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TEXT - Fitch affirms 3 Hungarian banks ratings
January 10, 2013 / 2:37 PM / in 5 years

TEXT - Fitch affirms 3 Hungarian banks ratings

(The following statement was released by the rating agency)
    Jan 10 - Fitch Ratings has affirmed CIB Bank Zrt's (CIB) and Kereskedelmi es
Hitelbank Zrt's (K&H) Long-term Issuer Default Ratings (IDR) at 'BBB' and
revised the Outlooks to Stable from Negative. Fitch has also affirmed Erste Bank
Hungary Zrt's (EBH) Support Rating at '2' and maintained MKB Bank Zrt's (MKB)
Support Rating of '2' on Rating Watch Negative (RWN). A full list of rating
actions is at the end of this rating action commentary.

RATING ACTION RATIONALE, DRIVERS AND SENSITIVITIES: IDRS AND SUPPORT RATINGS

The affirmation of K&H's (fully owned by KBC Bank; 'A-'/Stable) and CIB's (fully
owned by Italy's Intesa Sanpaolo; 'A-'/Negative) Long-term IDRs and the 
affirmation of K&H's, CIB's, and EBH's (fully owned by Erste Group Bank AG; 
'A'/Stable) Support Ratings reflects Fitch's opinion that there is a high 
probability that these banks would be supported by their parent institutions, if
required. 

Fitch has maintained the Support Rating of MKB (98.08% owned by Bayerische 
Landesbank; 'A+'/Stable) on RWN due to the owner's plan to sell the bank. In 
July 2012, Bayerische Landesbank agreed with the European Commission to divest 
its Hungarian subsidiary by end-2015 as part of its restructuring programme.

The revision of the Outlook on CIB's and K&H's IDRs takes into account the 
recent revision of the Hungarian sovereign's Outlook to Stable (see 'Fitch 
Affirms Hungary at 'BB+', Revises Outlook to Stable'). K&H and CIB's Long-term 
IDRs are currently constrained by Hungary's Country Ceiling, which reflects 
Fitch's view on transfer and convertibility risks and limits the extent to which
support from the shareholders of these banks can be factored into the banks' 
Long-term IDRs.

In Fitch's opinion, CIB, K&H and EBH remain strategically important subsidiaries
for their parents. In 2010, 2011 and 2012 CIB, EBH and MKB received a total 
HUF501bn of fresh capital from their owners, which represented 32%, 134% and 78%
of their equity at end-2009, respectively. Foreign parents withdrew a 
substantial amount of non-equity funding at CIB, K&H, EBH and MKB but this 
mostly reflected lower external funding requirements due to fast loan book 
contraction. 

The IDRs of CIB and K&H could be upgraded or downgraded if there was an upgrade 
or downgrade of the Hungarian sovereign rating, which Fitch currently views as 
unlikely. The ratings of CIB and K&H could also come under downward pressure if 
their parents' credit profiles, and hence their ability to provide support, 
materially weaken. EBH's Support Rating could be upgraded or downgraded if there
was a two-notch upgrade/downgrade of Hungary's Country Ceiling. However, Fitch 
currently views this as unlikely.

Fitch will resolve the RWN on MKB's Support Rating no later than upon the 
disposal of the bank. However, the agency's current expectation is that this is 
unlikely to take place during the next 12 months due to ongoing restructuring of
MKB and limited potential demand for Hungarian banks at present. Prior to a 
sale, the Support Rating could be downgraded if MKB's parent fails to provide 
timely and adequate support for the bank, or if Hungary's Country Ceiling was 
downgraded by two notches. However, Fitch views such scenarios as unlikely. 

RATING ACTION RATIONALE, DRIVERS AND SENSITIVITIES: VIABILITY RATINGS (VRS)

The affirmation of K&H's VR at 'bb-' reflects the bank's relatively resilient 
internal capital generation, asset quality better than the sector average (NPLs 
ratio of 12.7% at end-Q312) and a balanced funding structure. At end-Q312, the 
gross loans/deposits ratio of 89% was one of the lowest in the sector. K&H's VR 
is also driven by relatively high credit risk in the bank's loan book augmented 
by the weak operating environment in Hungary.

The affirmation of CIB's VR at 'b' reflects its tight capitalisation (albeit 
strengthened by HUF45bn of fresh equity in 9M12), its weak performance, driven 
by margin compression and high loan impairment charges, growing NPLs (23% of 
gross loans at end-H112), particularly in exposure to the highly leveraged real 
estate/construction sector, and moderate reserve coverage of bad debts. In 
Fitch's opinion the bank is likely to remain loss-making in 2013, but Fitch 
understands that the parent remains committed to providing sufficient new 
capital to replenish any shortfall.

The liquidity positions of K&H and CIB in local currency (HUF) is comfortable. 
However, both banks are strongly dependent on their parents to provide them with
(on- and off-balance sheet) funding in euros and Swiss francs, used to finance 
their sizable foreign currency loan portfolios. 

Performance at both banks is likely to remain under pressure (particularly at 
CIB) due to weak economic activity (restricting opportunities for loan growth) 
punitive bank levy and further deterioration in asset quality. The latter is 
likely to result in further loan impairment charges considering the material 
share of restructured loans in portfolios and reliance on largely illiquid real 
estate collateral. However, deterioration in retail books could subside somewhat
if government-sponsored (and in-house) aid schemes for households prove 
successful.

The VRs of K&H and CIB could be downgraded if there was a further marked 
deterioration in their asset quality or capitalisation. A sustainable 
stabilisation of asset quality, significant strengthening of capitalisation 
(particularly at CIB) and improved performance of the Hungarian economy could 
result in an upward revision of the ratings.

The rating actions are as follows: 

CIB 

Long-term foreign currency IDR: affirmed at 'BBB', Outlook revised to Stable 
from Negative

Short-term foreign currency IDR: affirmed at 'F3' 

Viability Rating: affirmed at 'b' 

Support Rating: affirmed at '2'

K&H 

Long-term foreign currency IDR: affirmed at 'BBB', Outlook revised to Stable 
from Negative

Short-term foreign currency IDR: affirmed at 'F3' 

Viability Rating: affirmed at 'bb-' 

Support Rating: affirmed at '2'

EBH 

Support Rating: affirmed at '2'

MKB 

Support Rating of '2' maintained on Rating Watch Negative

 (Caryn Trokie, New York Ratings Unit)

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