S&P: Ratings On Hungary's Magyar Export-Import Bank Raised To 'BBB-/A-3'; Outlook Stable
We equalize our long?term rating on Hungary Eximbank with the sovereign creditrating on Hungary, given our view of the bank as a government?related entity (GRE) and our opinion that there is an almost certain likelihood that the Hungarian government will provide timely and sufficient extraordinary support to Hungary Eximbank in the event of financial distress. In accordance with ourcriteria for GREs, we base our view of an almost certain likelihood of extraordinary support on our view of Hungary Eximbank's:
Critical role in supporting Hungarian exports, which is a key policy objective and crucial to national economic growth, given the country's openness and trade dependence; and
Integral link with the Hungarian government, which is the bank's sole owner; the government's statutory guarantee of Hungary Eximbank's liabilities; and the inclusion of losses on the bank's interest rate mismatches and supported loans in the government's budget.
Established in 1994, Hungary Eximbank operates under the remit of the Ministryof Foreign Affairs and Trade. The criteria for its export credit operations, which make it eligible for state?supported financing, come from its general business guidelines as well as from the regulations of international bodies such as the Organization for Economic Co?operation and Development and the European Commission. In its role as Hungary's official credit export agency, the bank supports the country's export growth strategy by granting pre-export loans, buyers' credit, and discounting facilities directly to exporters, and by providing indirect funding through refinancing loans to domestic commercialbanks and interbank import facilities of buyers' foreign banks.
Due to the nature of the supported exports, the bank plays a critical role forthe government to achieve its export strategy goals, and its particular exportfinancing closely interrelates with its setup and support by the state. In 2015, the mandate for the bank changed slightly to include lending for the "national interest", rather than only export financing. We expect lending thatis not directly related to exports, or to projects with less value added, in Hungary to increase.
The bank's loan portfolio has expanded rapidly in recent years, and we expect credit growth to continue in 2016, in line with the bank's ambitious strategy to increase its activities. Consequently, the bank's support for Hungarian exports underlines its key policy role. Hungary Eximbank's funding base comprises loans, interbank loans, notes issued under a global medium?term noteprogram launched in December 2012, and shareholders' equity, including both share capital and reserves.
Hungary Eximbank benefits from the government's statutory guarantee for both its on? and off?balance?sheet liabilities. The statutory guarantee is explicitand unconditional, with a current upper limit defined in the government's budget of Hungarian forint (HUF) 1.2 trillion (€3.8 billion). This compares with the bank's on?balance?sheet liabilities of HUF728 billion at year?end 2015.
Although the guarantee does not meet our criteria for timeliness, our assessment of an almost certain likelihood of timely and sufficient extraordinary support to Hungary Eximbank from the Hungarian government means that we equalize our long?term rating on the bank with that on Hungary. We anticipate that the government has the capacity and incentive to provide timely extraordinary support to the bank if needed and we do not view government support as subject to transition risk. We also take into consideration the government's sustained track record of ensuring an appropriate level of capitalization at Hungary Eximbank through repeated capital injections, which further underpins the bank's link with the state, inour view. The most recent capital increase of a total HUF30.9 billion took place during December 2015?March 2016, raising the bank's share capital to HUF89 billion. The government has made a commitment to further increase capital if the loan book continues to grow. However, we expect the current lending via commercial banks to decelerate due to concentration constraints, but direct lending to increase.
Hungary Eximbank also provides off?balance?sheet guarantees, the majority of which are guaranteed by the government, with the statutory guarantee providingcover for up to HUF350 billion. As of year?end 2015, HUF20.6 billion of Hungary Eximbank's total guarantee portfolio of HUF22.9 billion benefited fromthe statutory guarantee.
The stable outlook on Hungary Eximbank mirrors that on Hungary and reflects our expectation that Hungary Eximbank's integral link with and critical role for the Hungarian government's economic policies and growth?support plans willremain unchanged in the next 12 months. This should enable the bank to maintain its public law status and, therefore, its credit support from the government's statutory guarantee, and ultimately ensure the almost certain likelihood of extraordinary government support.
Changes in our assessment of the bank's relationship with the government couldlead us to consider lowering the ratings on Hungary Eximbank. In particular, over the longer term, strong lending outside of its traditional export financing activities could potentially reduce the policy importance of HungaryEximbank in the Hungarian economy. In addition, any upgrade or downgrade of Hungary will result in a similar action on Hungary Eximbank.