Rating action

Scope Ratings GmbH (Scope) has today downgraded the long-term issuer and senior unsecured ratings on MFB Hungarian Development Bank Private Limited Company (MFB) from BBB+ to BBB in both local and foreign currency. The Outlooks have been revised from Negative to Stable. Scope has also affirmed an S-2 short-term issuer rating in both local and foreign currency, with Stable Outlooks.

The latest information on the rating, including rating reports and related methodologies, is available here.

Summary and Outlook

The rating downgrade of Hungary from BBB+ to BBB and the Outlook revision from Negative to Stable have had a consequential impact on the rating and outlook of MFB. The bank's ratings are aligned with those of the sovereign, reflecting the explicit, direct, irrevocable and statutory funding guarantee provided by Hungary for MFB's financial obligations.

This alignment of MFB's ratings with those of the sovereign (BBB/Stable) is based on Hungary’s guarantee for MFB's financial obligations arising from, including bonds issued, credits and loans taken, deposits from the interbank market, and replacement costs currency or interest rate swaps for fundraising purposes. This guarantee underscores the close relationship between MFB and the Hungarian state, providing stability to MFB's funding structure.

The guarantee also highlights the critical role MFB plays in supporting the Hungarian economy, which is a strategic objective of the government. Support from the Hungarian state has also been instrumental in strengthening MFB's capitalisation and liquidity, as evidenced by Scope's recognition of the bank's history of financial support from the government. However, Scope also acknowledges that the bank's balance sheet is constrained by limited loan portfolio diversification and modest, albeit stable profitability. These factors are a reflection of MFB's public policy mandate.

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced over the next 12 to 18 months.

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

Conversely, the rating/Outlook could be upgraded in the event of an upgrade of the rating/Outlook of Hungary.

Rating rationale

The ratings of MFB Hungarian Development Bank Private Limited Company are aligned with those of the sovereign, and thus any change in the sovereign's creditworthiness affect the ratings of MFB. The recent downgrade of Hungary's sovereign rating from BBB+/Negative to BBB/Stable has led to a corresponding downgrade for MFB.

The bank's ratings are aligned with those of the sovereign, as Hungary provides a statutory funding guarantee for MFB's liabilities arising from bonds issued, credits and loans taken, deposits from the interbank market, and replacement costs of currency or interest rate swaps used for fundraising purposes. The MFB Act stipulates that MFB cannot incur guaranteed liabilities beyond the upper limits approved in Hungary’s central budget for a given year¹.

MFB benefits from a comprehensive liability support mechanism provided by the Hungarian state. In addition to the explicit guarantees covering MFB's debt obligations, the government also guarantees payment claims arising from loans and guarantees issued under specific programmes or even on a case-by-case basis via government resolutions. Furthermore, the government provides liability and/or asset-side interest rate subsidies for certain credits and loans provided by MFB.

To manage its foreign exchange risk, MFB has implemented a foreign exchange arrangement scheme with the Hungarian state. Under this scheme, the state budget reimburses any losses incurred by MFB in converting loans or funds into foreign currency, while foreign exchange gains are passed on to the state budget. The primary goal of the scheme is to keep interest rates low for the ultimate beneficiaries of MFB's loans, while also protecting the bank from losses caused by forint volatility.

Overall, MFB benefits from a robust support framework provided by the Hungarian state. The comprehensive liability support mechanism, combined with the foreign exchange arrangement scheme, demonstrates the close relationship between MFB and the government and reflects the bank's strategic importance in supporting the Hungarian economy.

Scope recognizes that MFB is a key government-related entity that plays a crucial role in implementing economic policies for the Hungarian state, given its pivotal role as the only development bank focused on the domestic market. For instance, this has enabled MFB to launch significant loan programmes in 2020 and 2021 to combat the impact of Covid-19, with some of these loans and guarantees backed by state guarantees up to 90%.

Hungary has taken several measures to reinforce MFB's capitalisation and lending capabilities and provided financial support during periods of capital market volatility. This exceptional support from the Hungarian state further underpins the alignment of MFB’s ratings with those of the sovereign.

Hungary has undertaken two capital increases of HUF 84bn and HUF 151.4bn in 2021 and 2020, respectively, in response to the bank's expanding balance sheet and rising risk-weighted assets. Additionally, during periods of heightened capital market volatility, Hungary has extended financial assistance to MFB. For instance, in 2009, Hungary arranged a multi-currency loan using funds borrowed from the IMF. The state also offers short-term bridge financing to MFB and other government-related entities to ensure the optimal timing of capital market transactions, given that MFB's issuances are benchmarked against sovereign bonds.

Furthermore, MFB benefits from low substitution risk and contributes to macro-economic stability, which strengthens the likelihood of exceptional support from the Hungarian state. In addition, the bank's guarantee structure provides it with a resilient access to capital markets, while its funding access is further supported by the preferential treatment of its bonds under Solvency II and the zero risk-weighting under Basel III/CRR.

However, MFB’S loan portfolio diversification is limited and its profitability modest, reflecting MFB's public policy mandate. The concentration of its loan portfolio in certain sectors and its focus on domestic exposures also make it somewhat susceptible to developments in the Hungarian economy, particularly any significant worsening in the country's export-oriented economy. MFB's profitability has been modest, averaging 0.24% in the period from 2017 to 2021, reflecting its non-profit character and public policy mandate.

Qualitative Scorecards (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).

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) fulfilment 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 fulfil 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.

Factoring of Environment, Social and Governance (ESG)

The MFB's rating is significantly impacted by its governance and social considerations, which are evaluated by Scope in its assessment of the institution's integration with its public sponsor. This assessment highlights the importance of a supportive legal framework that mandates MFB's compliance with its statutes and underscores its role as a competition-neutral public law entity.

The MFB's role encompasses the provision of key services that serve national economic and social objectives. This is particularly evident in the institution's recent response to the socio-economic consequences of Covid-19 and the war in Ukraine.

Although the long-term environmental developments were considered as part of the rating-relevant credit risks evaluation, they did not directly influence the rating action.

Rating committee

The main points discussed during the rating committee were: i) the level of integration with the public sponsor; ii) the explicit liability support mechanism.

Rating driver references
1. Act XX of 2001 on the Hungarian Development Bank Limited Company (the MFB Act)
Paragraphs 1(a), 1(c) and 1(d) of Article 5 of Act XX of 2001 on the Hungarian Development Bank Limited Company (the MFB Act) provide for a statutory guarantee (in Hungarian: készfizető kezesség) in the form of an absolute direct suretyship.

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Government Related Entities Rating Methodology, 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, 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 Ratings: Giacomo Barisone, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 16 July 2021. The Credit Ratings/Outlooks were last updated on 16 September 2022.

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
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