Moody’s Investors Service has raised its outlook on Hungary’s banking sector to positive, the ratings agency reported on June 28.

The move increases hope that Moody’s might be the second rating agency to return Hungary to investment grade. Fitch offered the country an escape after close to five years in 'junk' when it upgraded the sovereign to BBB- from BB+ on May 22. Sovereigns generally need an investment grade from at least two of the major ratings agencies in order to attract many institutional investors.

Standard & Poor's suggested earlier this month it is unlikely to offer an upgrade during its next scheduled review in September. Moody’s only changed its outlook on Hungary’s rating to positive in November, but left Budapest on tenterhooks in March. Moody’s is scheduled to review the sovereign on July 8.

The Hungarian government has insisted for some time that the country's macroeconomic fundamentals deserve an investment grade, noting that the country's external vulnerability has been slashed. However, the agencies remain wary of erratic policymaking - especially concerning the banking sector - and the independence of institutions, the central bank in particular.

Moody's improved view on the banks could help swing the balance, however. As one analyst pointed out to bne IntelliNews earlier this year, Moody’s traditionally puts more weight on the banking sector than the other agencies.

“The positive outlook on Hungary's banking system reflects lenders' improving loan quality and capital. A shift in the government's policy stance towards banks should also support their financial fundamentals and capacity to grow," Armen Dallakyan, vice president of Moody’s, said in a press release on June 28 accompanying the report.

The ratings agency expects loan quality will continue to improve this year and in 2017, benefiting from rising household income and from the banks' efforts to restructure and sell problem loans. Moody’s forecasts that non-performing loans will decline to about 12% of total gross loans by the end of 2016, from 13.1% a year earlier.

Moody’s said that the improvement of the asset quality was also helped by the conversion of banks’ FX-denominated retail loans to Hungarian forints – as it removed asset quality risks due to possible local currency depreciation – and by the fact that banks substantially increased their loan-loss reserves in 2015. Dallakyan added that credit growth has improved, although it will continue to be modest as demand for corporate loans remains weak.