Suspicion is rising that the Magyar Nemzeti Bank (MNB) is the real purchaser of MKB, the former fourth-largest bank in Hungary that was sold by the state in late March.

The body of circumstantial evidence that foundations owned by the central bank - which is headed by a close ally of Prime Minister Viktor Orban - are behind the private equity funds that agreed a deal to buy MKB is growing, Vilaggazdasag reported on April 4. The case is a swift and frank test of the MNB's transparency, after the Constitutional Court ruled on March 31 that it must allow public scrutiny of all cash under its stewardship.

The MNB, which has overseen MKB since it was bought by the state in 2014, has repeatedly rejected claims that the bank was bought by the central bank itself, using equity funds as a cover. However, with the names of the investors behind the funds - both of which were launched just weeks ahead of the deal - remaining unknown, speculation about the central bank's involvement is growing.

Wagging tongues

Little is known about the future owners of MKB. The MNB confirmed on March 31 that the bank was sold to a consortium for HUF37bn (€117.8mn). Hungarian pension fund Pannonia will take 10%, but it's the role of two private equity funds - Hungarian Metis and Luxembourg-based Blue Robin Investments SCA, that will each buy a 45% stake - that has tongues wagging.

Both were launched only in February, and will each pay HUF16.65bn for their stakes in MKB. Adam Balog, the present CEO of MKB and former deputy governor of the MNB, said on March 30 that Blue Robin Investments SCA is backed by Indian and Chinese investors. Neither did he discuss the make up of Metis, which was created by private equity fund manager Minerva with HUF31bn of registered capital.

However, Balog also serves as president of the board at one of the MNB's foundations, Pallas Athene Domus Scientiae (PADS). It is this "non-profit" organisation that is attracting the most attention from the Hungarian press. 

PADS founded a company called Ferida in October, with capital of HUF2bn. However, three other MNB foundations topped that up by a further HUF20bn in late February.

According to weekly Magyar Narancs, documents at the Court Registry explained that the reason for the capital increase was that the board has been instructed to "conduct a legal and numerical examination in connection with foreign investment opportunities ... [but that] ... the financial situation of the company has not made it possible to purchase shares."

There the trail ends. Many Hungarian media and analysts conclude that Ferida is in fact behind Blue Robin Investments or Metis.

Secrecy

If the speculation is true, it is not clear why the central bank would go to such lengths to keep an acquisition of MKB secret. However, it could have several reasons, according to analysts.

“The MNB would have the chance to use MKB as its own bank on the market without disclosing the identity of its real owners," Miklos Ligeti, legal director at Transparency International Hungary, told bne Intellinews. "That could be good for many purposes: giving loans for prestige projects or for friends for instance."

At the same time, the MNB would likely be keen to avoid close scrutiny should it actually be the buyer, both home and abroad. The European Commission would likely consider it a conflict of interest for the MNB foundations to acquire a stake directly in the bank, suggests portfolio.hu.

However, keeping an MNB acquisition secret would not be easy, especially given the recent ruling by the Constitution Court. In response to a government bill, passed by parliament on March 1, which sought to remove the MNB's foundations finances from public oversight, Hungary's President Ader made a rare move against his ally Orban to block the legislation.

In its ruling, the court stated that the MNB exercises public functions, its foundations and companies exclusively manage public funds, and information on the use of that money should be available to the public.

The MNB stated clearly to portfolio.hu on April 4 that none of its foundations have invested, or plans to invest, in any of the private equity funds that bought stakes in MKB. However, the central bank is likely to have to disclose more detailed information about its foundations' activities to be able to clear up prevailing suspicion.

The fact that the investors behind the private equity funds have the possibility to remain unknown is problematic, and could spark more activity at the Constitutional Court, says Ligeti. “According to the constitution, public assets can only be transferred to companies whose ownership structure is transparent,” he argues.

Benefits

Meanwhile, if it was achieved, an acquisition by the central bank would fit with Orban's long held ambition to have at least 50% of the Hungarian banking sector in local hands. MKB also appears to have benefitted from state funds over the past couple of years.

The government bought MKB from BayernLB for €55mn, plus a waiver of €270mn owed to the German bank, claiming it would reprivatise the lender soon. The German seller was forced to offload MKB due to a deadline imposed by EU state aid rules.

Hungary said at the time it would restructure the bank, which was struggling due to a large portfolio of bad commercial real estate loans. The MNB began buying toxic real estate loans this month via new 'bad bank' MARK.

The European Commission gave the go-ahead for the Hungarian government to provide aid for the restructuring of the bank in December. According to that deal, MKB must be listed by the end of 2019. How Hungary will manage to float the bank if it does not control any of the shares is not clear.