Hungary Banks Soar as Orban Agrees to Share FX-Loan Losses

Banks active in Hungary soared after the government agreed to share the costs for easing foreign currency borrowers’ debt burden by as much as 900 billion forint ($3.9 billion) in the next five years.

The Hungarian government and banks including OTP Bank (OTP) Nyrt. and units of Erste Group Bank AG (EBS) and KBC Groep NV (KBC) will share costs for forgiving some loans and taking on currency risks for others in the next five years, Economy Minister Gyorgy Matolcsy told reporters in Budapest today. Banks will take over losses of as much as 600 billion forint, while the government will carry 300 billion forint, he said.

Prime Minister Viktor Orban’s government also promised to cut the nation’s bank tax from the highest rate in Europe, and to consult the banks in the future before taking further action, according to the text of the agreement.

Raiffeisen Bank International AG (RBI), Erste and Intesa Sanpaolo SpA (ISP), were among the 10 top performers in the in the 46-member Bloomberg Europe Banks and Financial Services Index. (BEBANKS) OTP, Hungary’s biggest lender, climbed the most this month, rising 6.2 percent in Budapest. Raiffeisen advanced 5.3 percent in Vienna. The forint expanded by 1.5 percent against the euro.

“What is key is that for the first time in a while the two sides found an agreement,” Murat Toprak, a London-based strategist at HSBC Holdings Plc (HSBA), said in a telephone interview. The deal is “overall positive for Hungary and the forint in particular” because it “increases the chance” to secure an agreement with the International Monetary Fund, he said.

Franc Loans

Hungarians have borrowed in currencies including Swiss francs, euros and Japanese yen, mostly between 2003 and 2008, to avoid high interest rates for debt denominated in forint. The forint’s decline since 2008 helped push debt to about 4.9 trillion forint and has raised installments, principals and delinquency rates.

Orban’s government in September decided to force banks to swallow losses on such loans by allowing borrowers to repay at discounted exchange rates as long as they redeem them in full by February. That repayment plan, which the banks have said may cost them as much as 200 billion forint, has prompted them to sue the government in Hungary’s Constitutional Court and urged the European Union to take action against the government.

Talks to find a joint solution with the government were announced Nov. 3, two weeks before Orban also announced he plans to engage with the IMF again. Today’s agreement was signed by all major banks in the country, also including UniCredit SpA (UCG), Bayerische Landesbank, and FHB Bank Nyrt.

Debt Relief

Under this new deal, delinquent borrowers who convert their loans into forint until May will be forgiven 25 percent of the debt. Non-delinquent borrowers can for the next five years limit installments based on a discounted exchange rate of 180 forint per franc, with the government and banks sharing the interest payments on top of that. If the forint declines to 270 forint per franc, the government will carry the entire interest. Today one franc was worth 247 forint.

“In general, the pact is favorable for banks as the bank tax can partly be reduced by the losses related to the early repayment scheme in 2011 and to the non-performing loan conversion to forint loans in 2012,” Gabor Kemeny, an analyst at Concorde in Budapest, wrote in a note to customers today.

As much as 30 percent of the banks’ losses from Orban’s repayment plan and from the debt forgiveness for delinquent borrowers will be deductible from Hungary’s banking tax of 0.5 percent of assets. The levy raised 120 billion forint from the entire banking industry last year. The government also pledged to cut this tax by half from 2013, and to limit it by 2014 to the bank tax rate prevalent in the EU.

Hungary’s central bank “shall provide instruments” to allow the banks to close foreign exchange positions opened while converting loans, according to the agreement. The Magyar Nemzeti Bank said it can only provide foreign exchange reserves for the conversion if the government replenishes the reserves. The IMF- led financial aid package Hungary is seeking may be a potential source for this, the central bank said.

To contact the reporters on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net; Boris Groendahl in Vienna at bgroendahl@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; Frank Connelly at fconnelly@bloomberg.net

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