Erste Optimistic as Hungary Cabinet Discusses FX Mortgages

Erste Group Bank AG, which owns Hungary’s second-largest lender, is optimistic about a deal with the country’s government on phasing out billions of dollars of foreign-currency mortgages.

“We are quite confident that we can find a negotiated, reasonable solution for this issue in the next four weeks,” Andreas Treichl, chief executive officer of the Vienna-based bank, said in a conference call today. He added that regulatory risk in Hungary changes “on a weekly basis.”

Hungarians have struggled with mortgages borrowed in foreign currencies since the forint plunged during the economic crisis. Prime Minister Viktor Orban, facing 2014 elections, has promised to phase them out and lower monthly payments. Economy Minister Mihaly Varga rejected proposals this week from lenders on the topic and said the government would unveil its own plan in early November. The cabinet is scheduled to discuss it today.

OTP Bank Nyrt., Hungary’s largest lender, rose 0.8 percent to 4,476 forint by 2:05 p.m. in Budapest. The lender has tumbled 11 percent since the government said on July 16 it’s considering a new debt-relief plan. Banks lost $1.7 billion during a 2011 program and reacted by pulling out capital equal to 23 percent of Hungary’s gross domestic product and cutting new lending.

Burden Sharing

Borrowers, the government and banks should share the cost of any mortgage plan while measures should avoid having a “shock-effect,” OTP Deputy Chief Executive Officer Antal Kovacs said in an interview in Budapest today.

OTP competes with mostly foreign-owned banks including Erste, UniCredit SpA, KBC Groep NV, Intesa SanPaolo SpA and Raiffeisen Bank International AG.

Hungarians held 1.81 trillion forint ($8.5 billion) in the mostly Swiss-franc-denominated mortgages at the end of June and another 1.68 trillion forint in foreign-currency home-equity loans, which can be used for purchases other than homes, according to central bank data.

Borrowers’ monthly installments soared after the forint plunged against the franc -- about two-thirds of mortgages are in the Swiss currency -- during the crisis. A fifth of these loans is now non-performing, according to central bank data. The loans account for 13 percent of Hungary’s GDP, according European Bank for Reconstruction and Development data.

Competing Proposals

Hungarian lenders proposed the government expand a program allowing borrowers to temporarily repay mortgages at fixed, below-market exchange rates for five years, with the government and banks splitting the interest-rate costs, Origo news website reported yesterday, citing an unnamed person with knowledge of the plan. Banks also offered to forgive part of the capital portion above the fixed exchange rate, Origo said. Details of the banks’ proposals haven’t been made public.

The government plans to phase out foreign-currency mortgages over the next three-to-five years and cut borrowers’ monthly payments by as much as 20 percent, Varga said on Oct. 25, without revealing details of his plan.

“The government’s proposal will likely incorporate a lot more of lenders’ proposals than either side will be willing to admit,” Otilia Dhand, an analyst at London-based Teneo Intelligence, said in an e-mail. The government’s aim “is to address the long-term problem of foreign-currency lending as much as to boost its own popularity ahead of the 2014 general elections.”