TEXT-S&P: Summary: Central-European International Bank Ltd.

(The following statement was released by the rating agency)

Feb 20 -

Summary analysis -- Central-European International Bank Ltd. ------ 20-Feb-2012

(Unsolicited Ratings)

CREDIT RATING: Country: Hungary

Local currency BBpi/--/--

Primary SIC: Commercial banks,

nec

Credit Rating History:

Local currency Foreign currency

13-Dec-2011 BBpi/-- --/--

06-Apr-2009 BBB-pi/-- --/--

Rationale

Standard & Poor's Ratings Services bases its unsolicited public information (pi) rating on Hungary-based Central - European International Bank Ltd. (CIB) on the bank's 'bb' anchor as well as its view that the CIB's business position, capital and earnings, funding, and liquidity are neutral factors for the rating, and that risk position is a negative factor. We assess CIB's stand-alone credit profile (SACP) in the 'b' category.

The 'bb' anchor draws on our Banking Industry Country Risk Assessment (BICRA) methodology and our view of the economic risk and industry risk in Hungary, where CIB operates. The BICRA for Hungary is group '7', based on economic risk and industry risk scores of '7'. The BICRA score is informed by our evaluation of economic risk. We view Hungary as a relatively advanced economy, with a well-diversified economic and export structure. Rising household indebtedness continues to strain the banking system, especially as a large proportion of mortgage loans are denominated in Swiss francs--a currency which has strongly appreciated against the Hungarian forint (HUF) since 2008. As a result, the profitability of the Hungarian banking sector could weaken, as could its capacity to supply new credits to the economy. Our assessment of industry risk is underpinned by the stability of the banking system and the focus on stable retail and corporate banking activities. While we believe that regulators failed to prevent banks' relaxed underwriting practices, they are gradually addressing the issues that have arisen. Banks' funding profiles are generally unbalanced and have a deficit of customer deposits compared with loans.

We view CIB's business position as a neutral rating factor. CIB is one of five banks that dominate the Hungarian banking market, and operates there as a universal bank, with particular strength in corporate banking where its loan market share exceeds 15%. This supports good cross-selling capabilities with the corporate clientele and subsequent good fee generation capacity. CIB's competitive position is weaker in the more lucrative retail segment, where it has a market share of under 10% in mortgages and retail deposits. We believe, however, that CIB is exposed to the risks associated with operating in a single country and that concentration risks render its business model more vulnerable in a downturn. The bank benefits from its 93% ownership by Italian bank Intesa Sanpaolo SpA (BBB+/Negative/A-2), and close financial and operational integration, notably for funding and swap facilities to reduce foreign exchange risk. Belonging to a financially strong and committed banking group bolsters the confidence of customers and depositors, in our view, especially in the current troubled economic times in Hungary.

Capital and earnings is a neutral rating factor in our opinion. This reflects our expectation that our projected risk-adjusted capital (RAC) ratio before adjustments for CIB should remain around 6%-6.5% in the next 12-18 months. This capital level compares relatively well in a local context and is neutral for the rating for a bank with an anchor in the 'bb' category, under our criteria. Our capital forecasts include a HUF40 billion equity injection from the parent in April 2011, and which substantially helped CIB stabilize its capital strength. The bank's internal capital generation capacity is weak, in our view, and margins are not high enough to buffer very high credit losses, which we expect occurred in 2011 and will likely occur in 2012. Operating performance is also burdened by declining volumes, a bank levy, rising credit costs, and our expectation for a one-off charge in the second-half of 2011 as a result of the government law on foreign exchange mortgage repayments. We think CIB consequently will likely report a loss again in 2011, after the loss posted in 2010.

Risk position is a negative rating factor, and the main weakness for the rating. CIB continues to face high risks in its loan book, given the fragile economic environment in Hungary and some troubled sectors where the bank operates, such as project and commercial real estate financing. The bank is also vulnerable to deterioration of the small and midsize enterprise sector, which is an important segment in its asset mix. As a result, nonperforming loans are above the sector average and continue to rise above the close to 20% observed at year-end 2010. In addition, CIB is exposed to foreign exchange risks in its mortgage portfolio, but to a lesser extent than peers given its lower retail focus.

Both funding and liquidity are neutral to the rating. CIB benefits from stable market shares in corporate deposits but the funding profile remains unbalanced, with a ratio of loans to deposits above 150% at midyear 2011. This is weaker than the sector average and creates relative reliance on external sources, notably interbank resources. Intesa Sanpaolo provides a significant part of these resources--68.5% at midyear 2011. This ongoing funding support, which we believe will persist, mitigates our concerns about CIB's unbalanced funding profile on a stand-alone basis. The bank is deleveraging, and we believe loan amortization will outpace new loan origination in coming quarters. This will create liquidity for CIB, which we believe it will place either with Intesa Sanpaolo or use to repay parent funding.

The 'pi' rating benefits from some uplift above the SACP, reflecting our opinion that CIB is a "strategically important" subsidiary of Intesa Sanpaolo, as our criteria define this term. We believe Intesa Sanpaolo will remain committed to CIB in the near future, despite the unfriendly measures taken by the Hungarian authorities vis a vis banks, and will continue to provide extraordinary support to CIB if needed.

Related Criteria And Research

-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011

-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011

-- Group Rating Methodology And Assumptions, Nov. 9, 2011

-- BICRA On Hungary Maintained At Group '7', Nov. 9, 2011

-- Ratings On Republic of Hungary Lowered To 'BB+/B' On Unpredictable Policy Framework; Outlook Negative, Dec. 21, 2011