Bloomberg News

Hungary Banks May Be Downgraded at Moody’s After Mortgage Plan

October 05, 2011

Oct. 5 (Bloomberg) -- Seven Hungarian banks have been placed on review for a downgrade at Moody’s Investors Service on concern that exchange-rate losses from a government mortgage plan may erode their profitability.

The banks on review are OTP Bank Nyrt., Hungary’s largest lender, and its mortgage unit; Foldhitel es Jelzalogbank Nyrt.; and the local units of KBC Groep NV, General Electric Co., Erste Group Bank AG and Bayerische Landesbank, Moody’s said in a statement late yesterday.

The average deposit rating of Hungarian banks is Baa3, one step above Ba, Moody’s said. Issuers rated Baa offer “adequate financial security” while Ba-rated companies offer “questionable financial security,” according to Moody’s.

Hungary is allowing borrowers to repay mortgages denominated in foreign currencies such as the Swiss franc ahead of schedule at more than 20 percent below market exchange rates, forcing lenders to swallow losses. The Cabinet has also introduced a 120 billion-forint ($530 million) annual tax on banks and wants to restructure 180 billion forint of county debt.

“Moody’s believes that the approved law will likely trigger losses for the banks and impact their capital positions,” the company said. “The review will assess the impact of the law on a bank by bank basis, taking into the level of exposure to foreign-currency mortgages, the take-up rate by borrowers; the level of profitability and the capital buffers available.”

‘Systemic’ Support

OTP competes mostly with units of international banks including Raiffeisen Bank International AG, Erste, UniCredit SpA and Intesa Sanpaolo SpA. OTP’s shares advanced 2 percent to 3,065 forint at 9:17 a.m. in Budapest. The lender has lost 48 percent of its value in the past three months.

Moody’s will consider in its review the “likelihood of systemic and parental support for Hungarian banks given the overall weakening support environment.” The company said it doesn’t expect foreign parent banks to “immediately alter their commitment to Hungary.”

The government is allowing borrowers to repay mortgage loans in a lump sum this year at rates of 180 forint per Swiss franc and 250 forint per euro. The forint traded at 243.54 per franc and 298.6 per euro today. Foreign-currency loans account for 70 percent of mortgage lending, Moody’s said.

The central bank is allowing domestic banks to tap the country’s foreign-currency reserves to address an expected rise in foreign-currency demand as borrowers repay loans at below- market rates. The central bank estimates that 20 percent of a total of 18 billion euros ($24 billion) in foreign-currency mortgages may be repaid at fixed exchange rates.

Stress

“The government’s scheme adds stress to a banking system already under significant pressure, reflected by deteriorating asset quality and weak profitability,” Moody’s said. “This additional scheme will exert negative pressure on the banks’ stand-alone credit profiles and may constrain the banking sector’s capacity to contribute to economic growth.”

Hungary’s mortgage repayment plan poses “risks to the banking sector and Hungary’s reputation among investors,” Fitch ratings said in a separate report today. Hungary’s sovereign credit is rated the lowest investment grade at Moody’s, Standard & Poor’s and Fitch Ratings.

--Editor: Alan Crosby, Douglas Lytle

To contact the reporters on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net;

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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