Bloomberg News

Citi Sees ‘Prohibitive Costs’ in any Erste, KBC Hungary Exit

January 12, 2012

(Updates with Erste, Raiffeisen closing branches, injecting capital, in fourth paragraph.)

Jan. 12 (Bloomberg) -- Erste Group Bank AG, KBC Groep NV and Raiffeisen Bank International AG would be faced with “prohibitive costs” of more than 11 billion euros ($14 billion) should they decide to exit the Hungarian market, according to a note from Citigroup.

“We believe the cost of exiting Hungary in a disorderly fashion would be prohibitive for all three banks with Erste having the highest cost, and even factoring in potential benefits from forint depreciation the additional impact to tangible book values remains unaffordable,” London-based Citigroup analysts Stefan Nedialkov and Simon Nellis wrote in a note to customers today.

Banks are struggling in Hungary, which last year decided to force lenders to take losses on foreign-currency mortgages after introducing Europe’s highest bank levy in 2010.

Should all three banks decide to “exit Hungary, we estimate the cost of doing so would exceed 11 billion euros, easily outpacing their profits generated in Hungary since their entry into the country,” the analysts wrote in the note.

Austria’s Erste and Raiffeisen injected about 1 billion euros of fresh capital into their Hungarian units last year to cover losses caused by the government’s banking laws. Erste, which owns the country’s second-biggest lender, said on Dec. 9 that it will cut as much as 15 percent of its staff in Hungary and close about a quarter of its branches.

Raiffeisen, owner of the fifth-biggest bank in Hungary, said on Nov. 24 that it would cut its Hungarian work force 11 percent and close 10 percent of its branches. Both banks have said they will remain in Hungary.

With the Hungarian government “quickly finding itself between a rock and a hard place, the natural motivation may be for it to -- partially -- reconcile with the International Monetary Fund, the European Union and the banks,” according to the Citigroup note. “So we believe the immediate risks of a disorderly Hungary exit for the banks have decreased somewhat: code alert yellow, not orange.”

--Editors: Douglas Lytle, Alan Crosby

To contact the reporter on this story: Zoe Schneeweiss in Vienna at zschneeweiss@bloomberg.net

To contact the editor responsible for this story: Stephen Foxwell at sfoxwell@bloomberg.net


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