OREANDA-NEWS. Fitch Ratings has affirmed MFB Hungarian Development Bank Private Limited Company's (MFB) and Hungarian Export-Import Bank Private Limited Company's (Hexim) Long-Term Issuer Default Ratings (IDR) at 'BB+' with Positive Outlook. A full list of ratings actions is provided at the end of this commentary.

KEY RATING DRIVERS - ALL RATINGS
Both banks' IDRs, Support Rating Floors and senior unsecured long-term ratings are equalised with those of the Hungarian sovereign (BB+/Positive). The ratings affirmation reflects Fitch's view that the authorities will continue to provide support to both banks, if required. The Positive Outlook mirrors that on the Hungarian sovereign rating.

The agency believes that the government's willingness to support MFB and Hexim remains strong, while its ability to provide extraordinary support at all times is currently moderate, albeit improving, as reflected in the sovereign ratings.

Fitch considers the banks' strategic policy roles to fund domestic economic growth (MFB) and promote Hungarian exports (Hexim) to be of high importance in assessing the likelihood of support. The direct and irrevocable statutory guarantees relating to both banks' funding activities (funding guarantees) and other forms of financial support available for both banks from the state are also key to the rating.

Fitch also takes into consideration the full ownership of both banks by the state ( shareholder rights are exercised by the Prime Minister's Office (MFB) and the minister in charge of the Ministry of Foreign Affairs and Trade (Hexim)) as well as dedicated legal acts (separate for each bank) that define their mandates, operating rules and relationship with the state.

Both banks rely on wholesale funding, raised in the domestic and international capital and money markets in the form of bonds, loans and interbank deposits. The limits of the funding guarantees for both banks are set annually by the act on the central budget of Hungary. In 2016 these limits are: HUF1,900bn (around EUR6bn) for MFB, up from HUF1,800bn in 2015, and HUF1,200bn (around EUR4bn) for Hexim (both covering also replacement costs of foreign exchange and interest rate swap transactions). At end-2015, the utilization rates were 56% for MFB and 73% for Hexim (including EUR0.7bn unused within Hexim's EUR2bn MTN programme). Neither bank is allowed to raise debt above these limits and both are required to seek approval from the relevant minister for all major borrowings. These limits are unlikely to be fully utilized in 2016, in Fitch's view.

Apart from the funding guarantees, other forms of state support include back-to-back statutory guarantees on select credit exposures (total limit of HUF800bn (MFB) and HUF350bn (Hexim)) as per the budget act for 2016, which were only moderately utilized at end-2015. There are also interest rate subsidies (MFB), an interest compensation mechanism (Hexim), FX-risk hedging (MFB), ordinary capital injections and liquidity support. The combined approved limit of the funding and back-to-back guarantees is HUF4,250bn equal to about 13% of forecast 2015 Hungary's GDP, which represents a potentially material, but manageable contingent liability for the state.

In 2015 Hexim continued to receive equity injections from the state, which ensure its capital adequacy amid dynamic loan book expansion. MFB's existing solid capital buffer (end-1H15 total capital ratio of 19.25%, consolidated IFRS) is available to support further expansion planned. Existing non-performing exposures were reasonably provisioned at both banks at end-3Q15. Both banks have comfortable liquidity cushions and manageable refinancing schedules. At the same time, liquidity support from the state could be made available, if needed, as tested in the past (2011-2012) when both banks had been offered short-term bridge financing from the state to optimise timing of capital market borrowings.

As specialised credit institutions, both banks are exempt from the Bank Recovery and Resolution Directive, suggesting no impediments for the state support flowing through to the banks' senior creditors, and Capital Requirements Directive (CRD IV). At the same time, both banks are also supervised by the Hungarian regulator (National Bank of Hungary) and are subject to compliance, although with certain exemptions, with the prudential requirements for solvency, risk management, liquidity, disclosure rules and a few others.

Fitch does not assign Viability Ratings to these banks as their business models are entirely dependent on the support from the state.

RATING SENSITIVITIES - ALL RATINGS
MFB's and Hexim's ratings are sensitive to changes in the Hungarian sovereign ratings. Consequently, a potential upgrade of Hungary would result in an upgrade of the banks' IDRs and senior unsecured long-term ratings. Hexim's and MFB's rating are also sensitive to the state's willingness to support them, which Fitch believes is unlikely to change in the foreseeable future.

The rating actions are as follows:

MFB
Long-Term IDR: affirmed at 'BB+'; Outlook Positive
Short-Term IDR: affirmed at 'B'
Support Rating: affirmed at '3'
Support Rating Floor: affirmed at 'BB+'
Senior unsecured debt long-term rating: affirmed at 'BB+'

Hexim
Long-Term IDR: affirmed at 'BB+'; Outlook Positive
Short-Term IDR: affirmed at 'B'
Support Rating: affirmed at '3'
Support Rating Floor: affirmed at 'BB+'
Senior unsecured debt long-term rating: affirmed at 'BB+'
Senior unsecured debt short-term rating: affirmed at 'B'