July 24 (Reuters) - Following are highlights of an interview that National Bank of Hungary managing director Marton Nagy gave to Reuters late on Wednesday.
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”The bad bank will be formed by the autumn, in September or October. It will primarily buy commercial real estate loans and the foreclosed real estate behind them.
”The commercial real estate portfolio is worth 1.8 trillion forints in banks’ balance sheets, of which roughly 510 billion is non-performing, putting the NPL ratio at nearly 30 percent in this segment. But this is only part of the problem. Restructured loans also mask a large number of problematic deals.
”Non-performing loans represent about 300 deals, worth 1.5 billion forints on average. There is a restructured category, which is still performing but is not problem-free. This means about 200 deals worth roughly 300 billion.
”When it comes to price, it is a question whether the bank keeps such commercial real estate loans at the correct price in its books.
”There will be different prices for each deal where it will be worth selling, but one thing is for sure. Transactions will take place at the real market value, which will force the banks to realise their losses, because this will be below book value.
”The goal is for these deals to be removed from banks’ balance sheets. By clearing out such loans, the NPL rate would fall to 10 percent in the corporate segment and we could say that, apart from household foreign currency loans, we have also removed toxic project loans from the system and banks would end up with clean balance sheets.
”The main rule is going to be that the asset manager will buy such assets from liquid and solvent banks only.
”The pricing procedure has not been finalised yet. Removing these assets at book value is not good, because it does not necessarily reflect the real value. It will either be a uniform discount, individual valuations, or the combination of these two approaches.
”The lifetime of the asset manager can be as much as 10 years. The purchase of the assets will represent a much shorter period. That will be a one-off opportunity. There will be a window, which will close after a certain period.
”Who will finance this? There are three players: the banking system, the government, the central bank, and a fourth one, the foreigner, a hedge fund, who might enter. The question is the extent of private involvement at the start or later. It is not certain that there will be a pure solution, it could be a mix.
”At the end of the day, the central bank’s balance sheet will shrink. On the asset side, foreign currency reserves will decline while stock of the two-week instrument will also decline.
”From a macro aspect, gross external debt will fall significantly, but foreign currency reserves will also decline. Net external debt will remain unchanged. The extent of the change depends on how much of household foreign currency loans will be converted.
”Whether the central bank will help the conversion in one, two or three steps will depend on the current level of reserves and where the expected level will be.
”The question is whether during the conversion we will be able to reduce the expected level of reserves to a degree that gives us as wide room for manoeuvre as possible, enabling us to help in removing foreign currency loans from the system as quickly as possible.
”Based on the current situation we do not believe it can be done in one go. But the central bank is analysing this and we need to prepare for each possible eventuality so that we are able to do it. We are also interested in getting rid of foreign currency loans as quickly as possible.
”Right now, I do not think the central bank would be able to handle the conversion of the entire stock of foreign currency loans involved.
”If conversion takes place after the settlement (of the exchange rate spread and the interest rate hikes), then we need to see that some conversion obligation arises already during the settlement process. It remains to be seen whether conversion and settlement will take place at the same time.
”Three or four large banks will leave the banking system and the number of large banks will decline. There will be fewer, but bigger major banks, who will compete fiercely in pricing and then there will be niche banks.
”The future is about synergies, but this leads to jumbo banks. So it should not be the top three banks that begin to buy, but say two medium banks should form a major bank, or a small and a big one should become a larger one.
”After the removal of toxic assets, household foreign currency loans and commercial real estate loans, the value of each bank will be positive. A positive and a clearly defined positive value. That is why there will be a buyer.
”It is not mainly about state ownership but domestic ownership, because of diversification.
“We need to find a diversification where even though you run the risk that in a bad scenario you may need to bail out some banks, but on the other hand, you do not run the risk that in case of a recession everybody deleverages and leaves, deepening the downturn.” (Reporting by Krisztina Than and Gergely Szakacs; editing by Tom Pfeiffer)