RBI injects capital into "stuck" Hungarian unit

By bne IntelliNews January 29, 2014

bne -

Austria's Raiffeisen Bank International injected €55m into its Hungarian banking unit in late 2013, it revealed on January 28. Coming on the heels of an about-face on a previous suggestion it was ready to sell the subsidiary, and a capital increase at German-owned MKB Bank, it looks like the forecast exodus of foreign banks from Hungary is off - for now at least.

RBI made the announcement of the capital injection in Raiffeisen Hungary in its prospectus for its €2.79bn share sale, reports Reuters. It offered no direct reason for the move, but cited losses absorbed from the scheme run by the Hungarian government in late 2011 to force banks to allow borrowers with foreign currency loans to pay them off at below market rates. Budapest is planning to introduce another version of the scheme in a bid to rid the country entirely of forex loans. Overall, the group has forecast 2013 provisioning to rise as high as €1.2bn.

Of particular note, however, is that the injection came within a month of an admission from RBI that it was studying offers for the Hungarian unit, suggesting it swiftly discovered that it would not be receiving a bid that would come close to its valuation. Other foreign-owned banks that have said they are looking to leave Hungary have also been raising capital at their subsidiaries, suggesting they also envisage holding out to try to limit losses on any divestment.

Germany's Bayerische Landesbank has to sell MKB Bank by 2015 to meet the terms of a 2009 state bailout, and even announced at one point late last year that it planned to split off its non-performing assets into a bad bank in order to speed up the process. On January 27, however, BayernLB announced a capital increase of around HUF80bn (€262m).

Hammering down prices

The injection of fresh capital into Hungarian units by foreign banks suggests that they're not ready to give up the ghost just yet. Following years of tough treatment from the government - in the form of high taxes and enforced schemes to shoulder losses on foreign currency loans - the majority are now loss making. Recent research from Citigroup shows the country's large foreign banks are now at a breakeven point, with profits earned before Fidesz came to power in 2010 now balanced by losses since.

Further damage at the hands of the ruling Fidesz party is anticipated, and the likelihood that it will win another four years in office at elections in April proffers little relief on the horizon. The exit of foreign banks to give Hungarian players a greater role in the sector is a clearly stated goal of Prime Minister Viktor Orban, who appears unperturbed by the fact that lending has virtually ground to a halt. The central bank, now controlled by Orban loyalists, said in November that it expects up to half of the country' large foreign banks to withdraw from the market.

Indeed, the banks appeared to weary of the fight in 2013, with Italy's Intesa Sanpaolo announcing in March that it could sell. Others have followed, with even UniCredit - CEE's largest lender - hinting it could reconsider its Hungarian investment if the state pressure continues.

However, the government appears not to just want them gone, but to leave behind billions in assets. Marton Nagy, the Magyar Nemzeti Bank's managing director, suggested in November that foreign banks hold around €10bn in assets at their Hungarian units. However, in a scenario that looks to resemble the ongoing push to rid Hungary's utilities sector of foreign players, the plan seems to be to hammer down valuations.

RBI said on November 19 that it was examining offers for its Hungarian unit. Given the climate, a foreign suitor was always clearly unlikely. At the same time, OTP - the largest locally owned bank - has also suggested it's loath to make large acquisitions during the government campaign against the sector. To date, just one foreign bank has escaped: Italy's Banco Popolare sold its small subsidiary to Hungary's MagNet Bank for just €500,000 in April.

Unconfirmed reports in early January said Szechenyi Kereskedelmi Bank - majority owned by the CEO of the Government Debt Management Agency and the state - offered RBI just €1 its local unit. The Austrian bank performed a u-turn on January 8 - the same day it announced the group capital hike - saying it had decided against selling "under current conditions". Unnamed sources told Reuters that RBI had decided selling at a knock-down price would trigger losses the bank was not prepared to accept.


Without apparent realistic suitors, and stuck with huge loan portfolios, it appears the banks have few options to try to stick it out in Hungary for the meantime. That won't surprise Budapest. Nagy predicted back in November that the expected exodus would take some time while balance sheets are unwound.

Some analysts hinted late last year that the foreign banks look stuck for the meantime, particularly given their high level of investment recently. On December 19, Fitch Ratings affirmed its ratings on four foreign-owned Hungarian banks: CIB Bank, K&H, Erste Bank Hungary and MKB. The actions, the agency said, "reflect Fitch's opinion that there is a high probability that they would be supported, if required, by their sole shareholders."

"In Fitch's view," the note continued, "KBC, Intesa and Erste will continue to have a high propensity to support their Hungarian subsidiaries, which form part of the strategically important Central and Eastern European market ... The recent track record of support for the subsidiaries has been strong. Between end-2009 and end-3Q13, CIB and EBH received a total of HUF178bn (almost €600m) and HUF219bn (about €730m) new equity from their owners, respectively."

However, the analysts also suggest there may come a point that the foreign banks will be forced to cut their losses. "[O]ver the longer-term there is uncertainty with respect to the strategic importance of the Hungarian market for Intesa and Erste, in light of persistently weak performance of their subsidiaries... the ratings could also come under pressure if support is delayed, or should further onerous domestic bank regulation and weak market prospects make shareholders' commitment to their subsidiaries less certain."

That slow death is presumably part of the plan in certain circles in Budapest. Asked on January 22 about the likelihood of an exodus, Raiffeisen Hungary CEO Heinz Wiedner told Portfolio.hu: "In the near term it will not happen, but in the long term it can. At this moment I cannot see in what way it could happen ... it is hard for me to see that the banks would exit within a year. In our case the discussions have been closed. And as you could hear, the other big banks are not considering leaving this market, either. I even do not think that Russian or Chinese investors could be interested in Hungarian banks right now."

Economy Minister Mihaly Varga claimed on the same day that neither is the government, for the meantime. "The Hungarian state does not intend to buy Raiffeisen Bank's Hungarian daughter in the near future," he wrote in a response to a question from a fellow lawmaker according to Austria's FriedlNews.

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