Hungarian Prime Minister Viktor Orban promised “a new system” after winning elections two months ago. Bankers are finding out what he means the hard way.
Orban announced a tax on the financial industry on June 8, a week before European Union leaders agreed on plans for similar levies. Hungary, which aims to raise 200 billion forint ($880 million), may end up being the most punitive for bankers in the region based on the size of the country.
“They need money and the bank sector is an easy place,” said Pedro Fonseca, an analyst at Macquarie Research in London, who today cut his price estimate for OTP Bank Nyrt., the nation’s largest lender, by 18 percent. “This is still a big sector which is making a good deal of money and the government is going to take money from it.”
Banks in Hungary are now in talks with the government about how the payments will be set. Budapest-based OTP was downgraded also by Bank of America Merrill Lynch, UBS AG, Deutsche Bank AG and Citigroup Inc. because of the tax, which equates to about $88 for every Hungarian.
U.K. Chancellor of the Exchequer George Osborne yesterday announced plans to tax banks in his first budget since May elections. He is seeking 2 billion pounds ($2.9 billion) in annual revenue starting in 2011 with a new levy on balance sheets. That works out at about $48 per head.
Orban, 47, unveiled his plan along with a package of spending cuts to bolster market confidence after his spokesman, Peter Szijjarto, spooked markets with comments about the “grave state” of the economy. The talk sent the euro to a four-year low against the dollar.
“We are not particularly happy about the decision for the tax,” said Federico Ghizzoni, head of UniCredit SpA’s east European operations, which has about 255,000 clients in Hungary. “It’s important to be treated in a fair way. This is a quite expensive tax if you look at the number itself. This is not touching the long-term positive approach.”
Officials at OTP declined to comment on the tax because talks are continuing with the government.
Shares in the bank, which had a monopoly during four decades of communism in Hungary, are down 23 percent over the past three months compared with a drop of 2.5 percent for Warsaw-based PKO Bank Polski SA, its Polish counterpart. OTP fell 1.5 percent to 5,170 forint by 2 p.m. in Budapest.
The prime minister’s office has no information that would suggest that Orban’s 200 billion-forint target won’t be attainable this year, Szijjarto said in Budapest on June 18.
At the same time, banks in Hungary required relatively little help to weather the financial crisis of the past two years. Europe’s biggest bank rescue was Royal Bank of Scotland Group Plc, which cost the British taxpayer 45.5 billion pounds. By comparison, OTP in March repaid the last of the 400 billion-forint government loan it got in 2009.
European Union leaders vowed June 17 to push for global taxes on banks and financial transactions to clamp down on speculation. The Group of 20 nations will discuss the regulation of the industry later this week.
France, Germany and the U.K. may vary the terms of new taxes on banks depending on their economic situation, the governments said in a joint statement yesterday.
It shows that Hungary is “at a competitive advantage” by being at the fore of the proposals, Szijjarto said.
Hungary’s banks may be taxed an extra 160 billion forint this year, with the rest of the funds raised from insurance and leasing companies, analysts at Merrill Lynch estimate. Banks have combined loans and securities of 29 trillion forint, according to the Hungarian Banking Association in Budapest.
OTP, the nation’s most profitable bank, may be saddled with 25 percent of the tax burden should the levy be based on assets, to as much as 63 percent if it’s related to pretax profit, Merrill Lynch’s Cristina Marzea and Ivan Bokhmat wrote in a research note on June 14.
Vienna-based Raiffeisen International Bank-Holding AG is the foreign lender with the most at stake in Hungary, followed by Austria’s Erste Group Bank AG and KBC NV of Belgium, according to JPMorgan Chase & Co. Raiffeisen spokesman Peter Klopf said in a June 8 statement that “additional pressures on banks” can hinder developing the economy.
“We thought that the new government would be banking-sector friendly,” UBS analysts Daniele Brupbacher and Alastair Ryan wrote in a report. “This turned out to be a wrong assumption and a real surprise to us. The new government’s plan reminded people that there could be more regulation ahead.”
Hungary was the first European Union country to receive an international bailout in the 2008 financial crisis as demand dried up for the country’s debt, threatening a default.
The government, elected in April on a promise to end five years of austerity, pledged to meet a budget deficit target approved by the International Monetary Fund and the EU, which provided the bulk of the 20 billion-euro ($24 billion) lifeline.
Orban will probably use the money to plug budget holes and finance tax cuts promised in the election campaign, said Gernot Jany, an Erste Group Bank AG analyst in Vienna.
“The new government promised tax cuts,” Jany said. “This tax reduction has to be financed some way.”