RPT-Fitch: Hungary Bank Loan Refund Costs Will Hurt Foreign Parents

Tue Jul 8, 2014 8:49am EDT

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July 8 (Reuters) - (The following statement was released by the rating agency)

The potentially high costs of a new law requiring Hungarian banks to compensate loan customers will require material capital injections from foreign parents to restore regulatory capital and lending capacity, Fitch Ratings says.

The law, passed on 4 July, requires lenders to repay borrowers for unilateral interest rate changes to retail loan contracts that were made by banks passing on some of their higher foreign-currency refinancing costs after the 2008 financial crisis. Lenders are also required to compensate customers for exchange-rate spread charges on foreign-currency loans.

The central bank's preliminary estimates of costs for the sector are HUF600bn-900bn (EUR2bn-3bn), according to Reuters. The compensation payments could wipe out around a third of the sector's equity at end-2013. But the impact will vary significantly from bank to bank as a handful of lenders generate most of the sector's profits and capital is tight in some large foreign-owned banks. Individual lenders' portfolio mix will also influence the final costs.

OTP, Hungary's largest bank, estimated its compensation costs to be around HUF147bn (in the worst-case scenario), with over 80% arising from the unilateral interest-rate increases. This would lower the bank's 1Q14 Basel III common equity Tier 1 ratio by a relatively small 1.7pp to 14.7%, reflecting OTP's substantially stronger capital position compared with other Hungarian banks. Profit warnings are likely from most of the largest Hungarian banks or from their parent institutions. Austria's Erste Bank warned last week of higher loan provisions in Hungary related to the new compensation. KBC said today that its Hungarian subsidiary has sufficient capital to absorb the impact of the new legislation, which the bank estimated at up to EUR232m (around HUF70bn).

We will review the ratings of Hungarian banks once we have analysed the impact of the new law on individual banks' credit profiles, and assessed the foreign parents' readiness to offset losses with further capital injections, where required. The VRs of Erste's subsidiary (b-) and Intesa's subsidiary, CIB (ccc), are already very low, reflecting their weak asset quality and capitalisation. K&H, the subsidiary of Belgium's KBC bank (bb-), has considerably larger loss-absorption capacity.

Further costs from the potential conversion of retail foreign-currency loans into forints may be on the way, with the government set to make a decision this autumn, in a separate step. Losses for banks could be substantial because of the popularity of the products in the run-up to the crisis. The state may share some of the costs of the conversion, but is unlikely to have much appetite for this as the EU has just warned that the country may fall back under its strict budget oversight.

Unorthodox measures penalising banks have become common in Hungary since the crisis. They include the early repayment of some foreign-currency loans at non-market exchange rates in 2011 and 2012, a one-off financial transaction tax in 2013 and a hefty special bank levy since 2010, which the EU has said should be phased out.

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