Banks draw temporary relief as Hungary hints at gentler plan on forex debt

By bne IntelliNews July 25, 2013

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Hungary's largest bank OTP recovered some of its recent share price losses on July 24, as its CEO warned the government not to impose huge losses on the financial sector via a bid to reduce foreign currency household debt, and the economy minister emerged from a cabinet meeting to suggest any move would be gradual. The market remains on tenterhooks as it awaits a final plan, although local press reports this morning claim the most extreme of the options has been rejected.

Prime Minister Viktor Orban's cabinet was scheduled to determine how to help reduce the struggles of hundreds of thousands of households holding forex mortgages. The sudden resurgence of the issue has hit market sentiment hard since a deputy justice minister suggested a new policy was back on the cards earlier this month.

A scheme to offer relief to borrowers in late 2011 forced the banks to shoulder huge losses, and reports have suggested the more extreme options being considered in Budapest could prove even more costly. However, with the government reportedly mulling several alternative schemes, little detail was released.

The only statement to come out of the meeting was from the economy ministry, which said that it has been agreed that forex loans should be "phased out". Minister Mihaly Varga said that, "in the opinion of the government foreign-currency denominated mortgages for home purchases need to be eliminated from the domestic lending market in a way which 'takes into consideration the aspects of timing and burden-bearing'."

Varga said later that he had been delegated to hold talks with the Banking Association. A spokeswoman for the association said a meeting is scheduled for July 25, reports Reuters.

Foreign currency loans - particularly in Swiss franc and euro - were pushed by the banks ahead of the crisis as emerging market currencies rode high. However, currencies such as the forint have plummeted since, pushing monthly installments through the roof for borrowers. The huge volume of forex debt is a rare brake on the Fidesz government's policymaking due to increased sensitivity to market sentiment on the currency.


Meanwhile, the CEO of OTP surprised during a press conference by launching a scathing attack on the government's plan. Until now, Sandor Csanyi has been seen as a close confidante to Orban, and therefore he sparked alarm and a sharp slide for OTP by selling virtually all of his shares recently. In his first public comments since selling close to €36m worth of shares in the bank over the past fortnight, the CEO told reporters he did not know what the government is planning and that he did not sell shares to send a message that it bad news is on the way, reports Reuters. He repeated assertions by OTP's press office made at the time of the sales that he merely wanted to free up capital for an agricultural businesses he also owns.

The powerful banker hit out at ministers close to Orban, and warned the cabinet not to damage investor sentiment further with a big hit on the banks. The CEO - who previously close relationship with the Fidesz government has seen signs of tension recently - insisted a bit hit on the banks "would increase distrust (towards Hungary), and reduce banks' ability to attract capital".

The media has been stuffed with theories over the options the government is discussing to finally resolve the forex debt issue, and the lack of a final plan - or indeed pretty much any detail on the alternatives - leaves that guessing game to continue. Practically the only clear hint offered by Budapest has been that it intends to introduce legislation to redress the huge arbitrage between the value of the forint when the loans were taken out and the current market rate.

The brokerage Equilor points out that Varga's claim that forex debt will be "phased out" "suggests that all [forex] loans (HUF3,700bn) will be converted to HUF loans. The main question is who will bear the HUF1,100bn loss on these loans. In the worst case scenario, OTP will take HUF250bn (or HUF900 per share) loss, which has already been mostly priced in."

Citing sources close to the PM, Hungarian newspaper Nepszabadsag reported on July 25 that the most extreme proposal considered was rejected at the cabinet meeting. However, all other alternatives are said to remain on the table. The newspaper also claimed that implementation of the plan might take between three and five years.

Erste Bank analysts say they still assume that the full stock of forex mortgages held by Hungarian banks will be affected, rather than just problematic loans. "The uncertainty remained after the new information and further details are expected in the coming weeks," they write in a note to clients. "We consider that government wants to have action on the total FX-based mortgage-backed loans of HUF3,552bn or CHF 14.9bn."

Temporary relief

However, Csanyi's outburst, combined with Varga's hints that the government will not hit the sector as hard as might be feared, allowed the market to draw back from the nightmare scenarios imagined. Shares in OTP rose nearly 5% on a flat market, according to the FT, although that still leaves the price around 13% lower than before the news of Csanyi's share sales broke last week.

Despite the continued uncertainty, analysts are trying to look on the bright side. Erste says the broad announcements delivered on July 24 suggest the government's forex debt programme is likely to inflict far less damage to Hungarian bank stocks than previously feared. "Our ... calculations indicate a 90% lower valuation impact compared to the previous assumptions we made following the justice minister announcement last week," they write. "For OTP we now calculate a HUF448 impact per share, for FHB it would be HUF552 per share and for RBI EUR0.58 per share."

However, relief that the banks may not face another complete battering from Budapest will only be short term. While uncertainty continues to stalk investors, and the government proves once again its capricious policymaking, the longer term impact is likely to weigh further on Hungary's financial markets.

As Tim Ash at Standard Bank points out, "there is a huge range of possible outcomes/costs on the Hungarian banking sector, depending on what option is chosen. It is encouraging that Varga seems to be backing a lower cost option, [but] that said, arguably the damage has been done (again), in terms of the sentiment hit to the banking sector and business in general. [T]his is yet another iteration of government action on the issue, after a line had appeared to have been drawn in the sand earlier in the year. The obvious concern is that this just re-accelerates European bank deleveraging out of Hungary, which further stalls growth/recovery."

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