- Tue March 17, 2015

Hungary tells banks: shape up or ship out

Foreign banks are finding it hard to make their operations in Hungary pay. They say they are still committed to the country. So what will they make of the finance minister’s public call for consolidation?

Recent years have not been kind to Hungary’s embattled foreign banks, and the pain isn’t over yet. Since premier Viktor Orban swept to power in 2010, lenders have been hit by a brace of new taxes – one directly targeting profits, the other carving a slice out of every financial transaction – as well as a relief scheme for mortgage borrowers.

Caught in the state’s crosshairs, some foreign banks have understandably opted to siphon capital out of the country and sequester it in more industry-friendly jurisdictions.

That has further infuriated a populist government. Desperate to encourage banks to lend more, to foster growth and boost spending, it is now pressing foreign banks to answer a simple question: Are you in or out?

“We would prefer [foreign lenders] to leave rather than to stay and be zombie banks,” financial policy minister Gábor Orban told Euromoney in December in Budapest. “Either they clean up, restructure and get scale, or they sell to someone who will.”

Orban, no relation to the premier, said a key strategic aim for 2015 would be to whittle down the number of industry players.


Some consolidation needs to take place. A system of seven or eight large banks, each with 6% to 8% market share, is unsustainable
Gábor Orban, financial policy minister

“The present structure of the banking sector cannot last for much longer,” the minister believes. “Some consolidation needs to take place. A system of seven or eight large banks, each with 6% to 8% market share, is unsustainable. Ideally, that number would be reduced to five, and ideally this would happen through mergers and acquisitions.”

Achieving that will not be easy. Orban says that if banks remained “in limbo”, torn between boosting lending and cutting their losses, the government would “have to step in”. The clear aim is to convince a handful of foreign lenders to sell their local assets to domestic lenders and exit the country.

Yet it isn’t clear what, precisely, the government can do to achieve its aim. A few notable transactions took place last year. Five months after MKB was folded into government ownership, SME-focused lender Budapest Bank was absorbed by the state in early December. The two outfits will likely be merged then sold to private local investors, with the government retaining a minority stake, creating the country’s second-largest lender after OTP Bank.

Those sales however were flagged long in advance. Budapest Bank’s outgoing owner GE Capital has been shedding assets around Europe, keen to focus on a core grouping of faster-growing markets. BayernLB, which received state aid during the financial crisis, had been desperate to sell MKB for years. It bought the bank for €2 billion in the 1990s, but made a loss of €409 million in 2013 alone, before finally selling the unit for a paltry €55 million.

Despite the finance minister’s exhortations, it’s hard to see quite how the state could force the hand of any lender unwilling to leave. Hungary is a member of the European Union and cannot arbitrarily force its will on foreign banks and corporations.

Even minister Orban admits that if foreign banks “won’t sell, we cannot buy – it’s as simple as that”.

Inside the corridors of power, though, it’s clear which lenders Hungary’s parliament would like to see banished from the country. “The two banks that contribute least to the government’s growth model are CIB Bank and Raiffeisen,” says a senior government official. “I’m confident that the rest of them are committed to the cause and are here to stay.”

This draws a distinct line in the sand. On one side of it are OTP, Austria’s Erste Group Bank, Italy’s UniCredit and Belgium’s KBC Bank, owner of local unit K&H. On the other side stand CIB, owned by Italy’s Intesa Sanpaolo, and Vienna-based Raiffeisen Bank International (RBI). Yet both lenders singled out by the senior state official – and by any government executive interviewed on the subject – proclaim, in public at least, their determination to stay the course.

For RBI, the mere suggestion of exiting a nation seen as vital to its regional interests is a painful one. Indeed, all Austrian banks, notes Gyorgy Barcsa, chief economist at independent Budapest based think-tank Szazadveg Economic Research, “see Hungary as a vital market of long-term strategic importance”.

Raiffeisen has been present in Hungary since 1987, two years before the fall of the Berlin Wall. In September, its Hungary chief executive, Heinz Wiedner, said RBI would pump €200 million of extra capital into its subsidiary. A spokesperson refused to comment on “rumours” that it might exit the market.

For its part, Intesa Sanpaolo in July announced plans to inject Ft15 billion ($60 million) in fresh capital into its local unit. A spokesperson told Euromoney that Italy’s largest lender was “restructuring its operations at CIB Bank” and was “not planning its disposal”.

Yet every foreign lender faces the same predicament. Superficially, Hungary’s economy is in a reasonable state. Economic output rose 3.2% year-on-year in the three months to end-September, the fastest sovereign rate of expansion in the EU after Poland. But that growth, focused mostly on sectors such as auto production, hasn’t trickled through to the financial sector. New taxes, among the highest in the region, have hurt profits: the new direct levy on bank earnings now accounts for 0.5% of gross domestic product.

And there’s more grief to come. In November, Hungary’s parliament approved laws that will force lenders to convert €9 billion-worth of foreign-currency loans issued before the financial crisis into forints, the local currency, at the most customer-friendly of two exchange rates, while strict limits will be imposed on the terms of new loans.

And there’s more grief to come. In November, Hungary’s parliament approved laws that will force lenders to convert €9 billion-worth of foreign-currency loans issued before the financial crisis into forints, the local currency, at the most customer-friendly of two exchange rates, while strict limits will be imposed on the terms of new loans.

Markets reacted with cautious approval, hopeful that the rules will satisfy both government and lenders. Premier Orban has long claimed, not unreasonably, that by issuing hundreds of thousands of borrowers with loans printed largely in Swiss francs, lenders exacerbated the local impact of the crisis and slowed Hungary’s return to growth. Loan costs spiraled and households, unable to meet debt repayments, simply stopped spending. That ire underpins the government’s general antipathy toward banks, foreign or otherwise.

For their part, lenders welcomed the news with a studied restraint. Without doubt, the ruling will further diminish profits, or widen losses. Hungary’s central bank, the MNB, expects lenders typically to lose in the order of $400 million each a year from lower interest income.

One local bank CEO put a more realistic number at north of $600 million. Yet he also remained hopeful that the foreign-currency conversions would bring an end to a wearying stand-off between the government and the financial service industry that has, notes Szabolcs Varga, a local partner at Vienna-based private banking outfit Gutmann, created a “frozen banking system” paralysed by indecision.

But bank bashing in Hungary remains a fashionable pursuit, particularly for a populist premier, and more pain is likely in store for 2015. A new bad bank is being created expressly to store failed commercial real estate loans from lenders. In November, the MNB said it had set aside $1.2 billion to buy bad “project loans” that, it said, were a drain on the financial sector and the economy: at the end of June, the country’s corporate non-performing loan ratio stood at 18.5%.

Local bank chiefs fret that this is just a long-term ruse to create a powerful new local lender at a time when economic prospects are improving and the commercial property sector is once again showing signs of life.

“Our fear,” says a senior executive at a Budapest based lender, “is that the government will want us to sell project loans to the new bad bank at a loss. Why would we do that when we could make a much larger profit from a sale two or three years from now?”

Some fear the government will use the bad bank as leverage with which to buy high-quality assets at knockdown prices. If that doesn’t work, notes the senior bank executive, “they may create incentives to spur us to sell, such as by raising capital adequacy requirement levels on project loans they suddenly [deem] risky. They can’t directly expropriate assets. But they might find new ways to ensure our cooperation.”

Most signs point toward greater domestic control of the financial sector. In mid-2014, the premier outlined his aim of seeing at least half the banking industry fall into Hungarian hands. In November, he upped that figure to 60%. Many expect that number to rise further. Yet the government is not interested, insists minister Orban, in owning the banking sector outright. “We are conscious of the risks of running a bank,” he says, adding that it’s “not our intention” to hold onto the likes of Budapest Bank and MKB. “We want to sell them sooner or later, maybe while retaining a minority government stake of 15%, 20%, 25%.”

Then there’s FHB, the second-largest local lender, which in July sold a 49% stake to the national postal agency, Magyar Posta, for Ft28.5 billion, and has been expanded to incorporate a coterie of healthy rural savings cooperatives. The aim with the enlarged lender, believes one industry insider, is to create “a strong local player on the retail side, able to compete with OTP and the foreigners”.

And for once the views of government and financial institution align. “I am sure that in time, [FHB] will be able to compete with other lenders,” says minister Orban. “It now has the size to be able to run in that [sort of] company.”

What company will that look like? To one bank insider whose institution’s local future appears secure, it might come down to two factors: what sort of pain the government would mete out to limbo banks unwilling to leave, and what sort of cash it might splash as an incentive.

“Hungary has genuine strategic value,” he says. “Look 20 or 30 years down the line – this is the sort of market you want to be in. But right now, there is the question of whether it’s worth operating here. Ultimately it will all come down to price. If the government got that right, there is no doubt in my mind that more than one foreign lender would leave.”

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