Moody's Investors Service has maintained its negative outlook on Hungary's banking system citing continued downside risks for local banks from the weak operating environment, which will result in pressures on asset quality and capitalisation. According to Moody’s, Hungarian banks continue to be heavily exposed to wholesale and FX funding, as well as parental support constraints in a system that is predominantly foreign-owned.
Moody's expects Hungarian banks to continue deleveraging their balance sheets over the outlook period, as the challenging operating environment results in subdued supply and demand for loans.
The ratings agency also noted that the weak asset quality and pressure on capitalisation will remain major credit challenges for the Hungarian banking system over the next 12-18 months. The deterioration in asset quality will be driven by the weak economy, high unemployment and the sizeable amount of FX loans in the system, which renders the banks' loan books vulnerable to external currency market dynamics. Many of the foreign-owned banks rely on short-term FX funding facilities from their parent banks to fund their FX portfolios, thus exposing them to significant rollover risk in the current challenging funding environment, Moody's said.
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