Hungary’s FHB Mortgage Bank has significantly reduced the foreign exchange exposure in its covered bond programme as a result of a sharp decline in outstanding euro denominated bonds and a focus on its domestic currency for new bond issuance and mortgage origination, Moody’s said yesterday (Tuesday).

Sizeable foreign exchange risks remain in FHB’s programme, said the rating agency, but these have reduced since the beginning of last year. At that time, the vast majority of the issuer’s cover pool comprised Hungarian forint and Swiss franc denominated loans, while covered bonds were issued in forint and euros, leading to considerable currency mismatches.

However, over the course of last year, FHB has repurchased or redeemed euro covered bonds while also issuing forint denominated bonds. As a result the share of euro denominated covered bonds in FHB’s programme fell materially, by 63%, of all bonds outstanding.

At the same time, the share of Swiss franc denominated assets in the cover pool fell, by 13% as the issuer originated new mortgage loans in Hungarian forint. In addition, under a law change in September 2011 borrowers can pay back their foreign-currency denominated mortgages in forint, a move that raised concerns among some rating agencies and other analysts. (Select Hungary from our country dropdown menu in the righthand column for further coverage.)

Moody’s yesterday said that sizeable foreign exchange risks remain in FHB’s covered bond programme, with over 40% of all assets still Swiss franc-denominated.

“If the government’s decision to allow repayment of these CHF debts at a steep discount in HUF is repeated, the level of assets in the cover pool would suffer a further haircut,” said Moody’s.

However, the rating agency said that it expects foreign exchange risks to decline because FHB’s new issuance is primarily forint-denominated and new mortgage loans are originated solely in its domestic currency.