Hungarian Banks Brace for Losses in FX Loan Case Ruling

Hungary’s top court will rule tomorrow on the fairness of banks’ exchange-rate margins for foreign-currency mortgages that may be used as the basis of a judgment affecting about $15 billion of the loans.

The court is considering a complaint from a borrower who says Hungary’s largest lender, OTP Bank Nyrt., made excessive margins by using differing exchange rates for the amount it charged him each month for his Swiss franc-denominated loan and its calculation of the outstanding principle. A ruling against the bank may cost the industry as much as 50 billion forint ($225 million), said Akos Kuti, a Budapest-based analyst at Equilor Befektetesi Zrt.

“The consensus in the markets is that banks will have to repay money to borrowers because of the exchange-rate margins they used,” Kuti said by phone.

Prime Minister Viktor Orban, who was re-elected in April to another four-year term, has pledged to phase out household foreign-currency loans once the Supreme Court hands down decisions on the fairness of exchange-rate margins and on the practice of unilateral interest-rate increases by lenders.

The court, known as the Kuria, will start reading out a verdict at 10 a.m. tomorrow in Budapest, it said in invitations to journalists. The ruling follows a verdict by the European Union’s top court in April that national courts can replace unfair contract clauses.

Repaying Borrowers

OTP competes mostly with foreign lenders in Hungary including Erste Group Bank AG, Raiffeisen Bank International AG, UniCredit SpA, Bayerische Landesbank, Intesa SanPaolo SpA and KBC Groep NV.

The plaintiff in the case says OTP calculated his monthly installments in forint based on the rate at which the bank sold francs, while it valued the principle at the rate at which it bought francs.

The Supreme Court will follow the ruling with guidelines on how to restore the fairness of contracts, if necessary, involving different exchange-rate margins and unilateral interest-rate increases. The government has pledged to unveil its measures in the autumn, aiming to definitively phase out such loans.

The supreme court finding unilateral interest-rate increases unfair would “hurt banks much more” than any repayments owing to the exchange-rate margins lenders used, Kuti said.

Potentially Explosive

“The ruling on banks’ unilateral changes to interest rates may be the potentially explosive issue,” Phoenix Kalen, a London-based strategist at Societe Generale SA, said in an e-mail today. “An ’unfair’ verdict could entail banks having to implement retroactive changes in vast numbers of both outstanding as well as expired contracts.”

Lenders may have to repay “several billion forint” to borrowers following the rulings, Mihaly Patai, head of the Budapest-based Banking Association and chief executive officer of UniCredit’s Hungarian unit said in an interview with Napi Gazdasag May 19.

The downside for banks may be limited by both the government’s aim and previous rulings. The government has said any intervention shouldn’t make foreign-currency borrowers better off than forint borrowers. The measures also shouldn’t threaten banking stability, Economy Minister Mihaly Varga said in a public radio interview today.

Constitutional Court

Any retroactive change to contract terms must “take into account the interests of both parties as much as possible,” the Constitutional Court ruled on March 17.

Foreign-currency mortgages and home-equity loans were at $15 billion at the end of March, making up 64 percent of mortgage-related loans, according to a Bloomberg calculation based on central bank data. The loans became ubiquitous in Hungary last decade as borrowers sought to take advantage of lower interest rates on those compared with forint loans.

Repayments and defaults soared after the global financial crisis began in 2008, during which Hungary was the first European Union member to obtain a bailout. The crisis led to a plunge in the forint and an appreciation in the franc as investors found a safe haven in the Alpine currency during the turmoil.

Orban’s government has sought to make banks bear responsibility for the spread of foreign-currency loans and has imposed Europe’s highest bank levy. In 2011, he also forced banks to swallow $1.7 billion in losses on the early repayment of some mortgages at below-market exchange rates. The cabinet also set up a program allowing the temporary repayment of foreign-currency loans at fixed exchange rates.

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