TEXT-S&P takes various rating actions on Hungarian banks
-- We believe economic risks for the Hungarian banking sector are rising in a context of deteriorating sovereign creditworthiness and economic slowdown. -- The quality of banks' retail and corporate books is likely to continue to weaken, keeping credit losses high for the next two years and keeping banks' financial profiles under pressure. -- We are lowering our anchor--or starting point for our ratings--for banks operating in Hungary to 'bb-' from 'bb'. -- We are therefore lowering our long-term rating on Magyar Takarekszovetkezeti Bank ZRt to 'BB-' from 'BB'. The outlook is stable. -- We are affirming our ratings on OTP Bank PLC and its subsidiary OTP Mortgage Bank at 'BB/B'. The outlook is stable. -- We are also affirming our unsolicited public information (pi) rating on K&H Bank and Central-European International Bank at 'BBpi', and on MKB Bank at 'Bpi'. Dec 19 - Standard & Poor's Ratings Services said today it had lowered its long-term counterparty credit rating on Magyar Takarekszovetkezeti Bank ZRt. (Takarekbank)to 'BB-' from 'BB' and affirmed its 'B' short-term rating. The outlook is stable. We are also lowering our stand-alone credit profile (SACP) on Takarekbank to 'b-' from 'b'. At the same time we affirmed our long- and short-term ratings on OTP Bank PLC and its core subsidiary OTP Mortgage Bank at 'BB/B'. The outlook is stable. We are lowering OTP's SACP to 'bb' from 'bb+'. We also affirmed our unsolicited public information (pi) ratings on three subsidiaries of foreign groups--K&H Bank and Central-European International Bank Ltd. (CIB) at 'BBpi', and MKB Bank ZRT at 'Bpi'. We view economic risks for Hungarian banks as having increased incrementally, based on expectations of a more protracted downturn in the country with an expected 1.5% GDP contraction in real terms in 2012 and a muted 0.5% rebound in 2013. Continued fiscal rationalization, a distortionary and unpredictable tax environment for the financial sector, and very tight credit conditions because of the fragility of the banking system weigh on future growth prospects. We expect a deterioration of the creditworthiness of the main economic agents--households, corporates, and public bodies--which should translate into higher levels of problem loans for banks. We expect nonperforming loans (NPLs) to continue to rise rapidly, moving toward 18% in the household segment in 2013 from 16.2% at midyear 2012 and 3.5% in 2008, and 23% in the corporate sector from 20.9% at midyear 2012 and 3.5% in 2008. We therefore believe the banking sector will be loss making in 2012 and 2013, the third consecutive year, burdened by the need to create new provisions. We also see a negative trend in industry risk. The banking sector's profitability is being impaired by falling volumes. Most of the banks, especially foreign-owned ones, are deleveraging rapidly. We recognize the weak internal demand for credit, but believe another important reason for this rapid deleveraging is the punitive and distortionary set of ad hoc measures implemented by authorities and specifically targeting the financial sector to shore up public finances and relieve debt burden in foreign currency to households. In particular, banks suffered huge losses in fourth-quarter of 2011 when the mortgage repayment law enabled households to repay mortgages denominated in foreign currency--above 60% of the stock----at a fixed rated much lower than market rates prevailing at that time, implicitly equivalent to a debt write off for the banking system. The authorities' decision to implement a transaction tax and their decision not to halve the bank levy in 2013, as originally agreed in December 2011, will further weaken the banks' financial profiles and their ability to generate capital internally. This, in turn, will lead to a rapid reduction of credit supply to the economy, delaying recovery prospects. We also believe the authorities' unpredictable policy framework and unfriendly attitude toward the banking system may lead foreign parents to gradually reduce, but not stop, the channeling of resources in the form of capital and liquidity to their subsidiaries, accelerating the deleveraging process. We believe there is a risk of the industry downsizing, affecting its long-term dynamics. Our affirmation of the ratings on OTP Bank and its core subsidiary OTP Mortgage Bank reflects our belief that the bank has better business and geographic diversification than its domestic peers, notably profitable activities in Central and Eastern Europe (CEE) and Russia, which have enabled it to maintain strong operating performance despite the continuous rise in nonperforming loans in Hungary. OTP's ratings are the highest for a bank in Hungary, at the level of the sovereign. We have lowered OTP's SACP to 'bb' from 'bb+' to reflect higher economic risks in Hungary, where half of OTP's assets are located. We believe the bank remains exposed to the deterioration of the domestic economy and sovereign creditworthiness through its holding of government debt and lending to public sector entities like municipalities. The stable outlook reflects our expectation that the bank's business and financial profile will remain fairly unchanged over the next 12 months. It also reflects our view that the bank's capacity to generate capital from earnings will remain high, despite the current asset quality pressure and constrained business growth. As a core subsidiary, OTP Mortgage Bank's ratings move in tandem with those on OTP. We lowered our rating on Takarekbank by one notch to reflect our lowering of its anchor, and subsequently its SACP, to 'b-' from 'b'. Takarekbank continues to benefit from three notches of support from the Integrated Savings Cooperatives (SCs), for which it acts as the central organ. We believe Takarekbank is a "strategically important" subsidiary of the SCs. The stable outlook reflects the above-average resilience of the SCs business and financial profiles, which have been less affected than private banks in Hungary because of the SCs low share of foreign currency lending to households, well entrenched franchise in rural areas, and therefore favorable funding profiles. We also consider unlikely, at this stage, a revision of Takarekbank's SACP to the 'ccc' category, given its adequate liquidity and weak, but not deteriorating, capital position. The stable outlook also takes into account the outlook on the sovereign. Any negative action on the sovereign would likely be reflected in Takarekbank's ratings. Our affirmation of the 'BBpi' rating on K&H despite worsening operating conditions in Hungary reflects that we expect Belgian parent bank KBC Bank N.V. (A-/Positive/A-2) to provide it with extraordinary support in case of need. We view K&H as a "strategically important" subsidiary of KBC, and therefore the pi rating benefits from some uplift. Parental support partly offsets higher economic risks, in our view. K&H's SACP is in the 'bb' category. Our affirmation of the 'BBpi' rating on CIB despite worsening operating conditions in Hungary reflects that we expect Italian bank Intesa SanPaolo (BBB+/Negative/A-2) to provide it with extraordinary support in case of need. We view CIB as a "strategically important" subsidiary of Intesa, and therefore the pi rating benefits from one category of uplift. Parental support, shown by regular capital increases and funding support over the past months partly offsets, in our view, higher economic and industry risks. CIB's SACP remains in the 'b' category. Our affirmation of the 'Bpi' rating on MKB Bank despite operating conditions in Hungary reflects that we expect the bank to receive extraordinary support from the Hungarian government in case of need, as it is of "high" systemic importance, according to our criteria. MKB's majority owner Germany-based Bayerische Landesbank (not rated) has regularly provided capital support in recent quarters, but its longer-term intentions are unclear. Systemic support offsets higher economic risk, in our view. We have revised the SACP to the 'ccc' category to reflect the bank's very weak capital position and its continued dependence on parental support to maintain regulatory ratios above the minimum required, but with an extremely thin margin. 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 -- Bank Capital Methodology And Assumptions, Dec. 6, 2010 -- Long-Term Rating On Hungary Lowered To 'BB'; Outlook Stable, Nov. 23, 2012 -- Banking Industry Country Risk Assessment: Hungary, May. 4, 2012 BICRA SCORE SNAPSHOT* Hungary To From BICRA Group 8 7 Economic risk 8 7 Economic resilience High risk High risk Economic imbalances Very High risk High risk Credit risk in the economy Very High risk Very High risk Industry risk 7 7 Institutional framework High risk High risk Competitive dynamics High risk High risk Systemwide funding Very High risk Very High risk *Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores are on a scale from 1 (lowest risk) to 10 (highest risk). For more details on our BICRA scores on banking industries across the globe, please see "Banking Industry Country Risk Assessment Update," published monthly on RatingsDirect. RATINGS LIST Downgraded; Upgraded; Ratings Affirmed; CreditWatch/Outlook Action To From DOWNGRADED Magyar Takarekszovetkezeti Bank ZRt. Counterparty Credit Rating BB-/Stable/B BB/Negative/B AFFIRMED OTP Bank PLC OTP Mortgage Bank Counterparty Credit Rating BB/Stable/B BB/Stable/B K&H Bank Counterparty Credit Rating BBpi BBpi Central-European International Bank Ltd. Counterparty Credit Rating BBpi BBpi MKB Bank ZRT Counterparty Credit Rating Bpi Bpi NB: This list does not include all the ratings affected. Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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