Moody’s cut mortgage covered bonds issued by FHB Mortgage Bank from Ba1 to Ba3 on Friday after downgrading the issuer, and affirmed the Baa3 rating of OTP Mortgage Bank covered bonds following confirmation of the rating of the issuer’s parent, OTP Bank.

Moody’s lowered the local and foreign currency deposit rating of FHB Mortgage Bank (FHB) from Ba3 to B2 on Thursday because of a worsening of the bank’s standalone credit assessment due to an increasingly weak economic and operating environment in Hungary, and high reliance on wholesale funding, which recently led to higher funding costs.

The rating agency said that a Timely Payment Indicator of “very improbable” points to a rating range of Ba1 to Ba3 for FHB covered bonds, but that the programme benefits only from a limited rating uplift over the issuer because covered bondholders are significantly exposed to refinancing and foreign exchange risks given a high amount of foreign-exchange denominated assets in the cover pool.

Just shy of 46% of FHB cover pool assets are denominated in Swiss francs or euros, according to Moody’s, making covered bondholders vulnerable to political and economic factors, such as devaluation, redenomination and foreign-exchange moratorium, particularly in case of a Hungarian government default.

OTP Mortgage Bank (OTP) covered bonds were affirmed at Baa3 after the rating of OTP’s parent OTP Bank NyRt was affirmed at Ba1 on Thursday. The rating had been put on review for downgrade on 12 December alongside that of FHB and four other Hungarian banks in response to deteriorating economic conditions in Hungary and the approval of measures such as a bank levy by the Hungarian government. (See previous coverage here.)

On Thursday Moody’s lowered the bank standalone profile because of difficult conditions in Hungary, but affirmed OPT Bank’s senior debt rating at Ba1 because of the high likelihood that the bank would benefit from systemic support from the Hungarian authorities if needed, given its leading market position in Hungary (26.2% of total assets and 22.6% of total deposits in the banking system).

“This provides rating uplift of one notch for the local-currency deposit rating and senior debt rating for OTP Bank from the ba2 standalone credit assessment,” said Moody’s.

Because OTP Bank provides a full, irrevocable and unconditional guarantee of OTP’s obligations, Moody’s uses its, rather than OTP Mortgage Bank’s, rating as the issuer rating input to OTP’s covered bond rating, and the covered bond rating was affirmed at Baa3 following the affirmation of OTP Bank.

Moody’s noted that a TPI of “very improbable” would put OTP covered bonds in a rating range between Baa1 and Baa3. However, the covered bonds’ rating is constrained at one notch above the issuer rating, effectively also one notch above Hungary’s Ba1 government rating, said Moody’s, because of the material amounts of foreign-exchange denominated assets in the cover pool, as 47.4% of the assets in OTP’s cover pool are denominated in Swiss francs, Japanese yen or euros.