TEXT-S&P takes various rating actions on Hungarian banks

Wed Dec 19, 2012 1:17pm EST

-- 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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