Hungary’s Central Bank Assumes Control Over State-Owned MKB

Hungary’s central bank will take control of unprofitable MKB Bank to reorganize the lender that the state recently purchased from Germany’s Bayerische Landesbank.

“The Hungarian central bank has decided to offer a safety net to MKB,” meaning the central bank will guarantee liquidity for MKB for all its financial obligations, Magyar Nemzeti Bank Governor Gyorgy Matolcsy told reporters in Budapest today.

Hungary agreed to buy money-losing MKB in July for 55 million euros ($68 million) from BayernLB as part of Prime Minister Viktor Orban’s agenda to boost domestic ownership in the country’s banking industry to above 50 percent.

The government is looking to buy more banking assets after two acquisitions this year, Orban said in a Dec. 15 interview. Besides MKB, the state is also purchasing GE Capital’s Budapest Bank in a move the Cabinet has said should spur lending. It’s also in talks with Austrian lenders on boosting the state’s bank holdings.

MKB’s commercial real-estate credit portfolio has a very high bad-loan ratio, according to Matolcsy.

“Our task is to sort out this bad bank part, clean the loan portfolio and reorganize the bank,” he said.

Hungarian legislation forcing banks to refund borrowers for past lending practices deemed unfair will put further pressure on MKB whose earnings are being depleted by special bank levies. MKB’s losses amounted to 311 million euros in the first half of 2014, according to BayernLB.

Significant Cuts

The central bank, which will probably manage MKB for a maximum of one year, plans “significant” cost cuts, structural reorganization and a separation of unprofitable portfolio items, the regulator said in an e-mailed statement today.

The support for MKB may conflict with EU rules on state aid or the separation of powers between governments and central banks, according to Peter Attard Montalto, a London-based analyst at Nomura Holdings Inc.

“Interventions by central banks are allowed only when there are macro financial-stability risks – where there do not appear to be in this case,” Montalto said in an e-mailed note.

Hungary is in talks with Austrian lenders Erste Group Bank AG and Raiffeisen Bank International AG on a strategic alliance and expanding the state’s bank portfolio, Janos Lazar, the minister in charge of the Prime Minister’s Office, said in an interview in weekly Figyelo published today.

“I can absolutely confirm Minister Lazar’s comments,” Orban said at the same briefing today, without adding further details.

Difficult Market

Erste welcomed Lazar’s comments as the “first indication” that the government is acknowledging banks’ role in economic development after years of extra burdens imposed on the sector, the bank said in an e-mailed statement.

It’s unclear how much appetite the government will have for further acquisitions and whether it’s ready to improve bank earnings by cutting special taxes, said Johann Strobl, Raiffeisen’s chief risk officer.

“Hungary is a difficult market,” Strobl told journalists in Vienna. “My joy would have been larger had we sold a year ago than it would be now.”

Orban also said forint’s vulnerability is problematic for foreign-currency borrowers and due to the high ratio of foreign-currency denominated state debt. Hungary’s debt at 76 percent of economic output is still too high, Orban said.

The forint has weakened 1.8 percent this week, the second- worst performance among 14 European emerging-market currencies after the Russian ruble.

Matolcsy reiterated that the central bank has no exchange rate target and sees no pressure to intervene in the market.

“The zloty and the forint are moving in tandem, there’s no specific Hungary story,” Matolcsy said.

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