Hungary Amends Bank Tax Law as Government Offers Lending Reward

  • Proposed changes bring legislation in line with EU regulations
  • Central bank has warned of risk of creditless recovery

Hungary presented plans to cut a special bank levy, offering additional rewards for lenders that boost credit and attempting to bring the legislation in line with European Union demands.

The bill sets out a reduced tax rate of 0.31 percent in 2016 from the current 0.53 percent for bank assets exceeding 50 billion forint ($170 million), with an upper limit on payments, according to the draft posted on parliament’s website. An extra cap is pledged for later years for banks who increase lending.

The legislation makes good on Prime Minister Viktor Orban’s pledge in February to lower Europe’s highest bank tax and usher in more investor-friendly policies after years of battles with the financial industry. The central bank warned this week of the risks of declining corporate lending, while Fitch Ratings affirmed Hungary’s junk credit rating Nov. 20 citing the need for a "stable and predictable framework for the banking sector.”

"The message conveyed by the amendment is certainly positive as earlier rhetoric suggested punitive measures may be imposed to increase lending," Hai Than Le Phuong, an analyst at Budapest-based brokerage Concorde Zrt. said by phone.

Fair Value

The tax rate will drop to 0.21 percent in 2017 and 2018, according to the draft. The total 2016 tax payout per bank will be capped at 45 percent of this year’s level and at the 2016 level in 2017 and 2018, with an additional limit at 30 percent of the 2015 level for those who increase lending.

OTP Bank Nyrt., Hungary’s largest lender, could see its tax payout drop to 13 billion forint in 2016 from 28.7 billion forint this year, compared with earlier calculations of as much as 18 billion forint, Le Phuong said. The expected 5 billion forint decrease in OTP’s tax payout next year equals a 20 forint per share increase in the bank’s fair value, according to Andras Nagy, analyst at Erste Investment, a local unit of Erste Group Bank AG.

OTP shares declined 0.3 percent to 6,011 forint by 11:26 a.m. in Budapest as the trading volume amounted to 28 percent of the three-month full-day average. The stock has rallied 58 percent this year, outperforming the 41 percent advance of the benchmark BUX stock index.

The amendment cancels tax breaks compensating lenders for losses suffered in Ukraine after the EU said the measure was selective and breached the bloc’s rules.

Before it's here, it's on the Bloomberg Terminal.