Hungary: Banks count cost of FX loan legislation

Forced conversion planned for autumn; bill could top €4 billion, say analysts.

A slew of Hungarian banks issued profit warnings last month after the country’s parliament approved the latest round of legislation on foreign exchange and retail loans.

The new law obliges banks to refund customers for charging bid-offer spreads on FX loans, a practice ruled unclear and unfair by the Supreme Court in a judgement in June against market leader OTP, as well as for unilateral changes to interest rates on FX and forint-denominated retail debt. The bill covers all loans issued since May 2004, with the exception of those closed out more than five years ago.

Gunter Deuber
   In practice it’s likely that there will be some guidance on what rates should be used

Gunter Deuber
Banks are required to calculate their own liabilities under the legislation and have until mid-October to submit the results to the Hungarian central bank (MNB). Initial analyst estimates put the total cost to the sector in the region of €1.4 billion to €2 billion, of which the exchange rate component is expected to account for over half.

Gunter Deuber, head of CEE bond and currency research at RBI, said the banks worst affected would be those that expanded rapidly in the boom years of 2004-07, when Swiss franc and euro-denominated loans were in vogue and the forint was relatively strong. "That means mostly the foreign-owned lenders," he said.

That was borne out by banks’ response to the legislation. OTP, which has a market share by assets of more than 21%, said it stood to lose as much as Ft147 billion ($644 million). Only Ft27 billion of that, however, is expected to relate to FX spreads.

By contrast, number three lender K&H Bank – a subsidiary of Belgium’s KBC – said spread-related compensation would likely account for more than two thirds of its total estimated bill of €232 million.

Other western European banks affected include Erste, Raiffeisen and Intesa Sanpaolo.

Courts obliged

A provision in the legislation gives banks 30 days to mount a legal challenge to the ruling on "unfair" interest rate changes. The courts will then be obliged to rule on individual cases within another 30 days, leading analysts to question whether the Hungarian judicial system will be able to cope if the majority of banks decide to take legal action.

Other potential problems with the legislation include the difficulty for banks of calculating compensation on older loans for which they may lack full records of contract and rate adjustments, according to Peter Attard Montalto, emerging markets economist at Nomura. "As such," he said, " we see a risk that the MNB 'imposes’ some calculation methodology on banks where full records are not available."

Deuber agrees, noting that the provision to allow banks to calculate their own liabilities may simply have been a sop to European authorities, which have been pushing Hungarian policymakers to make a more consultative approach to the issue. "In theory, this offers some flexibility but in practice it’s likely that there will be some guidance on what rates should be used," he says.

That could come in the second part of the legislation on compensation, which a Ministry of National Economy representative confirmed to Euromoney will be completed at the autumn session of parliament.

The spokesperson also reiterated government plans for a bill that will mandate the conversion of all FX loans into forint, a process that economy minister Mihaly Varga told local media should be completed by the end of the year.

Viktor Orban has repeatedly said he would like to see at
least 50% of Hungarian banking assets in local hands

That could cost the banking sector a further €2 billion, say analysts, depending on the type of debt covered – discussions of the issue have so far focused on the €11.9 billion of outstanding FX retail loans but policymakers have recently mentioned the possibility of including borrowings by SMEs – and the exchange rates used.

In previous rounds of forced FX loan conversions in 2011 and 2012, rates as much as 30% below market levels were set by the Fidesz government. Simon Nellis, head of Ceemea banks equity research at Citi, noted that "more populist politicians" would probably like to see banks take a haircut of as much as 15% this time. "Given the pressure that would put on the currency, however, I think the central bank will be looking for a more moderate approach," he added.

The potentially heavy impact of the new laws on bank profits, already depleted by high sectoral taxes and substantial provisioning requirements, prompted renewed speculation that some western European banks could exit the Hungarian market. Montalto noted that the risk of bank exits was "substantial", particularly in view of policymakers’ stated intention of increasing local ownership of bank assets.

Indeed, the first move in that direction came at the end of July with the announcement that BayernLB had agreed to sell number four lender MKB to the Hungarian government for €55 million. The German bank also agreed to waive claims to €270 million in loans owed by MKB. The sale took markets by surprise as BayernLB had until the end of 2015 to dispose of its loss-making subsidiary under the conditions of its 2008 bailout and OTP had been tagged as the likely purchaser.

Other candidates for disposal include KBC and Raiffeisen, which earlier this year was reported to have rejected an offer of one forint for its Hungarian operation from state-controlled lender Szechenyi Bank. Prime minister Viktor Orban has repeatedly said he would like to see at least 50% of Hungarian banking assets in local hands.