Private banks eye panicky Hungarian rich

By bne IntelliNews August 16, 2012

Tim Gosling in Prague -

The Hungarian government's "unorthodox" economic policies are hurting the economy and spreading worries about political risk among investors. That has private banks with international networks salivating.

Shrugging off continued pressure from Hungary's government on the country's banks, Erste Group Bank's Hungarian unit increased its investment in the country with the acquisition of the local private banking arm of BNP Paribas on August 9. Erste said the acquisition was driven by the anticipation that Hungary's private banking market will undergo significant consolidation, but it's also likely the Austrian bank is one of several to note increasing interest from high net worth individuals keen to shift their assets out of the country. "We continue to believe in banking in Hungary, we're committed to grow here despite the hardships," Erste Hungary CEO Radovan Jelasity told a press conference.

Erste did not disclose the cost of the acquisition, though revealed it would increase its market share in Hungarian private banking from 9% to 12%, boost assets under management at Erste Bank's private banking division by HUF60bn (€217m) to HUF200bn, and increase its client list by around 400 to 2,200.

Money fight

Banks in Hungary have been fighting a concerted attack by the populist Fidesz government since it came to power in 2010. They have faced what Patrick Butler, a board member at Raiffeisen Bank International, claimed to bne is the "highest banking tax in the EU," as well as huge losses on foreign-currency mortgages incurred under a government scheme devised to relieve struggling borrowers.

Together with rising bad loan provisions, the Hungarian banking sector suffered its first loss for 13 years in 2011. Erste's local unit contributed €567m to the sector's total loss of HUF92.5bn, and followed that up with a €72.7m loss in the first half of this year. Still struggling against a continued slowdown in the economy and a new financial transactions tax that will be levied on all commercial bank operations, Erste's Hungarian subsidiary says it does not expect to return to a profit before 2014.

Alongside the other foreign banks that dominate the market, Erste cut back on investment in commercial banking around the turn of the year, with branches closed and staff released. The sector has also reduced lending in response to the government pressure, and as the Hungarian economy has slowed.

Money flight

However, Budapest's "unorthodox" economic policies have hurt business across the spectrum - and frequent speculation about favouritism being shown to those companies close to the administration has only unnerved investors further. On top of that, the economy continues to slow, and slipped back into recession in the second quarter of 2012 after escaping by the skin of its teeth in the first three months of the year.

While still awaiting a breakdown of the data, analysts from Erste's macroeconomics unit point out it is only exports that are likely to have offered any impetus to the economy, although with the vast majority of Hungarian exports headed to the Eurozone, that also looks shaky right now. They add that household consumption probably remained in negative territory during the quarter, and is expected to shrink 1.5% in 2012. "Moreover, investment activity is... poor and the outlook for investments is grim, partly due to the high uncertainty in the economy."

Meanwhile, inflation continues to rise - it increased 0.2 percentage points on a monthly basis to 5.8% in July - and the forint remains vulnerable, which leaves the central bank in a tight spot regarding easing monetary policy to offer some stimulus to the economy. The big question for the markets is progress towards a new loan agreement with the International Monetary Fund and the EU. For now, they are betting it will appear eventually, but should capricious Prime Minister Viktor Orban and his cohorts knock that confidence, the fallout will be swift.

As if that weren't enough to convince Hungarian investors they might be better off shifting their assets outside the country, the government has also made it clear that anyone is fair game in its fight to assert its unorthodox policy. One of its first moves when it came to power was to effectively nationalise over €10bn in private pension assets by threatening savers that they would not receive a state payout unless they elected to move their accounts.

The upshot of all this is that international private wealth managers note significant opportunity, eyeing increased client flows on the one hand, and acquisition opportunities on the other, as parent banks in the Eurozone face tough decisions in trying to shore up their balance sheets.

Stephen Maxonus, CEE head for Austria's Schoellerbank - a private banking unit within the UniCredit Group - told bne in June that Hungary has shot up its list of target markets recently, propelled by the political risk. On top of the lack of attractive investment opportunities offered by the economy right now, that's a compelling reason for the wealthy to look for an asset manager with an international network to deploy assets across Europe, he points out. "Austrian banks on the border have seen a huge rise in clients coming across from Hungary to deposit assets," he said.

Following the announcement of its purchase, the head of Erste's Hungarian private banking arm, Andras Kallay, stated that the Austrian bank is one that is ready to take advantage. "Erste continues to seek further acquisition targets," he said, "as we expect more consolidation on the market."

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