UPDATE 1-BayernLB sells unit MKB to Hungary

Thu Jul 24, 2014 8:57am EDT

Related Topics

* MKB investment has cost 2 bln euros since 1994

* Hungary to pay 55 mln euros

* BayernLB to waive 270 mln euros in receivables

* Hungary sees deal as first step in sector consolidation (Adds details)

By Jörn Poltz and Krisztina Than

MUNICH/BUDAPEST, July 24 (Reuters) - German state-backed lender BayernLB is selling its Hungarian MKB unit to that country's government, ending an ill-fated investment that has cost it a total of 2 billion euros ($2.7 billion) in losses over the last 20 years.

BayernLB bought MKB in 1994 as a way to expand its banking business in fast-growing Eastern Europe. But Hungary's banks were hit in 2010 by high taxes as the government sought to plug a budget deficit. It also forced lenders to take losses on a scheme allowing households to repay mortgages below market rates. Budapest-based MKB lost 409 million euros in 2013 alone.

"We got off with a black eye," said Markus Soeder, the finance minister of the German state Bavaria, which owns 75 percent of the lender, on Thursday.

The European Commission ordered BayernLB in 2012 to restructure and sell some businesses as a precondition for approving state aid for the German regional lender, which ran into trouble in 2008 after risky investments turned sour.

Hungary will pay 55 million euros for MKB and in return BayernLB will waive 270 million euros of receivables. This will result in a 2014 net loss at the Munich-based lender.

Hungary for its part sees the MKB acquisition as the first important step of a sector consolidation, Economy Minister Mihaly Varga said.

M&A

Prime Minister Viktor Orban has said he wants more than 50 percent of the banking sector to be in Hungarian hands, hoping that this will spur domestic lending.

Consolidation is likely also to be driven by a fresh financial blow for banks in Hungary later this year from new government measures to help borrowers, which could cost the sector 700 to 900 billion forints ($3.1-$3.9 bln) in refunds to clients for past interest rate and fee increases.

Foreign banks have been reducing their exposure to Hungary of late and its central bank expects more to leave the country completely.

However Hungary wants to own MKB only for a short period of time, Economy Minister Varga said.

"Our hope is that MKB regains its strong, competitive position within one or two years and thus it can be sold on the market," he said.

Hungary's biggest bank OTP had also been in talks with BayernLB on the asset, but was outbid by the state, BayernLB Johannes-Jörg Riegler said.

Bavaria's Soeder said that the only remaining risk for BayernLB was now troubled lender Hypo Alpe Adria, which BayernLB sold to Austria in 2009 after only two years of ownership.

Austria aims to seize 800 million from BayernLB and the country earlier this month passed a law on to ensure that Hypo's investors help to pay to wind down a bank that has cost 5.5 billion euros in public aid so far.

($1 = 0.7421 Euros)

($1 = 228.2500 Hungarian Forints) (additional reporting by Arno Schuetze in Frankfurt and Sandor Peto in Budapest; Editing by Sophie Walker)

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