OTP Sees Maximum $644 Million Hungary-Loan Refund Cost

OTP Bank Nyrt., Hungary’s largest lender, may incur a cost of as much as 147 billion forint ($644 million) based on a new law approved today that forces lenders to refund borrowers on charges deemed unfair.

The charge from unilateral contract changes on consumer loans may total as much as 120 billion forint while the cost of refunding borrowers for the exchange-rate margins on foreign-currency loans may total another 27 billion forint, the lender said in a statement to the Budapest Stock Exchange today.

Parliament approved a law today voiding exchange-rate margins on foreign-currency loans and declaring unfair unilateral changes to consumer credit going back as far as 2004, except where banks prove otherwise. The move is part of Prime Minister Viktor Orban’s efforts to punish banks for having extended the loans over the past decade, which soured after the forint’s drop in the 2008 debt crisis led to soaring repayments and delinquency rates.

OTP shares dropped as much as 4.1 percent today and closed 1.7 percent lower at 4,239 forint, pushing this week’s loss to 4.1 percent. Erste Group Bank AG, which owns the second-largest Hungarian bank, plunged 16 percent today after the lender warned it will post a loss this year as a result of higher bad-loan provisions at its Hungarian and Romanian units.

OTP said it will initiate a legal challenge to prove in court that its unilateral contract changes were fair while it is also considering “the possibility of remedy provided by the law” to prove the same for its exchange-rate margins.

Earnings Effect

The total negative pre-tax effect of the refunds for exchange-rate margins may be 25 billion forint after already making some provisions for this, OTP said, adding that it will book the charge in the second quarter.

“The Group’s liquidity and ability to lend will remain intact even in the long term,” OTP said in its statement. The bank’s Common Equity Tier 1 ratio would drop to 14.7 percent from 16.4 percent based on its worst-case estimate, OTP said.

The financial industry faces a loss of as much as $4 billion as a result of the law, according to the central bank. That doesn’t include the cost of converting as much as $16 billion in foreign-currency loans into forint, which the government plans to do later this year to rid the country of mostly Swiss franc-denominated mortgages.