Budapest Bank Rt. -- Moody's reviews ratings of seven Hungarian banks for downgrade

FOCUS OF THE REVIEW

Moody's review will consider the degree to which (1) the macroeconomic environment in Hungary and contagion from the ongoing euro area crisis will affect banks and their parents; (2) the Hungarian government's recently approved tax measures, which, combined with the risk of further policy measures, prompt additional pressure on banks; (3) the banks can continue to generate sustainable earnings; and (4) the asset-quality deterioration affects banks.

Moody's anticipates that these rating drivers apply to all the above banks; however, idiosyncratic features of each rated bank, reflected by their current ratings, will also play an important role in the conclusion of the review, and in determining the extent to which the current ratings may be affected.

Additionally, the deposit and senior debt ratings that continue to benefit from a likelihood of parental or systemic support will remain sensitive to any further changes in Moody's support assumptions.

The full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

--- FRAGILE MACROECONOMIC ENVIRONMENT

Moody's expects the Hungarian economy to contract by 1.4% in 2012, with very little growth, if any, in 2013. As domestic demand remains subdued, with unemployment likely to exceed 11% in 2013, economic growth will depend on export industries and the strength of external demand, which continues to be dampened by the effects of the euro area crisis.

In this difficult operating environment, banks will continue to deleverage sharply. In 2011, corporate and retail lending declined by about 6% and 10%, respectively, followed by 6% and 14% respective declines in H1 2012. The sharper decrease in retail loans also reflects the effects of borrowers' early repayment of their foreign-currency mortgages.

In Moody's view, the downsizing of the banks' balance sheets will remain a negative influence on economic activity, which, in turn, feeds back negatively in their asset quality and profitability.

Finally, the persistently fragile euro area environment exposes the Hungarian banking system to additional credit risks given that it is largely foreign-owned (at 79% of total capital as of 2012) and has historically benefited from substantial liquidity and capital support from parent banks. However, the ongoing financial challenges of Western European banks -- the main foreign owners of the Hungarian banks -- indicate, in Moody's view, increasing uncertainty as to the responsiveness of the parent banks towards their Hungarian operations, which have recently seen significant retrenchment of parental funding.

--- GOVERNMENT MEASURES ADDING PRESSURE

The Hungarian government's unorthodox measures introduced since 2010 -- combined with a weak economy and rapidly growing loan-loss charges -- have recently led to significant losses for the Hungarian banks, impairing their ability to lend. The government's measures include a large bank levy on assets, a temporary moratorium on residential evictions and an early repayment scheme for foreign-currency mortgages in the context of unfavourable market conditions.

Moody's notes that the recent approval of the financial transaction tax (FTT) on banks, effective from January 2013, combined with Hungary's decisions to maintain the bank levy in 2013, will likely cause the banking system to remain loss-making in 2013, further impairing the banks' lending capacity.

--- WEAKENING EARNINGS-GENERATING CAPACITY

Moody's notes that banks' 2012 performance remains weak, as evidenced by HUF10.5 billion of system losses for the first nine months of 2012. Also, net interest income, which represents a strength of the Hungarian banks, decreased by 6.5% in September 2012 year-on-year, mainly reflecting the increase in funding costs.

Moody's believes that four key factors will likely continue to weigh on the banks' operations and sustain the ongoing weakness in the banks' internal capital generation (1) the significant and increasing tax burden; (2) sustained high loan-loss charges, reflecting economic pressures; (3) deleveraging, which also constrains revenue-generating capacity; and (4) lower net interest income.

--- DETERIORATING ASSET QUALITY

The recessionary environment in Hungary supports Moody's expectations of ongoing asset-quality deterioration into 2013. Banks' non-performing loans (NPLs) reached 20.9% in the corporate portfolio, with a 49% coverage ratio, and 16.2% in the retail portfolio, with a 47% coverage ratio. Moody's considers banks' coverage of NPLs to be modest (on average), given the weak economic environment in Hungary.

The expected ongoing deterioration in the corporate portfolio is underpinned by the banks' significant exposure to the weak commercial real-estate sector, and the fragile small and medium enterprise sector. For the retail portfolio, the high differential in the exchange rate between the Hungarian Forint and the Swiss Franc at the time of loan origination continues to represent an element of pressure. Although the start of some debtor-assistance programmes may help to temper the deterioration, Moody's believes that the banks will likely achieve this through some loan restructuring.

Finally, whilst municipal debt accounted for just 3% of the total banking system assets at year-end 2011, the share of NPLs and restructured loans in this segment continued to rise to 10.4%, but provisions did not match the rate of deterioration.

At the end of October 2012, the Hungarian government announced its intention to take over HUF612 billion of local-government debt, almost 50% of total local-government debt. Moody's acknowledges that there is uncertainty as to how the government will treat this portion of debt, with respect to the banks.

ADDITIONAL CONSIDERATIONS

Moody's notes that following the general and rapid deleveraging of banks, current average capital position within the banking system do not show signs of deterioration, thus far. However, capital remains particularly modest for most of the rated banks under Moody's central and adverse scenarios and funding is now more costly and remains particularly challenging in foreign-currencies.

Please refer to www.moodys.com for a more detailed discussion of each institution's credit profile.

LIST OF AFFECTED RATINGS

Moody's has taken the following rating actions:

OTP Bank NyRt

All of the following ratings were placed on review for downgrade

- Local-currency long-term deposit rating of Ba1

- Foreign-currency long-term deposit rating of Ba2

- Foreign-currency long-term senior unsecured debt rating of Ba1

- Foreign-currency long-term subordinated debt rating (Lower Tier 2) of Ba2

- Foreign-currency long-term junior subordinated debt rating (Upper Tier 2) of Ba3 (hyb)

- D+ BFSR (corresponding to ba1 standalone credit assessment)

+++++++

OTP Mortgage Bank

All of the following ratings were placed on review for downgrade

- Local-currency long-term deposit rating of Ba1

- Foreign-currency long-term deposit rating of Ba2

- D+/ba1 BFSR +++++++ K&H BankAll of the following ratings were placed on review for downgrade

- Local-currency and foreign-currency long-term deposit ratings of Ba2

- D-/ba3 BFSR +++++++ Budapest BankAll of the following ratings were placed on review for downgrade

- Local-currency long-term deposit rating of Ba1

- Foreign-currency long-term deposit rating of Ba2

- D-/ba3 BFSR +++++++ FHB Mortgage BankAll of the following ratings were placed on review for downgrade

- Local-currency and foreign currency long-term deposit rating of Ba3

- E+/b1 BFSR +++++++ Erste Bank Hungary All of the following ratings were placed on review for downgrade

- Local-currency and foreign currency long-term deposit rating of Ba3

- E+/b2 BFSR +++++++ MKB BankAll of the following ratings were placed on review for downgrade

- Local-currency and foreign currency long-term deposit rating of B2

- Foreign-currency long-term senior unsecured debt rating of B2

- Foreign-currency subordinated debt rating (Lower Tier 2) of Caa2

- E+/b3 BFSR

The principal methodology used in these ratings was Moody's Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Budapest, Hungary, OTP Bank NyRt reported consolidated total assets of HUF9,830 billion as of 30 September 2012.

Headquartered in Budapest, Hungary, OTP Mortgage Bank reported consolidated total assets of HUF1,583 billion as of 30 June 2012.

Headquartered in Budapest, Hungary, K&H Bank reported consolidated total assets of HUF2,357 billion as of 30 September 2012.

Headquartered in Budapest, Hungary, Budapest Bank reported consolidated total assets of HUF895 billion as of 30 September 2012.

Headquartered in Budapest, Hungary, FHB Mortgage Bank reported consolidated total assets of HUF751 billion as of 30 September 2012.

Headquartered in Budapest, Hungary, Erste Bank Hungary reported consolidated total assets of HUF3,245 billion as of 31 December 2011.

Headquartered in Budapest, Hungary, MKB Bank reported consolidated total assets of HUF2,686 billion as of 30 June 2012.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The ratings of rated entity Kereskedelmi & Hitel Bank Rt. were initiated by Moody's and were not requested by these rated entities.

Rated entity Kereskedelmi & Hitel Bank Rt. or its agent(s) participated in the rating process. This rated entity or its agent(s), if any, provided Moody's access to the books, records and other relevant internal documents of the rated entity.

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Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

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