Erste makes peace with Orban in landmark deal

By bne IntelliNews February 9, 2015

bne IntelliNews -


Hungary will ease pressure on the banking sector in return for a stake in the local unit of Austria's Erste Group and a commitment to greater lending, it was announced on February 9.

In a landmark deal following five years of pressure on the banks, the Hungarian government has agreed to reduce Europe's highest banking tax "considerably". In return, it will be able to buy a 15% stake in Erste Hungary, which will give a boost to Budapest's growing ownership of the sector. At the same time, Erste has agreed to pump an extra €550mn in loans into the economy. 

This commitment is vital because the heavy hits the banking sector has taken since Prime Minister Viktor Orban's Fidesz party took power in 2010 have led banks to go slow on lending. That has left the Magyar Nemzeti Bank as the only significant driver of credit expansion. 

Depressed lending has damaged investment and is expected to hurt economic growth. From GDP growth of around 3.2% in 2014, analyts predict a slowdown to around 2% this year.

Erste has now agreed to boost lending to support the Hungarian economy. It said it will introduce several loan programmes in the next three years: a €250mn loan disbursement programme, including a complete financial package for public sector employees; a €100mn lending package for the Energy Efficiency Programme, and a €200mn loan facility to primary agricultural producers.

Time has come

Under the deal, the Hungarian state and the European Bank for Reconstruction and Development (EBRD) will acquire 15% each in Erste Hungary, Prime Minister Viktor Orban told a news conference on February 9, flanked by Erste Group CEO Andreas Treichl (pictured) and EBRD President Suma Chakrabarti. 

It is yet to be decided whether Hungary and the EBRD's acquisitions of  stakes in Erste will be done via a capital increase or an actual sale, Orban said. He added that a deal will be agreed "provided we can agree on the price".

"The purchase price will be negotiated between Erste and the two parties based on market valuation methods after conduct of a due diligence with support from external advisors, as is customary for similar M&A transactions," Erste said.

The PM said the bank tax will be lowered "considerably" in 2016 and 2017, with further cuts in view in the years to follow. The aim is to bring the tax closer to the EU average, he added. 

While he did not specify by how much the levy will be reduced, he noted the burden on the sector would drop by HUF60bn (€195mn) in 2016. The government expects the bank tax to bring HUF144bn in budget revenues this year, reports.

The move "is a recognition by the Hungarian government that with steps taken to address the foreign currency loan issue and the economy showing signs of a sustained recovery, the time has come to gradually reduce the tax burden on the banking sector in order to provide a stable environment and to improve the business climate in the sector for it to support more lending and thus economic growth," Erste said in a joint statement with the EBRD.

Orban has also pledged to address "the persistent challenge of non-performing loans in ways which are in line with international best practice", the statement adds.

Budapest pledges to "promote a stable and predictable framework to support macroeconomic stability", the EBRD notes. "It is a strong basis from which to increase the EBRD's engagement in the Hungarian financial sector."

Hungary also commits to "refrain from implementing new laws or measures that may have a negative impact on the profitability of the banking sector" and to ensure "fair competition between, and equal treatment of, all financial institutions active on the market" it continued.

The language used in the statement suggests the government has struggled in recent efforts to convince the banks to return to lending. The high taxes and schemes to phase out forex loans have pushed them into huge losses. 

Local ownership

Buying a stake in Erste's local unit fits into the government's drive to boost local ownership in the banking system. The government and central bank have been predicting an exodus of foreign owners over the past couple of years. The government already achieved its goal of having more than half of the sector in local hands after it completed the acquisition of the country's fourth largest bank MKB from Germany's BayernLB in October and agreed in December to buy Budapest Bank from GE Capital. It has spoken of merging the pair to create the country's second largest lender after locally-owned OTP.

However, the Hungarian government expresses its commitment to the banking sector in the document, the Erste and EBRD statement reads. The pair says the memorandum of understanding underlines that Hungary "does not intend to take direct or indirect majority ownership stakes in systemically important local banks [...] and is committed to transferring all direct and indirect majority equity stakes it currently holds in local banks to the private sector within the next three years."

Consolidation coming

According to local media reports, Erste is looking to buy the Hungarian unit of Raiffeisen Bank International (RBI). Erste has denied it is in talks with its compatriot,  though local media insisted a deal is on the cards on February 9, citing unnamed sources. RBI said in late 2013 that it was ready to listen to offers for its Hungarian business, as it looked to have tired of the punishment handed out by the government to foreign banks over forex loans. However, it soon retreated when it got just one offer, at €1.

Treichl also confirmed at the news conference that Erste is interested in buying Citigroup's retail business in Hungary. The US bank put several of its operations in smaller developing markets up for grabs late last year.

Meanwhile, the government looks to have missed out on the local unit of Russia's Sberbank. Recent reports that Budapest was in advanced talks with the Russian state-controlled giant were unfounded, reported on February 9. 

However, it claims Co-op Hitel is now closing in on a deal. The tiny finance house was set up in 2009 by Coop Group, a company whose main business is a grocery chain, and which is thought to be close to Fidesz.

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