Mainly Positive Rating Actions Taken On Three
Hungarian Banks Amid Diminishing Economic
And Industry Risks
Primary Credit Analyst:
Goeksenin Karagoez, FRM, Paris (33) 1-4420-6724; [email protected]
Secondary Contacts:
Magar Kouyoumdjian, London (44) 20-7176-7217; [email protected]
Markus W Schmaus, Frankfurt (49) 69-33-999-155; [email protected]
• In our view, economic and industry risks for banks in Hungary are
decreasing.
• The conversion of Hungarian households' foreign currency loans into local
currency has reduced their debt burdens, and the demand for residential
real estate is resuming.
• We are consequently raising our long-term ratings on OTP Bank PLC and its
core subsidiary OTP Mortgage Bank to 'BB+' from 'BB'. Concurrently, we
are affirming our 'BB/B' long- and short-term ratings on Magyar
Takarekbank.
• The outlooks on all three banks are stable based on our view of limited
room for bank- or industry-specific factors over the next 12 months.
PARIS (S&P Global) July 21, 2016--S&P Global Ratings Services said today that
it has raised its long-term foreign and local currency counterparty credit
ratings on Hungary-based OTP Bank PLC (OTP Bank) and its core subsidiary OTP
Mortgage Bank (OTP Mortgage) to 'BB+' from 'BB'. At the same time, we affirmed
our 'B' short-term foreign and local currency counterparty credit ratings on
both banks. We also affirmed our 'BB/B' long- and short-term foreign and local
currency counterparty credit ratings on Hungary-based Magyar
Takarekszovetkezeti Bank ZRt. (Takarekbank). The outlooks on the long-term
ratings on all three banks are stable.
The rating actions follow our review of economic and industry risks for
Hungarian banks. We have observed several positive developments since our last
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review of the banking industry in July 2015. Among these are regulatory
changes, including the completed conversion of households' housing and
consumer loans in foreign currency to Hungarian forint, as well as the
establishment of a new asset management company to deal with problem
commercial real estate loans. As a result, households now have comparatively
lower debt burdens and debt service, and domestic real estate prices have
started recovering. Most importantly, this conversion has eliminated the most
prominent credit risk for domestic banks. Although households' demand for new
loans is still weak, we think their appetite for credit will rise gradually.
Following several years of deleveraging, Hungarian banks' overall funding
metrics have improved visibly, and their reliance on the external bank debt
decreased. Yet, we think that the competitive landscape is now tougher because
credit demand has picked up only in the past few months and banks are
increasingly investing in lower-yield domestic government debt, in line with
the government's "self-funding" scheme.
Based on the above, we consider that economic risks for Hungary's banks have
lessened and have revised our assessment of economic risk for Hungarian banks
to '7' from '8' under our Banking Industry Country Risk Assessment (BICRA)
methodology. We now view the trend for economic risks in Hungary as stable.
At the same time, we have maintained our assessment of industry risk at '7'
and continue to regard the trend in this risk as stable. We therefore classify
Hungary in our BICRA group '7', versus '8' previously. Combined, these changes
mean that we have raised the anchor--the starting point for constructing our
bank ratings--to 'bb' from 'bb-'.
OTP BANK and OTP MORTGAGE
The upgrade of OTP Bank largely mirrors our revised view of the domestic
banking system, while also taking into account the bank's strengthened overall
risk profile. The latter mainly follows the positive domestic developments
described above but also incorporates the OTP group's increased loss coverage
across markets where it's active, including Ukraine and Russia. Also,
operations in these countries are returning to profitability, and their share
of loans within the group has decreased. They consequently represent less of a
drag on the group's risk position. Concurrently, we revised our assessment of
OTP Bank's liquidity to strong from adequate. The bank has a sizable amount of
liquid assets that cover its short-term funding needs more than adequately.
More than half of its deposits in Hungary fall under the coverage-of-savings
deposits guarantee, therefore making the bank resilient to reasonable stress
in the next 12 months. The bank has a high amount of unencumbered assets that
can be repurchased with the National Bank of Hungary and its counterparties.
Its exceptionally good liquidity metrics are also attributable to its
deleveraging in the recent past. We expect its liquidity metrics will
gradually weaken but remain well above peers' when credit growth potentially
accelerates in Hungary starting from 2017. We do not foresee the bank more
actively funding lending growth with short-term wholesale issuance.
Our assessment of capital and earnings remains unchanged, already taking into
account the continued gradual recovery of operational performance in
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2016-2017. We consequently expect our forecast risk-adjusted capital (RAC)
ratio for OTP Bank will improve to more than 8% in next 18 months but still
remain below our threshold for a stronger capital assessment.
We equalize the ratings on OTP Mortgage with those on parent OTP Bank because
we continue to regard it as a fully integrated subsidiary that is integral to
the group's strategy.
The stable outlook on OTP Bank and OTP Mortgage is based on our anticipation
that the group's business and financial profiles will remain commensurate with
the current ratings over the next 12 months, all else remaining equal.
The likelihood of a positive rating action on OTP Bank over the next 12 months
is limited because it would hinge on a similar rating action on Hungary and
strengthening in our stand-alone credit profile (SACP) assessment for the
bank, both of which we view as remote at present. In addition, we typically do
not rate a bank higher than its country of domicile. To consider an upward
revision of the SACP, we would expect to see the bank's RAC ratio above 10% on
a sustained manner, along with better assessments of other bank-specific
factors.
A negative rating action on OTP Bank, on the other hand, could stem from a
similar rating action on the sovereign or deterioration in our SACP assessment
for the bank. A weakened SACP could stem from a deterioration of the RAC ratio
to below 7%, owing to rapid loan growth to the detriment of capitalization, or
internal capital generation weakening because of a surge in risk costs. These
are not our base-case scenarios however.
TAKAREKBANK
The ratings on Takarekbank factor in our view that the bank compares poorly,
in terms of profitability and earnings generation, with other peers operating
in countries with similar economic and industry risk and rated at 'BB+' or
lower. They also take into account our upward revision of the group credit
profile to 'bb+' from 'bb', reflecting our view of Hungary's reduced economic
risks. The bank has reported negative capital sustainability levels, as
measured under our methodology, and an overall low earnings buffer. Historical
returns on equity have also been generally modest. Consequently, we apply a
one-notch negative adjustment to the rating to reflect our view that the bank
is and will likely continue to be a relatively poor performer in its peer
group. In addition, Takarekbank only recently enacted a radical
transformation. Therefore, it remains to be seen if the bank's recent overhaul
of its business model and enterprise risk management will prove efficient.
We also think that Takarekbank will benefit less than other larger domestic
peers from Hungary's recent regulatory initiatives to address foreign
currency-denominated mortgages and large commercial real estate project
finance loans, because it had lower exposure to these problematic asset
classes.
The stable outlook on Takarekbank balances the improving domestic economic
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environment and the bank's tighter integration into Hungary's group of savings
bank cooperatives with limited business prospects because the demand for
credit remains subdued. Moreover, as a niche bank with weaker earnings
capacity than the sector average, Takarekbank will in our view benefit less
than private banks from improved domestic economic growth. The bank' now
operates more closely aligned with the savings cooperatives' group strategy,
with harmonized marketing, product, and Information Technology systems. We
think that this could create stronger risk management, better efficiency, and
wider business opportunities over the next 12 to 18 months, which we already
factor into our ratings on Takarekbank. Therefore, we expect these factors
will help the bank maintain financial and business profiles that we regard as
commensurate with the current ratings over the next year.
We could take a positive rating action on the bank if we concluded that
conditions in the domestic economy and the purchasing power of households had
further improved, while credit demand picked up, leading to better earnings
for the group. This would also necessitate a stronger commercial strategy with
higher earnings margins and better efficiency, with improved earnings buffers
and capital sustainability.
Conversely, we could take a negative rating action on the group if its
profitability and earnings buffer remain below peers leading us to weaken our
assessment of its business position and if the group's projected RAC ratio
deteriorated below 3% at the same time. We would also consider a negative
rating action if, contrary to our base-case expectations, we observed
significant weakening in Takarekbank's links with the integrated savings
cooperatives, which would trigger a change in our view of its core subsidiary
status.
BICRA SCORE SNAPSHOT*
Hungary
To
From
BICRA group
7
8
Economic risk
Economic resilience
Economic imbalances
Credit risk in the economy
Trend
7
High risk
High risk
Very high risk
Stable
8
Very high risk
High risk
Very high risk
Positive
Industry risk
Institutional framework
Competitive dynamics
Systemwide funding
Trend
7
Very high risk
High risk
High risk
Stable
7
Very high risk
Intermediate risk
Very high risk
Stable
*Banking Industry Country Risk Assessments (BICRAs) and economic risk and
industry risk scores are on a 1 (lowest risk)-to-10 (highest risk) scale. For
more details on BICRA scores on all banking industries that we assess across
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the globe, see our latest "Banking Industry Country Risk Assessment Update,"
published monthly on RatingsDirect.
RATINGS LIST
Upgraded; Ratings Affirmed
OTP Bank PLC
Counterparty Credit Rating
Foreign and Local Currency
Senior Unsecured
Foreign and Local Currency
OTP Mortgage Bank
Counterparty Credit Rating
Foreign and Local Currency
To
From
BB+/Stable/B
BB/Positive/B
BB+
BB
BB+/Stable/B
BB/Positive/B
Ratings Affirmed
Magyar Takarekszovetkezeti Bank ZRt.
Counterparty Credit Rating
Foreign and Local Currency
BB/Stable/B
RELATED CRITERIA AND RESEARCH
Related Criteria
• Criteria - Financial Institutions - Banks: Quantitative Metrics For
Rating Banks Globally: Methodology And Assumptions - July 17, 2013
• General Criteria: Group Rating Methodology - November 19, 2013
• Criteria - Financial Institutions - Banks: Revised Market Risk Charges
For Banks In Our Risk-Adjusted Capital Framework - June 22, 2012
• Criteria - Financial Institutions - Banks: Banks: Rating Methodology And
Assumptions - November 09, 2011
• Criteria - Financial Institutions - Banks: Banking Industry Country Risk
Assessment Methodology And Assumptions - November 09, 2011
• Criteria - Financial Institutions - Banks: Bank Capital Methodology And
Assumptions - December 06, 2010
• General Criteria: Use Of CreditWatch And Outlooks - September 14, 2009
• Criteria - Financial Institutions - Banks: Commercial Paper I: Banks March 23, 2004
Related Research
• Banking Industry Country Risk Assessment Update: June 2016 - June 17, 2016
• Hungary 'BB+/B' Ratings Affirmed; Outlook Stable - March 18, 2016
Additional Contact:
Financial Institutions Ratings Europe; [email protected]
Certain terms used in this report, particularly certain adjectives used to
express our view on rating relevant factors, have specific meanings ascribed
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to them in our criteria, and should therefore be read in conjunction with such
criteria. Please see Ratings Criteria at www.standardandpoors.com for further
information. Complete ratings information is available to subscribers of
RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All
ratings affected by this rating action can be found on the S&P Global Ratings
public website at www.standardandpoors.com. Use the Ratings search box located
in the left column. Alternatively, call one of the following S&P Global
Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office
(44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225;
Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.
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