Moodys' Declares Hungary Bank Outlook Negative

Outlook for Hungary's banking system remains negative

The outlook on Hungary's banking system remains negative, says Moody's Investors Service in a Banking System Outlook published today (Banking System Outlook: Hungary available on www.moodys.com), reflecting its expectation that (i) asset quality will continue to deteriorate; (ii) profitability will remain weak; and (iii) the operating environment in Hungary remains uncertain.

The outlook expresses Moody's expectations for the fundamental credit conditions in this sector over the next 12-18 months. Moody's says that the Hungarian banking system is characterised by high  foreign-currency lending -  exceeding 70% - especially in Swiss francs.  Household borrowers, particularly, lack income in foreign currency that  would act as a natural hedge.

"The large amount of foreign-currency lending to households underpins the rating agency's expectation that asset quality will deteriorate further, as these borrowers' ability to service their debt has weakened significantly following more than 30% depreciation of the Forint against the Swiss Franc in recent years," explains Simone Zampa, a Moody's senior analyst and author of the report.

In addition, corporate loans are affected by the weak performance of the commercial real estate and the small and medium enterprises sectors.

According to the Hungarian National Bank, the level of problem loans in banks' portfolios is expected to rise above 13% in 2011 from 11% in 2010 for the retail sector, and above 15% in 2011 from 12.4% in 2010 for the corporate sector.

Profitability in the Hungarian banking system declined significantly in 2010, with several banks reporting losses, and Moody's expects earnings to remain weak in 2011. Profits have been eroded by (i) the rapidly growing cost of risk; (ii) shrinking business volumes; and (iii) a new tax on banks' assets.

Although Moody's economic outlook for Hungary in 2011 is more positive, the operating environment for banks remains challenging given the relatively distressed household and commercial real-estate sectors. Moreover, Hungarian banks have limited opportunities to lend to the well-performing export-oriented companies that are currently driving the economic recovery, as these companies receive much of their financing from their foreign parents.

These negative factors reduce the ability of the less well-capitalised banks to maintain a sufficient capital buffer in the current uncertain macroeconomic environment. This will likely lead to further shrinking of risk-weighted assets and deleveraging from some weaker banks.

"Banks remain highly dependent on foreign-currency wholesale funding compared with other countries in the region, which is a risk factor reflected in our negative system outlook," adds Mr. Zampa.

Despite the negative system outlook, Moody's believes that a major stabilising factor for the banking system has been its high level of foreign ownership (at 80% of system-wide bank capital at year-end 2010). Financially stronger parents have so far provided support in the form of capital and liquidity throughout the recent financial crisis and global recession. Moody's believes that this support is likely to continue, given the wider Central and Eastern Europe strategy of the parent banks and the fact that many of them are from countries that have strong economic and political links with Hungary. While not expected, the rating agency notes that support could decline in the future, if parent banks' strategic priorities and cost-benefit rationale change; Moody's ratings anticipate continuing support at current levels.