(Source: Info-Prod Research (Middle East))Moody's Investors Service today downgraded MKBBank's long-term local currency deposit rating to A1 from Aa3, afterchanging the bank's baseline credit assessment (BCA) to Baa2 from Baa1.The bank financial strength rating (BFSR) of C- was affirmed but itsoutlook was changed to negative from stable. Moody's also downgraded thebank's long-term senior unsecured debt ratings to A1 from Aa3 andsubordinated debt ratings to A2 from A1. The long-term local currencydeposit rating of A1 and senior and subordinated debt ratings of A1 andA2 respectively were placed on review for possible downgrade due to thereview for possible downgrade of the BFSR and the debt and depositratings of MKB Bank's parent, Bayerische Landesbank (rated Aa2/P-1/C-).The A3/Prime-2 foreign currency deposit ratings and Prime-1 short-termlocal currency deposit and foreign currency debt ratings were affirmed.The A3 long-term foreign currency deposit rating carries a negativeoutlook, due to the negative outlook on Hungary's A3 ceiling for foreigncurrency deposits. The downgrade of the bank's BCA reflects the weakening operating environment in Hungary, which has negatively impacted the bank'sfinancial fundamentals, mainly profitability and asset quality. MKBBank's Q3 2008 net profit was significantly affected by increasedprovisioning. "So far it has been primarily the bank's SME portfoliothat has deteriorated as a result of the weakening operating environment,but Moody's expects that asset quality will weaken further as Hungary isheading into recession in 2009. In this context, Moody's views with someconcern that MKB Bank's borrower concentration is high given its focus oncorporate lending and that it also has a substantial, albeit diversified,exposure to real estate developers," explained Gabriel Kadasi, leadanalyst at Moody's for MKB Bank. Moody's also said that this was a keyconsideration underlying the negative outlook on the bank's BFSR. Moody's said that it also anticipates that the bank's franchise maysuffer as a result of the difficulties faced by its parent, which mightput pressure on its liquidity and capital adequacy. "Although we do nothave immediate concerns with regard to MKB Bank's liquidity, we believeit may experience a weakening market positioning over the short to mediumterm due to funding and capital constraints," Mr Kadasi added. The long-term local currency deposit rating of A1 and MKB Bank's seniorand subordinated debt ratings of A1 and A2 remain on review for possibledowngrade as a potential downgrade of Bayerische Landesbank's ratingswould also affect the Hungarian subsidiary, whose ratings benefits from 4notches of uplift as a result of parental and systemic support. Therating agency added that it has adjusted the probability of support thatwould be extended to MKB Bank from Bayersiche Landesbank to high fromvery high in order to denote the parent's weakening ability to supportits Hungarian subsidiary and its lower current and expected contributionto group earnings. However, the change in the parental supportprobability did not affect the deposit and debt ratings of MKB Bank,which also benefit from Moody's assessment of the probability of systemicsupport. Moody's notes the possible downgrade of the debt and depositratings due to the change of the parent's rating is limited to one notch. MKB Bank's 60%-owned Bulgarian subsidiary, MKB Unionbank (ratedBa1/NP/D-) was not affected by these rating actions and all of itsratings were affirmed. Moody's previous rating action on MKB Bank was on 7 November 2008, when its foreign currency deposit ratings were downgraded to A3 (negative outlook)/Prime-2 from A2 (stable outlook)/Prime-1 due to a sovereignrating action that resulted in the downgrade of Hungary's ceiling forforeign currency deposits to A3 (negative outlook) from A2 (stableoutlook). Headquartered in Budapest, Hungary, MKB Bank reported IFRS consolidated 2007 net income of EUR63.6 million and total assets of EUR9.72 billion as of 31 December 2007.

Originally published by Info-Prod Strategic Business Information.

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