Bloomberg News

Erste Is First Foreign Lender to ‘Ring-Fence’ Hungarian Unit

October 10, 2011

(Adds closing prices in sixth paragraph, Moody’s in fourth and 18th.)

Oct. 10 (Bloomberg) -- Erste Group Bank AG, eastern Europe’s second-biggest lender, became the first foreign bank to recapitalize its Hungarian unit that the government in Budapest forced to swallow losses on Swiss-franc loans.

Erste will inject 600 million euros ($814 million) into the subsidiary, the Vienna-based lender said in a statement today. The bank, which expects a loss of about 500 million euros loss this year in Hungary, is provisioning an additional 450 million euros to cover credit losses caused by the mortgage plan and worsening economic prospects. Raiffeisen International Bank AG expects to provision 100 million euros for its Hungarian unit.

“Additional significant provisioning” is needed due to the “difficult” market environment in the country, Raiffeisen said today, adding that it will publish details on Nov. 24.

Hungarian lawmakers last month approved a law that allows the early repayment of foreign-currency mortgages at more than 20 percent below market rates. The government last year levied an extraordinary bank tax to raise 120 billion forint ($553 million) a year to plug budget holes. Erste’s local unit was among seven banks placed on review for a downgrade by Moody’s Investors Service on Oct. 5.

‘Depth of Damage’

“It shows the depth of the damage from the government’s policies,” Mark Macrae, a Prague-based analyst at Wood & Co., said in a phone interview today. “Erste is trying to ring-fence its exposure to Hungary.”

Erste’s announcement led OTP Bank Nyrt., Hungary’s largest lender, to fall as much as 3.3 percent in Budapest trading. OTP closed up 3.4 percent at 3,261 forint. Erste fell 11 percent, the most since May 13, 2009, to close at 18.4 euros. Raiffeisen dropped 5 percent to 21.15 euros in Vienna.

OTP competes mostly with units of international banks, including Erste, Raiffeisen, UniCredit SpA, Bayerische Landesbank, KBC Groep NV, and Intesa Sanpaolo SpA.

Erste signaled it may cut back on lending to reduce its risk in the country, vowing to stand by its Hungarian unit. The Austrian lender will focus on forint lending funded with locally sourced liquidity, the bank said today.

“This could lead to market share losses in the short term, but over time reduce the requirement for parent company funding and thus minimize Erste Group’s exposure to political event risk,” the lender said. Erste will also write down 312 million euros this year in goodwill from a 2003 acquisition in Hungary.

‘Aggressive Policy’

Prime Minister Viktor Orban’s “quite aggressive policy” on the banking industry may make it “less likely that parent banks will put more capital and funding into the Hungarian banking system,” Fitch Ratings said on Sept. 28.

Hungary, where two-thirds of mortgage loans are denominated in Swiss francs, is struggling to help borrowers after the Alpine confederation’s currency rose to a record, boosting defaults and pushing up monthly payments.

The country’s lawmakers last month approved a law that allows the early repayment of foreign-currency mortgages at 180 forint per Swiss franc and 250 forint per euro. The forint traded at 237.3 per Swiss franc and 293.75 per euro today.

Erste said that 200 million euros of its additional provisions are earmarked to cover losses from this plan.

‘Worrying Precedent’

The European Union has said the mortgage plan may violate its rules, while Hungary’s central bank warned that local lenders will suffer “significant” losses, causing damage to lending and growth prospects. Local banks have vowed to take their case to the Constitutional Court.

The mortgage plan sets “a worrying precedent” and is “credit negative” for Hungarian covered bonds, Moody’s Investors Service said on Sept. 27. A day later, Fitch said the plan is a “dangerous precedent” and may hurt lending.

The move may impact banks’ profitability and capital, Moody’s said on Oct. 5. The rating company placed Erste’s Hungarian unit of review for a downgrade along with OTP and its mortgage arm, Foldhitel es Jelzalogbank Nyrt. and the local units of KBC, General Electric Co., and Bayerische Landesbank.

Moody’s and Standard & Poor’s will send teams to Hungary this month to review the country’s credit grade, which is at the lowest investment level with negative outlooks at both companies, Debt Management Agency Chief Executive Officer Gyula Pleschinger said on Sept. 30.

Banks in Hungary are now “stretched to their limits,” Orban said on Oct. 3, the day when he said he would start talks with local lenders to restructure the 180 billion forint in county debt, which the government assumed.

--With assistance from Boris Groendahl in Vienna. Editors: Balazs Penz, James M. Gomez

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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