Some background for S&P's improvement of Hungary's BBB- outlook to positive

HUNGARY - In Brief 29 Aug 2017 by Istvan Racz

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Honestly, S&P's latest move to raise the outlook on Hungary's BBB- long-term credit rating to positive from stable took analysts, including us, by surprise. Previously, there was some mentioning of a potential for a step like this, but only as a possible secondary scenario.In hindsight, nonetheless, we could have suspected. The rating revision date was set to be August 25 a long time ago, the very same day on which the MNB was scheduled to publish the Q2 prudential data for the local banking sector. So S&P's decision, which explained the improvement of the outlook primarily by the improvement of banking sector results, in addition to a reference to favorable growth and fiscal trends, came out very shortly after the release of the positive dataset on banking. This could be a pure coincidence, in principle, but the more likely case is that S&P was greatly concerned about the local banking sector, and its rating revision date was deliberately set to match the MNB data release in question.And the banking data was indeed impressive, though not particularly running against expectation. Average ROE reached 15.2% in H1, largely stable after 15.5% in 2016, CET1 capital adequacy rose to 19.6% in June from 18.2% a year ago, and, what seems to have impressed S&P the most, the average NPL ratio on loans to non-financial enterprises and households fell sharply, to 4.2%/9.2% in June from 7.6%/16.9% in June 2016. Apparently, S&P was not worried too much that data for 2017 and 2016 is not directly comparable, as a big part of domestic credit institutions switched to IFRS reporting in January, and neither did they care too much about the fact that a significant part of H1 2017 profits w...