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Bayerische Landesbank on May 17 denied speculation that it is to be the next foreign investor to leave the Hungarian banking sector via a sale of its local subsidiary MKB Bank to the country's largest bank OTP.

BayernLB has to offload its Hungarian unit as part of a deal with the European Commission over a €10bn bailout it received from the State of Bavaria in 2009, with the final deadline for the divestment 2016. However, following comments last week from OTP CEO Sandor Csanyi that his bank is in talks over the acquisition of two foreign-owned banks, speculation has been growing that one of those is MKB Bank.

"Given the strong brand name of MKB Bank and the recent successful restructuring efforts, there are a number of interested parties who have contacted BayernLB and expressed interest. BayernLB has neither given exclusivity to any interested party, nor has it entered into advanced negotiations," the bank told Reuters. "The current strategic direction followed by MKB Bank will further increase the bank's core value."

In his comments last week, Csanyi also warned against further pressure on the sector from the government, which has forced the banks into huge losses via taxation and schemes to reduce household foreign currency debt, suggesting that economic recovery will be held back if too many foreign banks decide to leave. "There are visible signs that some banks want to leave Hungary and these are not small banks," he said.

Dominated by Eurozone groups, Hungary's banking sector has been hit hard since the Fidesz government came to power in 2010. High windfall taxes, one-off schemes to reduce foreign-currency debt amongst households and a new financial transaction tax drove the sector to its first loss in 13 years in 2011, and that continued last year. Although they've pulled back heavily on investment and lending, the foreign banks have insisted throughout that they remain committed to the Hungarian market. However, that determination has started to crack.

The CEO of Italy's largest retail bank, Intesa Sanpaolo, said in March that it may cut its investment in Hungary after losses in the country pushed the group into the red in the last quarter. "Hungary as you know used to be very good for financial services, it has now turned into a sort of nightmare," Enrico Cucchiani told analysts in a conference call.

Last month saw the first exit, when Italy's Banco Popolare agreed to sell its small subsidiary to Hungary's MagNet Bank for just €500,000.

Despite his warning, Csanyi is clearly happy to take advantage of the situation, saying the supports the call of Prime Minister Viktor Orban earlier this year for a higher ratio of Hungarian ownership in the sector, "because locally-owned banks are more deeply connected to the country and are not dependent of a foreign parent's decisions." The government is trying to find ways to push the banks - all of the major ones outside OTP being foreign owned - to start lending again, despite growing bad loans and the risks associated with Budapest's unorthodox policymaking.

Other potential targets for OTP include CIB, MKB and Raiffeisen - who have reported huge losses recently - while the local units of BNP Paribas and Deutsche Bank make a small contribution to the wider group, notes portfolio.hu. Axa, Commerzbank and Banco Primus have all indicated that they are ready to leave Hungary.