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«Rating Action: Moody's concludes reviews on three Hungarian banks' ratings; assigns Counterparty Risk Assessments to six banks Global Credit Research ...»

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Rating Action: Moody's concludes reviews on three Hungarian banks' ratings;

assigns Counterparty Risk Assessments to six banks

Global Credit Research - 29 May 2015

Actions follow conclusion of methodology-related reviews and revision of government support

considerations

London, 29 May 2015 -- Moody's Investors Service has concluded its rating reviews on three banks in Hungary:

OTP Bank NyRt, OTP Jelzalogbank Rt (OTP Mortgage Bank) and MKB Bank Zrt. The reviews, initiated on 17 March 2015, followed the introduction of the rating agency's revised bank rating methodology published on 16 March 2015.

In light of the revised banking methodology, Moody's rating actions generally reflect the following considerations (1) the "Weak" macro profile of Hungary ( Ba1 stable)(2) the banks' modest core financial ratios; (3) the protections offered to depositors and senior creditors as assessed by Moody's Advanced Loss Given Failure (LGF) analysis, reflecting the benefit of instrument volume and subordination protecting creditors from losses in the event of resolution; and (4) Moody's view of a decline in the likelihood of government support for some institutions.

Moody's has taken the following actions on the Hungarian banks:

- Upgraded two banks' long-term local-currency deposit ratings

- Upgraded two banks' short-term local-currency deposit ratings

- Affirmed two banks' long-term foreign-currency deposit ratings

- Affirmed two banks' short-term foreign-currency deposit ratings

- Affirmed one bank's subordinated and junior subordinated debt ratings

- Confirmed one bank's long-term local and foreign-currency deposit ratings

-Affirmed one bank's short-term local and foreign-currency deposit ratings

- Affirmed three banks' baseline credit assessments (BCAs)

- Assigned stable outlooks to long term deposit ratings of the three affected banks Moody's has withdrawn the outlooks on one bank's subordinated and junior subordinated debt ratings for its own business reasons. Please refer to Moody's Investors Service's Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.

Moody's has also assigned Counterparty Risk Assessments (CR assessments) to six Hungarian banks, in line with its revised bank rating methodology.

Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_181844 for the full list of affected credit ratings. This list is an integral part of this Press Release and identifies each affected issuer.

Please refer to this link for the initial bank review:

https://www.moodys.com/research/Moodys-reviews-global-bank-ratings--PR_321005 Please refer to this link for the revised methodology: https://www.moodys.com/research/Banks--PBC_179038

RATINGS RATIONALE

The new methodology includes several elements that Moody's has developed to help accurately predict bank failures and determine how each creditor class is likely to be treated when a bank fails and enters resolution.

These new elements capture insights gained from the crisis and the fundamental shift in the banking industry and its regulation.

(1) THE "WEAK" MACRO PROFILE OF HUNGARY Hungary's Macro Profile reflects moderate economic strength, high institutional strength and moderate susceptibility to event risk. However, the Macro Profile is constrained by modest, albeit rising, credit demand and the government's interventions into the banking system. The "weak" Macro Profile weighs down on the banks' individual risk profile and thus constrains their BCAs.

(2) THE BANKS' MODEST CORE FINANCIAL RATIOS

The Hungarian banks' BCAs (the average asset-weighted BCA stands at b1) reflect their modest core financial ratios, including a high, albeit declining, level of problem loans, moderate capital ratios, weak profitability and good liquidity metrics. However, the banks' BCAs range widely - from ba2 to ca - with the differences reflecting the longterm execution of each bank's business plan, which has resulted in variations in their performance volatility and financial fundamentals, and the strength of their market presence in Hungary.

(3) PROTECTION OFFERED TO SENIOR CREDITORS, AS CAPTURED BY MOODY'S ADVANCED LGF

LIABILITY ANALYSIS

Under its new methodology, Moody's applies its Advanced LGF analysis to the liability structures of banks subject to operational resolution regimes. Hungary, as a member of the European Union, has introduced bank resolution legislation in line with the EU Bank Recovery and Resolution Directive (BRRD). Accordingly, Moody's applies its Advanced LGF analysis to these banks' liability structures. For the three banks included in this rating action, this analysis results in "very low" or "low" loss given failure for long-term deposits, taking into account the banks' substantial volume of deposit funding and the volume of securities subordinated to deposits in their liability structures.

(4) DECLINE IN THE LIKELIHOOD OF GOVERNMENT SUPPORT

The lowering of Moody's government support assumptions reflects the reduced likelihood of support being forthcoming within the context of the expected implementation of the new bank recovery and resolution legislation.





The negative effect on the banks' deposit ratings from a decline in the expectation of government support has generally been counterbalanced by the low loss given failure assumptions under Moody's Advanced LGF framework.

--- BANK SPECIFIC ANALYTIC FACTORS

-- OTP Bank NyRt The upgrade of the bank's local-currency deposit ratings to Baa3/Prime-3 from Ba1/Not Prime reflects the affirmation of the bank's BCA of ba2 and the Advanced LGF analysis that provides two notches of uplift from the bank's BCA and offsets reduced government support assumptions. OTP Bank benefits from a large volume of deposits, and limited senior and subordinated debt, resulting in very low loss given failure. However, because of the implementation of resolution legislation, Moody's has lowered its government support assumptions for the bank to "moderate" from "high", leading to no uplift due to government support from one notch previously.

The affirmation of the bank's BCA at ba2 reflects the bank's resilient capitalisation and stabilising asset quality, as well as its good liquidity and earnings generation capacity. Moody's expects that the improving economic conditions in Hungary, Bulgaria (Baa2 stable) and most other CEE countries will cushion the negative effect on the bank's asset quality and profitability from its weakened operations in Russia (Ba1 negative) and especially Ukraine (Ca negative).

In 2014, Hungary adopted a law requiring banks to compensate retail borrowers for any extra charges on loans denominated in both foreign and domestic currency. The implementation of the law requires banks to make compensation payments to their retail borrowers or to offset the compensation amounts with the borrowers' overdue obligations. Subsequently, in November 2014, the Hungarian government decided to convert foreign currency-denominated retail mortgages into Forints at the prevailing market exchange rate. As a result of the settlement with retail borrowers and conversion of foreign-currency mortgages, problem loans at OTP Bank's Hungarian business declined to 13.1% at end-Q1 2015 from 17.5% as of year-end 2014. The bank's problem loan coverage remains strong at 84.3% at year-end 2014. OTP Bank has a good earnings-generating ability, thanks to its dominant position in Hungary and high, albeit modestly declining, net interest margins in Hungary and in some of the bank's foreign markets, particularly Russia and Bulgaria. OTP Bank reported a net loss of HUF102.26 billion for 2014, which was largely due to HUF194.8 billion of losses from one-off provisions for compensation to retail borrowers. However, the bank's profitability was also adversely affected by losses in its Russian and Ukrainian subsidiaries. Despite the sizable loss in 2014, OTP Bank's capital adequacy remains satisfactory, with a reported Common Equity Tier 1 ratio of 14.1% in December 2014, down from 16.0% in 2013.

The outlook on the bank's long-term deposit ratings is stable, reflecting its stabilising asset quality and capitalisation.

-- OTP Jelzalogbank Rt (OTP Mortgage Bank) The upgrade of the bank's local-currency deposit ratings to Baa3/Prime-3 from Ba1/Not Prime follows the rating action on its parent, OTP Bank. OTP Mortgage Bank's BCA and deposit ratings are positioned at the same level as OTP Bank NyRt given that (1) the bank is 100% owned by OTP Bank; (2) OTP Mortgage Bank is an integral part of the parent's franchise; and (3) it operates as a mortgage division of its parent. In addition, OTP Bank fully, irrevocably and unconditionally guarantees OTP Mortgage Bank's obligations.

The stable outlook on the bank's long-term deposit ratings is in line with the stable outlook on OTP Bank's ratings.

-- MKB Bank Zrt.

The confirmation of MKB Bank's (MKB) long-term deposit rating at Caa2 incorporates the affirmation of its BCA of ca and the Advanced LGF analysis that provides one notch of uplift from the bank's BCA. MKB benefits from a large volume of deposits and limited senior debt, resulting in low loss given failure. However, because of the implementation of resolution legislation, Moody's assigns a "moderate" government support assumption for the bank, which leads to a one-notch rating uplift, compared to two notches previously.

The affirmation of the BCA at ca reflects the fact that the bank is consistently loss-making, and requires frequent external capital injections from its parent. The bank's weak credit profile is mainly the result of its highly impaired loan book - the problem loan ratio increased to 32.2% at year-end 2014 from 30.2% at year-end 2013. At the same, time loan volume has been decreasing, putting additional pressure on the bank's earnings.

The outlook on the bank's long-term deposit ratings is stable, reflecting its recapitalisation in H2 2014, which has reduced the risk of further deterioration in MKB's risk profile and contained any potential losses to creditors over the next 12-18 months.

--- ASSIGNMENT OF COUNTERPARTY RISK ASSESSMENTS

Moody's has also assigned CR Assessments to six Hungarian banks. CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt and deposit ratings in that they (1) consider only the risk of default rather than expected loss; and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.

The CR Assessments for the six Hungarian banks are three or two notches above their adjusted BCAs, and reflect the seniority of the counterparty obligations and the volume of liabilities subordinated to them under Moody's Advanced LGF framework.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Upward rating momentum on the banks' ratings could develop from (1) a sustained improvement in profitability; (2) materially stronger capital positions; and/or (3) a significant reduction in problem loans.

Downward rating pressure could emerge if (1) credit underwriting standards deteriorate noticeably; and/or (2) further asset quality and profitability pressures emerge owing to a potential weakening in the operating.

environment.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in March 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES



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