The outlook for most of the rated Hungarian banks is stable, Moody’s Investors Service said in its new Banking System Outlook for
The bank financial strength ratings (BFSR) of Hungarian banks are underpinned by sound financial fundamentals, strong capitalisation and good growth opportunities mainly in retail and SME businesses. On the other hand, increasing credit risk on the back of the government’s fiscal package, growing foreign currency lending and unseasoned loan portfolios limit the upward potential of stand-alone ratings for Hungarian banks.
The local and foreign currency deposit ratings of Hungarian banks are underpinned by both foreign or state ownership and Moody’s assessment of the probability of support from the Hungarian authorities in the event of need. Moody’s expects the banks’ strategic shareholders, which are mainly major EU banks and are well established in Central and Eastern Europe (CEE), to provide not only expertise and knowledge transfer, but also financial support in the event of need.
Moody’s notes that Hungarian banks are focusing mainly on their domestic market, particularly the retail and SME segments, which offer better growth potential and higher margins than corporate banking. However, the focus on the domestic market means that competition remains fierce. Only two rated banks, namely OTP Bank Nyrt and MKB Bank Zrt., have expanded outside of
The Hungarian banking system has been negatively affected by the government’s 2006 fiscal package, aimed to cut the fiscal deficit and slow down the growth of government debt. “Worsening of the economic environment due to the austerity package has constrained the growth of the banking sector, led to asset quality deterioration and pressurised the sector’s financial fundamentals, but to date the impact has not proved to be as significant as feared when the programme was introduced,” said Gabriel Kadasi, a Moody’s Associate Analyst and author of the report.
Despite the worsening operational environment, the banking sector maintained a relatively strong, albeit slowing, growth in 2007.
Mortgages and secured consumer lending underpinned the growth of retail business, while in the corporate sector growth was driven mainly by real estate projects and banking with micro-corporates. Despite the continuing growth in lending, indebtedness ratios remain below those in developed countries. Moody’s cautioned, however, that declining real income and worsening profitability of the corporate sector, coupled with higher rates of indebtedness, is a reason for caution. “We continue to closely monitor the quality of the loan portfolios as banks’ new risk management systems have not yet been tested through a complete economic cycle,” added Kadasi.
Moody’s said it is also concerned by the growing share of foreign currency lending because it increases the credit risk of the banking sector. Many retail borrowers, as well as SMEs and micro-corporates, do not appear to fully appreciate the nature and magnitude of the foreign-exchange (FX) risk they are assuming and remain inadequately protected. However, the rating agency has not observed that the quality of FX lending is deteriorating faster than the quality of Hungarian Forint-denominated loans.
Moody’s noted that the profitability of Hungarian banks remains good, despite higher provisioning in 2006 and shrinking margins. The fierce competition on the market fuels the expansion strategy of many banks, which are opening new branches to be closer to their potential clients.
Although Moody’s considers these strategies to be feasible, they will continue to weigh on banks’ efficiency ratios in the short to medium term.
Capitalisation of Hungarian banks is adequate, thanks to good profitability, limited risk profiles and mainly organic growth strategies. Moody’s considers the overall risk profile of Hungarian banks satisfactory, and notes the significant improvement in credit risk management as a result of the introduction of new systems. Market risk remains modest as few Hungarian banks are engaged in substantial trading activities.
Finally, the liquidity of the Hungarian banking system remains adequate.
Although the rapid growth in lending pushed up the loans-to-deposits ratio to 150% by mid-2007, banks hold sufficiently large portfolios of liquid assets (mainly government securities) and many of them have committed credit lines from their parents. As liquidity is expected to continue tightening, Hungarian banks are becoming more reliant on market funding. Although this is in many cases largely provided by the parent banks, the current situation in the credit markets may require banks to seek alternative sources of funding, Moody’s noted.
