For the associated rating report, click here.

Rating action

Scope Ratings GmbH (Scope) has today affirmed BBB+ long-term issuer and senior unsecured ratings on MFB Hungarian Development Bank Private Limited Company (MFB) in both local and foreign currency. Scope has also affirmed an S-2 short-term issuer rating in both local and foreign currency. All Outlooks are Stable.

Summary and Outlook

Scope’s affirmation of MFB’s BBB+ rating reflects the explicit, direct and irrevocable statutory funding guarantee from Hungary (BBB+/Stable) of MFB’s financial obligations arising from bonds issued, credits and loans taken, deposits from the interbank market and replacement costs of currency or interest rate swaps entered into by MFB for fundraising purposes.

Scope acknowledges a record of financial support from the Hungarian state, which has strengthened MFB’s capitalisation and liquidity. In addition, MFB benefits from its high strategic importance as a key government-related entity, as it implements economic policies for the Hungarian state. The supportive legal setup makes changes in MFB’s business model or guarantee structure unlikely.

The bank benefits from a robust balance sheet with a sound asset quality and good capitalisation. MFB’s modest but stable profitability alongside limited loan portfolio diversification reflects the development bank’s public policy mandate.

The ratings could be upgraded in the event of an upgrade on Hungary.

The ratings could be downgraded in the event of: i) a downgrade on Hungary; and/or ii) changes in the legal framework or guarantee structure that notably weaken government support for MFB.

Rating rationale

MFB’s BBB+ rating reflects the guarantee framework for its liabilities provided by Hungary, which is the key factor for equalising MFB’s ratings with the ratings of the sovereign. The explicit, direct and irrevocable guarantees cover the bonds issued, credits and loans taken, deposits from the interbank market, and replacement costs of currency or interest rate swaps for fundraising purposes. The Hungarian state sets MFB annual limits on the guarantee scheme via budgetary acts. Scope considers the limits for 2022 sufficient to address the planned expansion of the bank’s lending.

MFB benefits from a multi-layered liability support mechanism provided by the Hungarian state. In addition to the explicit guarantees covering the bonds issued as well as all debt obligations of MFB, the Hungarian state guarantees MFB’s payment claims arising from loans and guarantees issued under certain programmes or even on a case-by-case basis via government resolutions and provides liability and/or asset-side interest rate subsidy for certain credits and loans provided by MFB. The bank manages its foreign exchange risk through a foreign exchange arrangement scheme with the Hungarian state: the state budget reimburses losses incurred by MFB in converting loans or funds into foreign currency, while foreign exchange gains are passed on to the state budget. The scheme’s main objective is to keep interest rates low for the ultimate beneficiaries of MFB’s loans. At the same time, the scheme shields the bank from losses arising from forint volatility.

To support the development bank’s financial position and lending, Hungary strengthened MFB’s capital position on several occasions. The latest occurrences involved capital increases of HUF 84bn in 2021 and HUF 151.4bn in 2020 in the context of a rapidly growing balance sheet and increasing risk-weighted assets. Hungary has also provided financial support in periods of intense capital market volatility. For example, in 2009 it provided a multi-currency loan from funds borrowed from the IMF. The state also provides short-term bridge financing to optimise the timing of capital market transactions by MFB and other Hungarian government-related entities, as sovereign bonds are the benchmark for MFB issuances.

The rating is underpinned by MFB’s high strategic importance to Hungary. As the only development bank in Hungary focused on the domestic market, MFB plays a key role in meeting national economic and political objectives. This was recently highlighted during the pandemic with MFB’s central role in disseminating state financial support to Hungarian companies. Overall, high business growth in the last two years has led to an increase of MFB’s balance sheet by around 70%, driven by the expansion of lending and investment activity and corporate bond subscriptions. In 2021, the bank approved 5% more loan applications than it had in 2020, subscribed a total of HUF 353bn in corporate bonds in 2021 (which was larger than planned) and participated in establishing several capital funds, committing a total of HUF 400bn with disbursements of HUF 129.6bn in 2021.

MFB’s asset quality is high, helped by a steadily decreasing share of non-performing loans relative to gross customer loans, which reached 1.96% in 2021 (2020: 3.39%). Sizeable loan programmes have been launched in 2020 and 2021 against the effects of the Covid-19 pandemic, some of them with limited risk given that loans and guarantees under certain programmes are covered up to 90% by state guarantees.

MFB’s Tier 1 capital ratio of 16.6% in 2021 is good. Following recent capital contributions by the Hungarian state, the bank’s capitalisation provides sufficient medium-term funding for operations. However, due to increasing risk-weighted assets and limited internal capital generation, the capital adequacy ratio decreased further to 14.7% by end-March 2022. MFB’s key strategic purpose, low substitution risk and contribution to macro-economic stability support a high likelihood of exceptional support from the Hungarian state, for example via further precautionary capital contributions to provide a sufficient buffer in view of a sharply increasing balance sheet.

The guarantee structure provides MFB a resilient access to capital markets. MFB’s funding access is further supported by the preferential treatment of the bank’s bonds under Solvency II and the zero risk-weighting under Basel III/CRR.

Despite these credit strengths, challenges to the BBB+ rating include the limited loan portfolio diversification and modest though stable profitability, both a reflection of MFB’s public policy mandate.

MFB’s loan portfolio is characterised by sectoral concentration. The focus on domestic exposures makes the bank’s asset quality somewhat susceptible to developments in the Hungarian economy. Any significant worsening in Hungary’s export-oriented economy could impact the bank’s asset quality and profitability. Macroeconomic risks in the context of the Russia-Ukraine war relate to the country’s high dependence on Russian energy and transition risks in its energy-intensive manufacturing sector (5.6% of MFB’s loan portfolio in 2021), to which Hungary’s export-oriented economy is exposed.

Finally, MFB’s profitability is modest though stable, reflecting its non-profit character and public policy mandate. Returns on assets over the past five years average 0.24%. Following a loss of HUF 8.8bn in 2020, which mostly reflected increased impairment and provisions in the context of a rapidly growing balance sheet, MFB turned a profit of HUF 4.4bn after tax in 2021. This positive result was supported by the expansion of interest-bearing assets in the portfolio coupled with higher rates, higher fee income thanks to the larger guarantee portfolio and the profit of market capital funds booked in 2021 for the first time. In addition, total operating expenses were lower than budgeted following the postponement of procurements to 2022.

Qualitative Scorecard (QS1 and QS2)

If a government-related entity benefits from an ‘integral/strong’ level of integration with the government, Scope may apply the ‘top-down’ approach, which takes the government’s rating as the starting point and negatively adjusts it by up to three notches (exceptions can apply). Equalisation of a government-related entity rating with that of its government is possible if an explicit guarantee exists.

Scope applies the rating equalisation factor due to the explicit, direct and irrevocable statutory guarantee for MFB’s debt obligations provided by Hungary (BBB+/Stable).

Scope assesses the level of integration between MFB and the Hungarian state as ‘strong’ (QS1), reflecting the bank’s i) single public ownership by the Hungarian state; and ii) fulfillment of operating activities exclusively on behalf of the government, with the main purpose of providing a key service in the public interest.

Scope assesses the ‘control and regular support’ for MFB as ‘high’ (QS2) as a result of: i) the ‘high’ ability of the government to control MFB, given that the scope and content of its activities are defined and regulated by law; and ii) the history of financial support for MFB, which has strengthened its liquidity and capital position, enabling it to fulfill its promotional duties.

Scope assesses as ‘high’ ‘likelihood of exceptional government support’ if MFB were to experience difficulties in making payments (QS2). This reflects the bank’s ‘high’ strategic importance to the government, ‘high’ substitution difficulty and ‘medium’ default implications for Hungary.

For further detail, see Appendix I of the rating report.

Factoring of Environment, Social and Governance (ESG)

Governance and social considerations are material to MFB's rating and are included in Scope’s assessment of integration with its public sponsor. This highlights the supportive legal framework that requires MFB to comply with its statutes and fulfil its role as a competition-neutral public law institution. This role includes the provision of key services in the public interest to support national economic and social objectives, as recently shown in measures dealing with the socio-economic consequences of Covid-19 and the war in Ukraine. Long-term environmental developments were also considered alongside the assessment of rating-relevant credit risks but these did not play a direct role in the rating action.

Rating committee
The main points discussed during the rating committee were: i) the level of integration with government; ii) the liability support mechanism; iii) the control and regular support; iv) the likelihood of exceptional support; and v) the supplementary analysis of MFB’s fundamentals.

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Rating Methodology: Government Related Entities, 6 May 2022), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain and the Rated Entity.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data. Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Jakob Suwalski, Director
Person responsible for approval of the Credit Rating: Dr Giacomo Barisone, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 16 July 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
© 2022 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.