(The following statement was released by the rating agency)
Jan 12 - Fitch Ratings has downgraded Hungarian banks CIB Bank Zrt’s (CIB) and Kereskedelmi es Hitelbank Zrt’s (K&H) Long-term Issuer Default Ratings (IDR) to ‘BBB’ from ‘A-‘ with Negative Outlook and CIB’s, K&H’s, Erste Bank Hungary Zrt’s (EBH) and Raiffeisen Bank Zrt’s (RB) Support Ratings to ‘2’ from ‘1’. Fitch has also maintained MKB Bank Zrt’s (MKB) Support Rating of ‘2’ on Rating Watch Negative (RWN) and affirmed OTP Bank Plc’s (OTP) Support Rating at ‘3’. A full list of rating actions is at the end of this comment.
The downgrade of CIB’s and K&H’s Long-term IDRs and CIB, K&H, EBH and Raiffeisen’s Support Ratings reflect the downgrade of Hungary’s Country Ceiling to ‘BBB’ from ‘A-‘. Both CIB and K&H share the Negative Outlook of the sovereign’s Long-term foreign currency IDR of ‘BB+’ and are likely to be downgraded if Hungary’s foreign currency Long-term IDR is downgraded further.
CIB and K&H’s Long-term IDRs are currently constrained by Hungary’s Country Ceiling, which reflects Fitch’s view on transfer and convertibility risks and limits the extent to which support from the shareholders of these banks can be factored into the banks’ Long-term IDRs.
Fitch’s outlook for the Hungarian banking sector remains negative. This reflects the high risks arising from exposure to foreign-currency loans, the recessionary environment (Fitch forecasts a 0.5% contraction of GDP in 2012) and significant losses due to high impairment losses, the special bank levy and the early repayment scheme for FX mortgages. Negative internal capital generation at most banks drags on lending capacity and the ability to attract funding and capital from parent institutions.
In early 2012, the forint depreciated to an all-time-low against the euro and Swiss franc, which could trigger a further increase of non-performing loan (NPL) ratios. The recent mortgage rescue program (agreed in mid-December 2011 between banks and the government) could have a short-term positive impact on households’ ability to service their debt and could limit the inflow of new NPLs, but without reducing overall household debt burdens.
The downgrade of CIB’s Viability Rating to ‘b’ from ‘b+’ primarily reflects the pressures on capitalisation due to a second consecutive annual loss in 2011 (based on Fitch’s expectations), modest specific reserve coverage of NPLs (42% at end-Q311) and the high proportion of foreign-currency denominated loans (77% of the loan book at end-Q311). NPLs were a high 25% at end-Q311, with unreserved NPLs equal to a high 126% of Fitch Core Capital. The loans/deposits ratio is a high 150%, indicating a large dependence on parent funding.
The affirmation of K&H’s Viability Rating at ‘bb-‘ reflects its resilient earnings in 9M11 due to a still solid interest margin, asset quality which is better than the sector average (the bank’s NPL ratio was 9.4% at end-Q311) and a balanced funding structure, with a loans/deposits ratio of 107% at end-Q311.