|Friends no longer? OTPs CEO Sandor Csanyi with PM Victor Orban in 2010|
Hungarys ruling party, Fidesz, which faces an election next spring, apparently wants to see more competition in the banking sector to spur lending and to give relief to voters that have outstanding foreign-currency mortgages totalling over $8 billion, roughly 6% of GDP.
Bank-bashing has been a favoured tool, as the government tries to deflect criticisms of its unorthodox policy mix. But antagonism between banks and the cabinet has risen, and the head of the countrys largest lender hitherto considered an ally appears to have come into the governments sights.
Fidesz is definitely now looking at Csanyi as an enemy, mainly as it cannot control him, says a prominent figure in Hungarian finance.
In late July, Csanyi spooked the market by selling the bulk of his personal OTP share portfolio worth around Ft10 billion ($43.6 million). A week later, he went on to warn that the governments mortgage plans might increase distrust and reduce banks ability to attract capital.
Csanyi has said the sale was pre-planned, to finance his agricultural ventures, although the governments mortgage policies influenced the price. Investors reacted badly: after the sale, the banks share price shed around 15% and is yet to recover fully despite largely positive second-quarter results.
Investors were willing to accept that the government would be doing something with the foreign-currency loan issue, says Simon Nellis, managing director, CEEMEA bank stocks, at Citi. But to see an insider sell aggressively was a huge worry.
Attacks on Csanyi have since come from prime minister Viktor Orbans chief of staff, Janos Lazar, who likened the CEO to an octopus whose economic influence touches every sphere of Hungarian life, adding that an individual wielding such power in a democracy poses a serious risk.
In August, Lazar called Csanyi the biggest usurer in the country. Csanyi is seeking recourse in the courts, as usury is a criminal offence in Hungary. OTP Bank says: Mr Csanyi does not and in the future will not respond to any personal comment from Mr Lazar. The chairman and CEO of OTP Bank is definitely not planning to step down.
Orban told a conference in March that the government was targeting at least 50% of the Hungarian banking system to be in Hungarian ownership, compared with a much lower level today. As such, the state plans to spend Ft100 billion on integrating savings cooperatives with its new 38.5% stake in a co-op umbrella institution, Takarekbank.
With the involvement of the Post Office and the Hungarian Electricity Group, the plan is to create an institution with the largest number of branches in the country a status that OTP (one of the few local banks not controlled by foreign groups such as Austrias Erste and Raiffeisen) enjoys today.
The intention is to create more competition and to reduce OTPs dominance, says Kornél Sarkadi-Szabó, chief strategy officer at Hungaria Ertekpapir, a Budapest brokerage. I would prefer to see regulatory steps aimed at increasing competition rather than the creation of another state-owned entity.
He adds: There are a few exceptions, but across the region the state has not been the most efficient or effective owner in this sector. Nellis says the government may get what they want, but at the expense of contraction in the banking sector, which is pretty damaging for the economy.
OTP says the new bank could, in the near term, mean an opportunity to acquire new clients: Restructuring [the savings co-ops] might be a long and difficult process, and as a result there will not be new sales points that would challenge OTP Bank or any other commercial bank with an extended branch network.
Meanwhile, plans for mortgage relief as Euromoney went to press included an up-front conversion to forints or a staggered conversion and interest-rate cap over five years or longer. The central bank also suggested that the existing scheme be tweaked, with principal payments reduced or waived and grace periods extended.
My worst-case scenario is that they would force banks to [immediately] convert loans at a favourable exchange rate, say Ft180 to the Swiss franc, says Nellis. That would have an around Ft110 billion impact on OTPs results, wiping out half its profits. He adds that as a result of the scheme other, less profitable banks might face net losses.
In its latest revision, Citi lowered its target price for OTP and shaved 21% off its 2013 EPS forecast, citing weak Russian results, asset-quality woes and concerns about FX loans. Ive not factored the FX scheme in forecasts, says Nellis. Weve known for a while that something bad is coming, its just the magnitude that is uncertain. Theres a chance that some of the cost will be shared. The government recognizes that without a properly functioning financial system its hard to generate growth.