OREANDA-NEWS. November 30, 2015. Fitch Ratings says in a new report that that the operating environment for banks in Hungary has improved, due to positive developments in the economy and the government's intention to facilitate a gradual normalisation of the banking business environment. The latter reflects the government's commitment to the EBRD (in February 2015) to refrain from implementing new onerous banking legislation and its decision to reduce the bank levy in 2016 and then further in 2017.

The inflows of impaired loans at all three Fitch-rated banks materially subsided in 1H15 due to the supportive operating environment and already seasoned legacy loan portfolios. However, a material improvement in loan portfolio quality will take time, due to muted demand for new credit and the slow workout of defaulted loans. Credit risks in the retail portfolios during the same period were significantly reduced by the conversion of foreign currency residential mortgages into forint and smaller monthly loan instalments. The latter was driven by the Act on Settlements and new rules on loan pricing.

The Issuer Default Ratings (IDRs) and Support Ratings of Kereskedelmi es Hitelbank Zrt (K&H), CIB Bank Zrt (CIB) and Erste Bank Hungary Zrt (EBH) reflect Fitch's opinion of a high probability of support, if required, from their respective sole shareholders - KBC Bank (A-/Stable/a-), Intesa Sanpaolo S.p.A. (BBB+/Stable/bbb+) and Erste Group Bank AG (BBB+/Stable/bbb+).

The Viability Ratings (VRs) of CIB (b-) and EBH (b) reflect their weak standalone credit risk profiles, which are constrained by weak asset quality and profitability. Both banks have reported large annual losses since 2010 and CIB remains unprofitable on an operating basis. The VRs of EBH and CIB also reflect their moderate capital buffers, comfortable funding and liquidity.

K&H's much stronger standalone creditworthiness (bb) mainly reflects the bank's fairly resilient asset quality and more moderate risk appetite through the cycle, ample liquidity and stable funding. However, K&H's VR also reflects a fairly high impaired loans ratio and only adequate capitalisation.

The report, 'Peer Review: Fitch's Rated Hungarian Banks', is available on www.fitchratings.com or by clicking the link above.