Hungary Top Court Rules OTP Foreign-Currency Mortgage Valid

Hungary’s top court ruled in favor of OTP Bank Nyrt., the country’s biggest lender, in a case related to foreign-currency mortgages, reducing the risk of similar lawsuits.

The court, known as Kuria, overturned a previous ruling voiding a disputed contract while imposing a retroactive limit on the exchange-rate margin the bank can charge, Judge Ursula Vezekenyi said today in Budapest. The verdict can’t be appealed.

The ruling may be a test case for 3.48 trillion forint ($15.4 billion) of foreign-currency mortgages held by Hungarian households as of March 31. Karoly Szasz, the head of the country’s financial regulator, in a letter to the Kuria published June 20 said the blanket invalidation of foreign-currency loan contracts would risk triggering bank runs and a potential state default.

“The court decided that it serves the interests of the parties if it rules the contract valid retroactively while modifying the contract’s conditions,” Gyorgy Wellmann, head of the civil department at Kuria said at a news conference after the reading of the verdict.

OTP rose 4 percent to 4,784 forint as of 3:40 p.m. in Budapest, its biggest jump in a month. The forint strengthened 0.3 percent to 293.52 per euro.

As part of the ruling, the exchange-rate margin that OTP can charge was retroactively limited to plus or minus 0.5 percent versus the bank’s mid rate, Wellmann said, adding that the verdict allows the borrower to seek “some minimal” repayment from the bank.

Franc Demand

Hungarian home-buyers borrowed mainly in Swiss francs for years to take advantage of lower interest rates until a drop in the forint in the wake of Lehman Brothers Holdings Inc.’s 2008 collapse sent repayments soaring and stoked bad debt.

Prime Minister Viktor Orban essentially banned foreign-currency mortgage lending in 2010 and temporarily allowed the early repayment of such loans at below-market rates, forcing lenders to swallow losses. That, along with Europe’s highest bank levy made the industry unprofitable, sank lending, and cost Hungary its investment-grade credit rating.

The European Union started an infringement procedure against Hungary last month saying the restriction of foreign-currency loans violates the free flow of capital.

Bank Losses

Hungarian banks may face their third consecutive year of losses as a result of “punitive” bank taxes, “high credit risks, weak economic activity,” Fitch Ratings said yesterday.

“This could ultimately lead to downward revisions of parent support-driven ratings for the banks,” Fitch said.

The government, in agreement with banks, introduced programs to help borrowers last year. Under one, which ended in September, banks converted non-performing foreign-currency loans into forint and wrote down a quarter of the debt in exchange for deducting some of their losses from the bank levy.

In a separate initiative, foreign-currency mortgage holders can join a government plan to help reduce repayments. The program allows debtors to make repayments at a fixed forint rate for as long as five years, with the difference between that rate and the market rate accumulating in a separate bank account. Some 150,000 borrowers, or 33 percent of those eligible, have signed up to the program, ruling party parliamentary leader Antal Rogan said May 24.

The amount of overdue foreign-currency mortgages stood at 1.51 trillion forint as of March 31, according to the regulator. OTP Bank Nyrt., Hungary’s largest lender, competes with foreign banks including KBC Groep NV, Bayerische Landesbank, Erste Group Bank AG, Intesa SanPaolo SpA, Raiffeisen Bank International AG and UniCredit SpA.

Commercial banks are in talks with the Cabinet to design a “market-based” solution for mortgage holders who are more than 90 days overdue with repayments, Daniel Gyuris, deputy head of the Hungarian Banking Association, said March 19.

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