Tim Gosling in Prague -
Germany's BayernLB announced on July 24 that it has agreed to sell Hungarian unit MKB to the state. A senior government minister called the purchase a "first step" in its strategy to raise local bank ownership, but Budapest is likely to find other targets tougher.
"In return for the purchase price of €55m (HUF17 bn), BayernLB will waive €270m in claims due from MKB," the German bank said in a statement. The deal for Hungary's fourth-largest bank is set to close by September 2014.
While foreign banks across the sector have been feeling the pressure of rough treatment from Budapest since the ruling Fidesz took power in 2010, they insist they will stay. However, the conditions on a 2009 state bailout stipulated BayernLB must sell before the end of next year.
Given that pressure, added to the high taxes and punitive forex loans scheme being put into place by the government, the German bank is clearly happy to be heading for the exit. "The MKB sale is a huge relief for us," said CEO Johannes-Jorg Riegler. "It will put an end to a difficult chapter in our bank's history and let us focus on the future."
Markus Soder, finance minister of the Free State of Bavaria, a BayernLB shareholder, said negotiations with Budapest had been “tough but fair" and expressed relief that "there will be no outstanding sums, so the Hungarian chapter will be closed for good."
Many have suggested the government's tough line on the banking sector is motivated by Prime Minister Viktor Orban's stated ambition to raise local ownership in the sector, pointing to the way legislation and a 30% cut to regulated prices has seen valuations of utilities drop, with the state on a buying spree in that sector.
MKB is the final asset BayernLB has to divest under European Commission demands over a bailout from Bavaria. The relief it has expressed at the sale likely stems from the difficulties other banks met at the turn of the year as they contemplated giving up the ghost in Hungary. Austria's Raiffeisen International Bank was offered €1 by a tiny Hungarian bank - owned by the state and head of the state debt agency - for its local unit earlier this year. No other bid came in, and foreign owners rushed to reiterate their commitment to the market.
Potential suitors are put off by the huge threats from government policy. The banks are facing a bill estimated at up to HUF900bn from the latest legislation on forex loans, with the possibility of even larger losses from a conversion of all such debt into forints in the near future. The banks, meanwhile, have a combined loan portfolio of around €10bn, according to the central bank; much of it not performing due to the forex loans issue.
OTP, Hungary's largest lender and locally owned, was linked to a potential purchase of MKB in early 2013, and reports in April suggested it could yet offer MKB an escape route. However, even OTP has complained loudly about the hits it has taken from the government, which has damaged its previously close relations with the ruling Fidesz party and made it wary of acquisitions.
None of these difficulties has deterred Budapest from consistently predicting an exodus, however. Martin Nagy, a senior official from the National Bank of Hungary, reiterated the claim yet again on July 24, claiming to Reuters he expects three or four banks will leave Hungary soon, although he declined to name names.
Meanwhile, Budapest was clearly delighted to have finally chased a foreign bank out. The government aims to strengthen lending and contribute to a more competitive banking system with the purchase, Economy Minister Mihaly Varga said in an interview posted on the government's website, according to MTI.
Varga called the deal the first important step in the sector's consolidation. He added that the government aims to make MKB strong and profitable. "Our hope is that MKB regains its strong, competitive position within one or two years and thus it can be sold on the market," Varga said, according to Reuters.
That will likely take considerable work; MKB is in very poor shape and has been dragging on BayernLB. It lost €409m last year, following a €308m loss in 2012, which forced the German parent into a capital injection early this year. BayernLB said in late March that it would make use of Bavarian state guarantees to cap the financial damage from a €7bn loss-making portfolio of asset backed securities.
Struggling to rid itself of those toxic assets, the German bank had announced a plan last year to split the Hungarian unit in order to speed up a sale. However, it then cancelled the move, deciding it would cost more than a gradual downsizing of assets. MKB had assets of €6.6bn at the end of 2013, and a market share of about 10% for retail and corporate lending in Hungary.
It's perhaps little coincidence then that Nagy offered an update on Hungary's plans to set up its own bad bank. The central bank hopes to have the toxic asset deposit ready by September or October, he told Reuters. It will buy toxic commercial property loans and foreclosed real estate from banks to clean up their balance sheets.
MKB was one of the biggest players in local real estate project financing and its stock of large corporate property loans amounted to gross HUF574bn at the end of 2013, according to Portfolio.hu. The bank announced on July 21 that it has set aside HUF5.1bn for the first half of 2014 to cover refunds to customers under the first phase of the forex relief scheme.
"By selling MKB, BayernLB will be able to free up enormous portions of capital it has been using to cover risk," the German bank said in its statement. "The transaction will therefore pull BayernLB’s hard core capital ratio down only by a negligible 0.3 percentage points."
"We got away with a black eye," Soder told Reuters.
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