). CIB's higher FCC ratio should be viewed in the context of the bank's higher credit risk concentrations and weaker internal capital generation. Regulatory common equity Tier 1 ratios stood at 12.9% at K&H (end-1Q17), 15% at EBH (end-1Q17) and 19.8% at CIB (end-1H17). These ratios were managed with comfortable buffers above the regulatory capital requirements (capturing CRD IV and EBA guidelines). CIB is also subject to additional regulatory capital requirement applicable from July 2017 (at 2% of risk-weighted assets), which addresses risks in the bank's legacy CRE portfolio. Overall, capital pressures have decreased due to return to positive internal capital generation (EBH and CIB) and reduced levels of unreserved impaired loans (K&H: about 20% of the adjusted FCC at end-1Q17; EBH: about 8% at end-1Q17; CIB: 23% at end-1H17). Refinancing risks at all three banks remain limited due to their stable deposit funding (contributing 85%-86% of total funding at end-2016) and sizeable liquidity buffers invested predominantly in cash, deposit placements at the parent groups and Hungarian government debt. At end-1H17, loans/deposits ratios remained well below 100% at all banks as credit growth has been moderate. RATING SENSITIVITIES IDRS AND SUPPORT RATINGS The Long-Term IDRs of K&H and EBH could be upgraded alongside an upgrade of the Hungarian sovereign rating or a positive change in Fitch's perception of country risks facing the Hungarian banks. A downgrade of the Hungarian sovereign rating would likely cause a downgrade of K&H's and EBH's IDRs. The IDRs of CIB are sensitive to the changes in IntesaSP's ratings. VRs The VRs of EBH and CIB could be upgraded following a further reduction of problem assets, coupled with improved profitability and stable, solid solvency metrics. Upside for K&H is currently limited and would require a substantial improvement of the operating environment and a broadening of the bank's domestic franchise. The VRs could be downgraded if the weaker operating environment translates into capital erosion as a result of additional credit losses. The rating actions are as follows: K&H Long-Term IDR: affirmed at 'BBB', Outlook Stable Short-Term IDR: affirmed at 'F2' Support Rating: affirmed at '2' Viability Rating: affirmed at 'bb+' EBH Long-Term IDR: affirmed at 'BBB', Outlook Stable Short-Term IDR: affirmed at 'F2' Support Rating: affirmed at '2' Viability Rating: upgraded to 'bb' from 'b+ CIB Long-Term IDR: affirmed at 'BBB-', Outlook Stable Short-Term IDR: affirmed at 'F3' Support Rating: affirmed at '2' Viability Rating: upgraded to 'b+' from 'b' Contact: Primary Analyst Olga Ignatieva Senior Director +7 495 956 69 06 Fitch Ratings Moscow Valovaya Str, 26, Moscow Secondary Analyst Agata Gryglewicz Associate Director +48 22 330 69 70 Committee Chairperson Artur Szeski Senior Director +48 22 338 62 92 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Summary of Financial Statement Adjustments - For K&H and EBH Fitch has classified the upward revision/adjustment to the carrying amount of loans that had been subject to regulatory FX settlements and conversion as a reversal of impairment charges rather than part of income as reported in the 2016 IFRs financial statements. Consequently these have been netted off EBH's and K&H's loan impairment charges reported in 2016 financial statements. We believe this approach better reflects the economic substance of the loan value revisions/adjustments. CIB has not recognised such an item, therefore, no adjustment has been made to its published figures. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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