Credit rating agencies S&P Global Ratings and Fitch lifted Hungarian credit rating to ‘BBB’, one notch above lowest investment grade
On Friday, February 15th, S&P decided to increase Hungarian credit rating to ‘BBB’ with a stable outlook while Fitch did it a week later. “The upgrade reflects Hungary’s sound growth prospects, supported by high private savings and real wage gains sustaining domestic demand, as well as the ongoing expansion of export capacity in the automotive and service sectors” it was stated by the agency. The decision did not surprise the market as GDP growth in 2018 of 4.8% YoY and strong external deleveraging are significant factors for credit houses. Namely, S&P stated that Hungarian economy reported solid balanced growth for six straight years, the external debt dropped to 10% GDP in 2018 down from 55% GDP in 2010, while double-digit wage growth did not derail its external competitiveness.
Nevertheless, there are some challenges that should be resolved before rising further on the investment grade scale. In particular, the economy has started to face capacity constraints as unemployment reached only 3.7% in 2018 with wages rising at double-digit pace. However, knowing Hungarian government’s stance on immigrants issue we see this challenge as an ongoing thing. Going further, exports make some 85% of Hungarian GDP and according to S&P some 16% comes from the automotive industry meaning that there are significant risks for the Hungarian economy in case of US-China-EU trade war. Hungarian politics is still under much scrutiny among EU officials and it looks probable that funds from the EU could decrease in the next program. Last but not least, Hungary is expected to run budget deficits of around 2% GDP in the coming years, with S&P saying that it finds government’s plans to reduce deficits to 0.5% GDP by 2022 too optimistic. Hence they “…believe that the opportunity to put the public debt on a sharp downward trend offered by the current cyclical upturn might be missed”, meaning that public debt should stay above 60% GDP handle for prolonged period of time. Talking about public debt, S&P states that Hungary significantly reduced its foreign currency denominated debt from 60% in 2010 to around 20% today.
Meanwhile, Croatia has not been in the investment class for six straight years now and there are many speculations that in this year the country might get back what it had lost in the latest double-dip recession. If you look at the bond market, Croatia seems to be investment grade for several months now, but let’s talk on that later. In its latest review in September 2018, S&P revised Croatian outlook to positive amid Croatia’s external and fiscal balance improvements, reduced risks on Agrokor issue and increased domestic demand and sound exports. Back then, they said that rating could be raised in case Croatia continues with reducing its public debt supported by control of expenditures and increasing revenues. Since then, the shipyard story emerged which still seems to be far from over while stories regarding Croatia entering ERM II became more frequent. Going on, Croatian economic development seems to be continued at the similar pace although tourist season did not accelerate further as some investors expected. As S&P’s analysts mentioned, Croatian external debt continued falling sharply while according to Eurostat public debt stood at 74.5% of GDP in Q3 2018, from above 84% only 4 years ago. Just to put things into perspective, Hungarian debt as a share of GDP stood at 72.4% while worth noting is that large share of Croatian bonds sits at domestic mandatory funds. All in all, with economic growth slightly decelerating towards 2.0% but still close to its peers, slight fiscal easing and unusually calm political situation we wouldn’t be surprised in case S&P decides to lift Croatia to the investment grade despite expectations on slowdown of global economy and stagnation of several main trading partners.
Looking at the market, as we said above, Croatia is already traded as it has investment grade although there are many funds that are not allowed to buy sub-investment papers, meaning that additional pressure could be expected in case S&P lifts Croatia on March 22nd. On the chart submitted below you can see how Croatian EUR denominated Eurobond maturing 2027 trades much tighter compared to Romanian one but still has room for tightening versus Hungary while 5Y CDS,
CEE 8Y EUR Risk Premia
Source: Bloomberg, InterCapital
In 2018, HPB recorded an increase in net interest income of 2.6%, an increase in net fee and commission income of 6.1% and a net profit of HRK 126.2m.
We are bringing you some key takes from HPB’s 2018 preliminary report. According to it, in 2018, HPB recorded an increase in net interest income of 2.6% YoY, amounting to HRK 551.4m. The rise could be attributed to a decline in interest expense of 20.7%. Further, net fee and commission income increased by 6.1%, amounting to HRK 218.6m.
However, when observing operating profit, it decreased by 18.3% YoY. Such a decrease could be attributed to an increase in general and administrative expenses, amortization and depreciation, which increased by HRK 67m (+17%).
In 2017, HPB also recorded high impairment losses and provisions, resulting in a low net income of HRK 7.9m. In 2018, impairment losses and provisions decreased by HRK 215m in 2018. This led to a steep increase in net income by HRK 118.3m, compared to 2017, which amounted to HRK 126.2m (+1498.8%)
HPB Performance (2015 – 2018) (HRK m)
Net profit is mainly consisted of parent-company result, apart from, HPB Invest recorded a net profit of HRK 0.9m, HPB-nekretnine added a net profit of HRK 0.9m. According to the relatively adverse effects from capital markets continued in fourth quarter, HPB-Stambena štedionica recorded a net loss amounting to HRK 4.1m, despite increasing volume and contribution of core operations to overall result.
Following the acquisition of Jadranska
L/D Ratio (2015 – 2018) (%)
In 2018, Kraš recorded a decrease in revenues of 1.2%, an increase in EBITDA of 10.3% and an increase in net income of 64.3%.
As Kraš published their 2018 preliminary results, we are bringing you some key takes from the report. According to it, Kraš recorded operating revenues of HRK 1bn, which represents a decrease of 1.2%. Of the operating revenues, HRK 547.4m was recorded on the domestic market, while HRK 466.9m was recorded on the foreign market.
Kraš Revenues (2015 – 2018) (HRK m)
Further, when observing operating expenses, they decreased by 2.4%, amounting to HRK 957.1m.
EBITDA amounted to HRK 116,2m, which represents an increase of 10.3% YoY. Meanwhile, EBITDA margin increased by 1.2p.p., amounting to 11.4%.
Going further down the P&L, Kraš recorded a net financial result of HRK -2.4m compared to HRK -14.1m in 2017. The better net financial result in 2018 resulted in a higher EBT of 56.6%, amounting to HRK 62.6m. Meanwhile net income increased by 64.3%, amounting to HRK 50.9m.
Also note that in 2018, the company finalized its Cap hike in which they gathered HRK 50.5m. Through the process, Kraš released 125 000 new shares.
Kraš EBITDA & Net Income (2015 – 2018) (HRK m)
In 2018, Banca Transilvania observed a 45.4% YoY increase in net interest income, 24.1% increase in net fee and commission income and a 1.2% increase in net income.
We are bringing you some key takes from Banca Transilvania’s 2018 preliminary report. According to it, Banca Transilvania recorded net interest income of RON 2.7bn, which represents an increase of 45.4%. Further, when observing the Group’s net fee and commission income, it increased by 24.1%, amounting to RON 777.7m. Both increases could be partially attributed to the consolidation of Bancpost, which was merged in 2018.
Operating income amounted to RON 3.9bn, which represents an increase of 35.3%.
Operating expenses, on the other hand, increased by 40.8%, amounting to RON 2bn. This increase could be attributed to the integration expenses of the above-mentioned Bancpost.
Going further down the P&L, Banca Transilvania observed an 18% increase in
Banca Transilvania Performance (2015 – 2018) (RON m)*
*In April 2015 the Bank acquired Volksbank recognizing a bargain gain of RON 1.65bn
Turning our attention to L&D, customer deposits reached RON 65.16bn (+33%), of which RON 43.34 are individual deposits and RON 21.82 billion are corporate deposits. Meanwhile, loans have increased by 25% YoY. In 2018, L/D ratio amounted to 61% which is a decrease of 4p.p.
When observing the NPE ratio, in 2018, it continued its declining trend, amounting to 4.97% (-1.06p.p.). Note that the company did not report its NPL ratio for 2018 in their preliminary report.
NPL & NPE ratio (%)*
*NPE ratio for 2015 not reported
L/D ratio (%)
In 2018, besides the merger and integration of Bancpost, BT Leasing merged with ERB Leasing, company purchased from Eurobank Group, once with Bancpost and ERB Retail Services. BT Direct and ERB Retail Services, non-banking institutions consumer finance companies will merge in the first half of 2019.