bne IntelliNews -

The Hungarian government is set to merge the two banks it bought this year to create the country’s second-biggest lender, local media reported on December 16, quoting unnamed sources.

According to Vilaggazdasag, the merger of Budapest Bank and MKB is a done deal. The merged entity would have a market share of about 12% in both loans and deposits, placing it second in Hungary.

That would make the country's top two banks domestically-owned, with OTP the market leader. Prime Minister Viktor Orban's government has said it wants to see as much as 70% of the sector in Hungarian hands.

In October the state closed a deal to acquire MKB, the country’s fourth largest bank, from Germany's BayernLB. Earlier this month it signed a preliminary agreement to buy Budapest Bank from GE Capital.

When announcing the deal for Budapest Bank in early December, Economy Minister Mihaly Varga said that a decision on a potential merger with MKB will be taken later. The government claims that it aims to sell the two banks within three years.

The merger is expected to be announced after the government completes the acquisition of Budapest Bank, according to the latest reports. A final contract is expected to be signed on January 16 at the latest, and the deal should close by mid-2015. 

Orban’s government claims that having more banks in local hands should spur lending and in turn support economic growth. The central bank is currently the main source of credit in the economy via its "Funding for Growth" scheme.

Orban announced in mid-December that the government is in talks with banks to boost lending. The PM says he has offered to lower the high tax burden Budapest has placed on the sector in exchange for increased lending. Orban suggests the levy is set to fall in 2016 or 2017.

Lenders in Hungary have been under immense pressure since Orban’s Fidesz party came to power in 2010. In addition to paying Europe’s highest bank tax, the introduction of a financial transaction tax and a relief scheme for mortgage borrowers, the government is now forcing banks to compensate borrowers for credit practices deemed unfair, leading to huge losses.

Banks are also expected to incur losses as a result of newly-adopted legislation forcing them to convert $14bn of foreign-currency mortgage loans to forints.