OTP Mortgage Bank was downgraded from Baa3 to Ba1 as part of a rating action on seven Hungarian banks by Moody’s on Friday following a downgrade of Hungary’s rating from Baa3 to Ba1. The banks remain on review for further downgrade.

Moody’s downgrade of Hungary on 24 November was driven by rising uncertainty surrounding the country’s ability to meet its medium term targets for fiscal consolidation and public sector debt reduction, and increased susceptibility to event risk stemming from the government’s high debt burden, heavy reliance on external investors, and large refinancing needs.

The rating agency downgraded Hungary’s country ceiling for foreign currency debt from A1 to A3 as part of the action on Hungary.

Hungary’s reduced financial strength has prompted Moody’s to lower its assessment of the capacity of the Hungarian government to support its banking system.

OTP and OTP Mortgage Bank were downgraded to reflect the banks’ weaker positioning within the D+ BFSR category, now corresponding to a standalone rating of Ba1.

“The lower standalone rating for the banks reflects (i) OTP’s operations, which are predominantly focussed on Hungary; and (ii) its risk profile and access to funding, which are closely interlinked with Hungary,” said Moody’s.

The ongoing review of Hungary’s commercial banks will assess on a bank by bank basis the effect of the government law that gives foreign currency mortgage borrowers the option, until February 2012, to repay their full mortgage balance at exchange rates below market rates.

At OTP Mortgage Bank’s previous Baa3 rating, its mortgage covered bonds, rated Baa1, had zero TPI leeway under Moody’s Timely Payment Indicator framework.