Moody’s: FX mortgage ruling credit negative for banks, with longer-term positive implications

London, June 23 (MTI) – The recent ruling by Hungary’s Supreme Court that unilateral changes by banks to foreign-currency mortgage interest rates were unfair in some cases is credit negative for Hungarian banks but has potential upside longer-term implications, Moody’s Investors Service said today.

In its weekly Credit Outlook report released in London, the rating agency said it views the verdict as credit negative for Hungarian banks because it increases the possibility that banks will have to make compensation payments to mortgage borrowers of around 1 billion euros, or about 11 percent of the banking system’s total capital, “according to our initial estimates”.

“Our estimates are based on the total volume of foreign-currency mortgages and average changes in the mortgage interest rates introduced by the banks since 2008”.

Based on the share of foreign-currency mortgages in the loan books of commercial banks with Moody’s ratings, the banks that risk paying the largest amounts in compensation are OTP Mortgage Bank, FHB Mortgage Bank, Erste Bank Hungary and K&H Bank, the report says.

“We expect that the Hungarian government will introduce in the third or fourth quarter of this year new measures to ease the debt burden of the foreign-currency mortgage borrowers”.

Although a comprehensive solution to the problem of foreign-currency mortgages will impose considerable costs on banks, it will also reduce the risks of continued punitive measures by the government, and remove the moral hazard that has prompted many borrowers to fall behind on their repayments in anticipation of improved terms for their mortgages.

Such a solution would help constrain the ongoing rise in non-performing loans in Hungarian banks’ foreign-currency mortgage portfolios, which reached 23.7 percent at the end of the first quarter of 2014, Moody’s said.

Source: http://mtva.hu/hu/hungary-matters