Rating action

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

The BBB/Stable ratings of MFB reflect several key factors:

• Equalisation factor: 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, including bonds, credits, loans, deposits from the interbank market, and currency or interest rate swaps. This guarantee underscores the close relationship between MFB and the Hungarian state, providing stability to MFB's funding structure.
   
• Strong integration with the public sponsor: MFB plays a critical role in supporting the Hungarian economy, which is a strategic objective of the government. Support by the Hungarian state has also been instrumental in strengthening MFB's capitalisation and liquidity, as highlighted by the bank's history of receiving financial support from the government.
   
• Robust stand-alone fundamentals: Scope also acknowledges the bank’s solid capitalisation, robust asset quality with low non-performing loans, and established market access. At the same time, the bank's balance sheet is constrained by limited loan portfolio diversification and modest profitability, reflecting MFB's public policy mandate.

Download the updated Rating Report here.

Rating rationale

Equalisation factor: The ratings of MFB are aligned with those of the sovereign, as Hungary provides a guarantee framework for MFB's liabilities. This guarantee covers bonds issued, credits and loans taken, deposits from the interbank market, and replacement costs of currency or interest rate swaps used for fundraising purposes.

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.

High strategic importance: Scope recognises 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. 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 several capital increases in recent years in response to the bank's expanding balance sheet and rising risk-weighted assets. In 2022, the bank received a total of HUF 170bn in additional share capital. 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.

Robust standalone fundamentals: MFB’s capitalisation with a CET1 ratio of 16.2% at YE 2023 is adequate and benefits from capital injections in recent years, mitigating a substantial increase in risk-weighted assets due to the bank’s expanded activities since 2020. The bank’s asset quality is robust, with low NPLs and comprehensive portfolio protection, including via guarantees from the public sponsor and other credit enhancements. Finally, MFB benefits from an established access to international capital and money markets, high liquidity in the domestic financial sector and internal liquidity buffers.

Credit challenges: limited loan portfolio diversification and modest profitability, both driven by public policy mandate.

MFB’s loan portfolio diversification is limited and its profitability modest, reflecting the bank’s public policy mandate. The concentration of its loan portfolio in certain sectors and its focus on domestic exposures also make it susceptible to developments in the Hungarian economy, particularly any significant worsening in the country's export-oriented economy. MFB's profitability is modest, reflecting its non-profit character and public policy mandate.

Outlook and rating sensitivities

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

An Upside scenario for the rating and Outlooks is:

1. Upgrade of the rating/Outlook of Hungary.

Downside scenarios for the rating and Outlooks are (individually or collectively):

1. Downgrade of the rating/Outlook of Hungary;
    
2. Changes to the legal framework or guarantee structure, notably weakening government support.

Qualitative Scorecard (QS1 and QS2)

Scope applies a top-down approach (QS1) in assessing the creditworthiness of MFB, which takes the public sponsor’s rating (Hungary: BBB/Stable) as the starting point. Scope sees ‘strong’ integration between MFB and Hungary, reflecting the bank’s: i) single public ownership by the Hungarian state; ii) fulfilment of operating activities exclusively on behalf of the government, with the main purpose of providing a key service in the public interest; iii) special legal status, and iv) financial interdependencies with the state.

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; ii) the ‘high’ oversight over personnel and strategic decisions; and iii) 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 ‘high’ default implications for Hungary.

Scope applies a rating equalisation factor given the explicit, direct and irrevocable statutory guarantee for MFB’s debt obligations provided by Hungary.

The approach also includes a supplementary analysis of the entity’s business and financial risk profiles, which has no bearing on the final credit ratings.

The assessments under QS1, QS2 and the rating equalisation factor result in an indicative rating of BBB.

The results were discussed and confirmed by a rating committee.

Factoring of Environment, Social and Governance (ESG)

Material ESG factors are captured by Scope’s rating approach through several analytical areas.

Governance and social considerations are material to MFB’s credit rating and were included in the assessment of the level of integration with the public sponsor, highlighting the supportive legal framework that mandates MFB's compliance with its statutes and underscores its role as a competition-neutral public law entity. MFB's role encompasses the provision of key services that serve national economic and social objectives. Our governance assessment also considers MFB’s standalone fundamentals, highlighting its sound risk profile and risk management.

Environmental considerations include the bank’s role in fostering the public sponsor’s transition agenda, with MFB integrating sustainability into its mid-term strategy 2022-2030. In its sustainable finance framework, the bank commits to contributing to the United Nations SDGs and the Paris Agreement, as well as EU environmental objectives in its lending activities.

Sustainable lending programmes include renewable energy and green buildings, and SME and higher education projects. In 2024, MFB introduced a Corporate Energy Efficiency Loan Programme in cooperation with the EIB and CEB. MFB established a sustainable finance framework in 2023 and issued its first green and social bonds in the first half of 2024.

Rating Committee
The main points discussed during the rating committee were: i) the level of integration with the public sponsor; ii) the liability support mechanism; and iii) a supplementary analysis of MFB’s fundamentals.

Methodology
The methodology used for these Credit Ratings and Outlooks, (Government Related Entities Rating Methodology, 10 December 2024), 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 Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings and Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Julian Zimmermann, Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 16 July 2021. The Credit Ratings/Outlooks were last updated on 9 March 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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