bne IntelliNews -

Austria's Erste Group has signed a deal to buy Citigroup's Hungarian retail banking business, the banks announced on September 2. The value of the transaction was not disclosed.

The sale is the latest in a string of deals in which foreign lenders have quit Hungary over the past 18 months after years of government interference pushed them into losses. The state has also been pushing hard to raise the share of local ownership in the sector.

Erste agreed a deal to sell a stake in its Hungarian operation to Budapest and the EBRD early this year as part of a supposed peace treaty between banks and the government. That same subsidiary has now agreed to buy Citibank’s retail banking and investment business, as well as its consumer loans and cards units. The deal also includes CitiBusiness microenterprise accounts and the transfer of consumer banking employees.

The transaction is subject to regulatory approvals, which are expected by the end of 2015. The transfer of customer accounts is not expected to occur before the fourth quarter of 2016.

Citibank announced in October that it would seek to exit its consumer businesses in 11 countries, including Hungary, in a bid to focus on markets where it has the greatest scale and growth potential. The US bank will keep its corporate banking business in Hungary.

By buying Citi’s consumer business Erste will expand its retail customer portfolio to become the second largest in Hungary, Radovan Jelasity, CEO for Erste Bank Hungary, said in a statement.

The deal comes as Erste is in the process of selling a 15% stake in its Hungarian unit to the state under a deal brokered in February. As part of the deal, in which the EBRD will buy a similar stake, Budapest pledged to ease the high tax burden on banks and refrain from inflicting more pain on the sector. Erste agreed to pump an extra €550mn in loans into the economy.

Hungary’s acquisition of Erste Hungary’s stake, set to be completed by the end of 2015, is part of the government’s strategy to boost local ownership of the banking sector. Over the past year, the government bought the country’s fourth-biggest lender MKB, as well as Budapest Bank.

Now with skin in the game, the government is offering some relief to embattled banks after years of punitive policies. It has pushed through a bill that will graducally reduce the country's high banking tax from next year. It is also mulling additional tax breaks for banks that increase their lending compared to 2009 levels. Data continues to show lending outside the central bank’s 'lending for growth' programme remains feeble.

The major motivation for Budapest is to convince the battered banks to resume lending in order to avoid an economic slowdown. After posting 3.6% GDP growth in 2014, the second fastest pace in the EU, Hungary looks set for a slowdown, with indicators mostly pointing downwards.