Hungary's bad bank set to start buying toxic assets

Hungary's bad bank set to start buying toxic assets
Hungary's banks are stuck with lots of bad real estate loans
By bne IntelliNews February 11, 2016

Hungary's bad bank can start purchasing distressed commercial real estate assets from banks later this month, the Magyar Nemzeti Bank announced on February 10, after the plan got the thumbs up from the EU. The central bank hopes the purchase of toxic assets should help revive bank lending to the slowing economy and give the real estate market a lift.

The European Commission gave the green light to Hungary’s plan to transfer non-performing loans off the balance sheets of lenders earlier the same day. The EU executive ruled that since the distressed asset manager MARK will purchase the assets at market price, it does not constitute state aid.

“High levels of non-performing loans in some member states are weighing on banks' balance sheets and hampering their ability to lend to businesses and households,” Commission Vice-President Valdis Dombrovskis said in a statement. “The measures planned by the Hungarian authorities and approved by the commission show that EU states are paying more attention to this issue, and demonstrate the possibility to design solutions that do not rely on state aid.”

MARK, set up with an initial budget of €1bn, will buy non-performing loans collateralised by commercial real estate assets. The launch should help lower the NPL ratio from the current 15% to just over 5% by 2017, according to the central bank’s estimates.

"The clean-up of bank portfolios may contribute to a revival in bank lending and a recovery of the real estate market from recession," the Magyar Nemzeti Bank (MNB) said.

Through the use of both carrot and stick, the central bank has been trying persuade banks to resume lending to the economy. The MNB has been the only significant driver of credit growth in recent years, with the banks wary of erratic policymaking after suffering tough times since the Fidesz government took over in 2010.

While Budapest has made overtures to mend fences recently, the banks insist there is little demand in the economy for credit. Meanwhile, many also remain weighed down by large loan portfolios on commercial property built up through the boom preceding the crisis in 2008.

Bayern LB's sale of MKB – Hungary's fourth largest bank at the time – to the state in late 2014 was largely driven by losses connected to the sector. It racked up huge losses from its high exposure to property loans, which reportedly totalled HUF574bn (€1.85bn) at the end of 2013.

The MNB said in a statement that MARK would start buying distressed assets after publishing the terms and conditions of the scheme later this month. Participation in the scheme will be voluntary for banks, but MARK will make binding offers for all eligible portfolios for sale in a purchase programme that will last for 15 months.

The central bank will drive the operation of the distressed asset manager in the initial stages, the statement notes. It plans, however, to eventually transform MARK into an entirely market-based operation in the medium term.