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German state-backed lender BayernLB is close to securing a deal to offload Hungarian unit MKB to the country's biggest bank, OTP, claim sources. Should a sale happen, it will be the first exit that the battered foreign banks have managed, despite high pressure and expectation.

OTP and BayernLB have been in intense talks in recent weeks and are likely to reach an accord, Reuters claimed on April 2, referring to three unnamed sources. However, it adds that one says a price is yet to be agreed. OTP and BayernLB declined to comment.
 
The newswire notes that Bavarian state premier Horst Seehofer said on March 31 that he had been in Hungary recently. The state of Bavaria is the majority owner of BayernLB. The bank has been ordered to offload MKB by the European Commission, as part of a restructuring deal provoked by a state bailout in 2009.

That leaves the German bank vulnerable to the pressures in Hungary. Rough treatment from the government has helped push the sector into the red in the last couple of years, and Hungarian Prime Minister Viktor Orban insists more banks should be in Hungarian hands. Several foreign lenders said late in 2013 that they may sell, but a lack of suitors and a huge volume of poorly performing assets has blocked deals. 

Raiffeisen International Bank said in December that it was mulling offers for its local unit. It was reported in January that it rejected an offer of €1 from Szechenyi Kereskedelmi - a tiny bank in which the state holds 49%. Many foreign lenders have spent the time since insisting that they will stay to see out the storm.

On top of the requirement from Brussels however, MKB is in very poor shape and dragging on the parent. The Hungarian unit lost €409m last year, following a €308m loss in 2012, which forced BayernLB into a capital injection early this year. BayernLB said in late March that it will 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 MKB's toxic assets, the German bank 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, according to Reuters, and a market share of about 10% for retail and corporate lending in Hungary.

Meanwhile, the return of Hungary's biggest bank as a potential buyer could catch the attention of foreign banks that have given up on attempting to exit. With the government pushing for increased local ownership of the banking sector, OTP has long appeared the major suitor, and said in May 2013 it was preparing two deals. MKB was widely speculated to be a target, alongside Credit Agricole's local unit.

However, the senior management at OTP then had a very public falling out with the government over its rough handling of the banks. That saw CEO Sandor Csanyi and cohorts dumping OTP shares, and clearly losing enthusiasm to expand exposure to high sectoral taxes and further huge losses on foreign currency loans.