Hungary Approves Loan Refunds as Banks Face Mounting Losses

Jul 04, 2014 11:32 am ET

(Updates with prime minister in fourth paragraph, stocks in sixth and seventh, banks in 16th.)

July 4 (Bloomberg) -- Hungarian lawmakers approved a law forcing banks to refund borrowers on charges deemed unfair on as much as $28 billion in outstanding loans.

Parliament, where Prime Minister Viktor Orban’s coalition has a two-thirds majority, approved the law by a vote of 184 to 1 with 2 abstentions. The legislation voids exchange-rate margins used on foreign-currency loans and declares unfair unilateral changes to consumer credit going back as far as 2004, except where banks prove otherwise.

Orban, re-elected in April to another four-year term, has pledged to phase out foreign-currency loans to households and to force banks to share the burden. Payments on the loans, mostly denominated in Swiss francs, soared as the forint plunged after the 2008 financial crisis, leading to rising rates of defaults and delinquency.

“This was a historic day that may be the start of a new era,” Orban said at a factory opening in Pilisborosjeno, outside of Budapest. “The era of fair banks may follow.”

The financial industry faces a loss of as much as $4 billion as a result of the law, according to the central bank. That doesn’t include the cost of converting as much as $16 billion in foreign-currency loans into forint, which the government plans to do later this year to rid the country of mostly Swiss franc-denominated mortgages.

Banks Plunge

OTP Bank Nyrt., Hungary’s largest bank, dropped as much as 4 percent today, the most in three weeks, and closed 1.7 percent lower at 4,239 forint. OTP’s recommendation was cut to underweight from equal weight at Concorde Ertekpapir Zrt. on July 1 as the brokerage estimates the bank’s losses at as much as $1 billion from today’s bill.

Erste Group Bank AG, which owns the second-biggest lender in Hungary, plunged 16 percent, the most in the Euro Stoxx 600 index, after yesterday forecasting a 2014 loss of as much as 1.6 billion euros ($2.2 billion) on higher provisions in Hungary and Romania.

‘The market is severely complacent and arguably underestimating some of the disruptive impact the proposed path will have on the banks in the short to medium run,’’ Peter Attard Montalto, a London-based economist at Nomura International Plc, said in a report this week.

OTP and Erste compete in Hungary with lenders including, Raiffeisen Bank International AG, UniCredit SpA, Bayerische Landesbank, Intesa SanPaolo SpA and KBC Groep NV.

Losing Ground

The legislation originally aimed to help almost half a million foreign-currency mortgage borrowers before the government widened it to include all consumer loans, whether denominated in forint or foreign currency and beyond mortgages.

The law replaces exchange-rate margins banks used in foreign-currency loan contracts with the central bank’s mid- rate. For unilateral contract changes, the law declares them unfair unless banks can prove otherwise in court. Lenders have 30 days to initiate a legal challenge.

The government plans separate laws following parliament’s summer recess to specify how banks need to refund borrowers and and how foreign-currency loans will be converted to forint.

A request by lenders to have the refund plan apply only to loans signed after 2009 has been rejected by the ruling party, which has said that the statute of limitations doesn’t apply to existing loans. Supreme Court Justice Gyorgy Wellmann said on July 2 that it’s up to lawmakers to fix the statute in a law.

Bank Tax

For banks, the refund plan comes on top of Europe’s highest bank levy and after a $1.7 billion loss in 2011 when Orban allowed borrowers who could afford it to repay foreign-currency mortgages at below-market rates in a lump sum. Borrowers who participated in the plan wouldn’t get refunds under the bill.

Lenders have paid 1 trillion forint ($4.4 billion) since 2010 in the form of extraordinary taxes and other one-time measures, on top of annual 220 billion forint in regular taxes, the country’s Banking Association said on July 1.

The retroactive changes in the legislation approved today are “unfair” as they “violate the rule of law and cause uncertainty among investors,” the lobby group said in a statement today.

The government may consider giving banks tax breaks to partially compensate their losses, ruling party lawmaker Gergely Gulyas told public television M1 today.

Apart from looming court battles on the fairness of unilateral contract changes, the focus will shift to the conversion of foreign-currency loans to forint. While details have yet to be worked out, the ruling party wants to convert the loans at below-market exchange rates. Lenders have said these must be done at market rates.

The ruling party will “insist that the conversions be done at below-market exchange rates,” parliamentary group leader Antal Rogan told M1 television late yesterday. “Our position is clear that the exchange-rate risk must be shared, meaning that borrowers can’t bear this fully.”

--With assistance from Marton Eder and Edith Balazs in Budapest and Boris Groendahl in Vienna.