Tim Gosling in Prague -

Hungary's banks are braced for a big hit, following the government's submission of a bill to parliament on June 27 that demands lenders compensate borrowers of foreign currency loans for "unfair" charging over recent years. The central bank warned the following day the banks may have to shell out close to €3bn.

The legislation introduced to the government-dominated lower house is a rapid response to recent legal rulings, and is but the first step of a populist package that the ruling Fidesz party has been threatening for around a year. A three-month programme in late 2011 allowing loans to be paid off early at below market exchange rates reportedly cost the banks over €1bn. Meanwhile, over the past 12 months, the levels of non-performing loans (NPL) have mounted, as borrowers hold off paying debt while they await the relief scheme. 

The government has been pushing over the last year for a legal green light to implement a wider scheme to force banks to offer relief to those who took out foreign currency loans, mostly in Swiss francs, in the boom years before the crisis hit in 2008. These borrowers have been hit hard by the fall of the forint since. However, Hungary's top courts have consistently failed to offer a clear framework, which means the thousands of individual cases are becoming tied up in the legal system.

Out of patience

Prime Minister Viktor Orban and his administration now appear to have run out of patience, and have seized upon a ruling from the Supreme Court in early June that said the banks' practice of using a spread in forex rates - ie. lending at one rate and basing repayment on another - was unfair. The justice ministry bill says lenders must reimburse borrowers any gains made through the practice.

It also stops the use of spreads in future, as well as banning unilateral interest and fee rises in loan contracts. That applies to both forint-denominated and forex loans, unless banks challenge the legislation by September. The government has said it plans a second bill when parliament reconvenes - which is likely to act upon pledges from senior officials to wipe out the use of all forex loans by Christmas.

That represents the biggest threat hanging over the banks. The fear is that the government will force them to convert outstanding loans at unfavourable rates, and at a rapid pace. Like the first stage legislation, it is the subject of much debate between the government and the Hungarian Banking Association. The lobby group last week assured the government it will comply with the new legislation, but insisted at the same time policymakers should work out a fair burden-sharing programme, and take into account the sector's "load-bearing capacity".

However, Budapest appears ready to play hard ball. Economy Minister Mihaly Varga warned last week that the government is ready to face any legal challenge from the banks. Meanwhile, although analysts have generally agreed the first phase legislation is likely to hit the banks for HUF400-600bn, the Fidesz-associated National Bank of Hungary (NBH) looked to raise the bar on June 28. 

NBH Deputy Governor Adam Balog told local media that the bill could come in as high as HUF900bn (€2.9bn), according to Reuters. He added however that none of the country's banks will need to increase capital significantly. Analysts at Erste put the figure at HUF500bn-600bn, and suggest "overall, according to the present information, the package under formation could be significantly higher than the 'final repayment' package was in 2011-12." 

Local produce

In the background, the government is pushing for a greater share of locally-owned banks. With the forex loans schemes coming on top of high sectoral taxes and tough regulatory action, the majority of the banks - the major ones, apart from Hungarian OTP, owned by Eurozone groups - have seen heavy losses since Orban came to office in 2010. 

That appears to be part of the plan, intended to persuade foreign owners to quit the country and lower valuations. Similar pressure has been seen in the energy sector, in which MVM - anointed "state-champion" by Orban - is busy buying out foreign investors. However, Budapest is unable to leverage legislation on "strategic" companies to force the banks to sell as it has done with the utilities. 

While some foreign banks looked ready to call it quits in late 2013, reports suggested local suitors essentially wanted them to walk away empty-handed despite holding huge loan portfolios and other assets reported to total around €10bn. 

In November, Raiffeisen Bank International (RBI) admitted it was studying offers for its Hungarian unit. However, it received just one - a €1 bid from the tiny Szechenyi Kereskedelmi Bank, which is majority owned by the CEO of the Government Debt Management Agency with the state holding the remaining 49%. RBI recapitalised the subsidiary at the end of 2013.  

Yet the NBH remains keen to predict an exodus of foreign banks, and Balog didn't pass up the opportunity on June 28. He insisted the measures in the submitted bill will help banks get rid of toxic assets without hurting the stability of the sector, but may make some foreign bank owners rethink if they want to stay in Hungary. 

"This situation will keep the markets on edge for some time," admit analysts at Commerzbank. "[C]oncern surrounding the fairness of upcoming legislation has escalated since PM Orban recently reiterated that the government … plans to drive the sector towards less than 50% foreign-ownership."

Yet, since the turn of the year, the banks have again lined up to reiterate their commitment to the market. Without realistic acquisition offers they have little choice. While Budapest may want to turn the screw, it must tread a little warily. The heavy pressure on the banks has seen them pull their heads in, and the central bank's "funding for Growth" schme is the only realistic source of credit for many. While Hungary has seen healthy recovery in the first half of 2014, the expectation is that it will struggle to keep up the pace mid-term, as credit remains tight and investors continue to baulk at government policymaking.