The international credit rating agency justified downgrading Hungary and other countries to negative from stable on Wednesday primarily on the grounds that rising prices and interest rates are affecting the creditworthiness of many businesses and households, which could lead to new problematic outstanding debts.
In addition to Hungary, Moody’s also revised the outlook for the German, Italian, Czech, Polish and Slovakian banking systems to negative, MTI reported.
According to Louise Welin, Moody’s vice president for specialist areas, operating conditions in these economies are continuing to deteriorate, weakening the quality of banks’ outstanding portfolios, their profitability and their access to funding, although the impact of this varies across economies. These economies are equally affected by the energy crisis and high inflation resulting from the Russian invasion of Ukraine, Welin added.
In a separate six-page analysis of the Hungarian banking system, Moody’s says it expects Hungary’s gross domestic product (GDP) growth rate to slow from 5.5 percent this year to 0.8 percent in 2023.
The rating agency points out that it has lowered its forecast for next year, as it had previously expected the Hungarian economy to grow close to 3 percent in 2023. Moody’s also expects the capital position of Hungarian banks to weaken as organic capital generation from profits will not keep pace with the growth in risk-weighted assets.
Hungarian banks will continue to rely mainly on a stable domestic deposit base as a source of funding, but the largest banks will face difficulties in raising funding from international debt markets and in issuing significant amounts of debt to meet minimum requirements for their own funds and maturing or convertible liabilities (MREL) in difficult market conditions, Moody’s said in an analysis on Wednesday.
The rating agency said government measures that have drained a significant portion of banks’ profits have created an uncertain environment that has further weakened the attractiveness of Hungarian banks to foreign investors.
Moody’s stresses, however, that Hungarian banks’ loss-absorbency reserves are ample. The loan-loss reserves of Hungarian banks rated by the agency covered 94 percent of their non-performing loan portfolios at the end of 2021, Moody’s said in an analysis on Wednesday.
On September 24 last year, Moody’s upgraded Hungary’s sovereign rating by one notch to the current ‘Baa2’, and its outlook had remained stable since then.