The state managed to purchase MKB bank from its Bavarian owners at an extremely low price, just one-sixth of the market value. With the transaction the fourth biggest financial institution is reacquired in national ownership. Also, the aim of an at least 50% Hungarian owned banking system is now getting very close and, according to certain calculations, it is even accomplished, weekly Demokrata reports.
Demokrata said, one should buy at a low price and sell at a high price –minister of national economy Mihály Varga declared, after stating that after 20 years the Hungarian state is buying back MKB bank. As it is, the negotiated price is a mere 55 million euros, approximately 17 billion forints, whereas analysts estimate the realistic price of the bank to be 100-110 billion euros (70% of the company value). In addition, the former owner BayernLB has also agreed to cancelthe 84 billion forint debt of MKB. In view of this step considered as a capital increase, the purchase ultimately cost the Hungarian government nothing, and as a matter of fact profits equivalent to HUF 67 billion forints is appearing in the national property.
Sale at any price
During the negotiations the Hungarian side took advantage of the fact that the Bavarians were in a state of constraint. As it is, during the outbreak of the financial crisis it was the 10 billion euros bailout of the Bavarian state that pulled BayernLB out of the situation of bankruptcy. However, the provincial support had a price tag attached: according to EU regulations the financial institute had to agree to sell of all of its foreign interests by end of 2015 and transform into an exclusively Bavarian retail bank. Nevertheless, the lingering of the crisis made this undertaking difficult to fulfill given that it was precisely the financial investments that had undergone a devaluation. Yet the Bavarians were able to sell of their Bulgarian and Romanian bank subsidiaries. Still, the Hungarian unit was much more problematic, in part due to the towering losses of mounting foreign currency loans and in part due to the special taxes levied on banks. Stephan Winkelmeier, thefinancial director of BayernLB, was quoted as saying at the end of last year that under the current circumstances MKB was unsellable, therefore they intendedto break it up into several banks, however, this idea became a no-go in a matter of months.
According to Demokrata, as of 2010, MKB had posted a loss of nearly 100 billion each year, in 2013 for example it registered a loss of HUF 122.2 billion. Over the past four years BayernLB was forced to sustain a total loss of HUF 439 billion through its Hungarian banking subsidiary and was also forced to undertake a capital increase in 2009, 2010, 2012, and 2013. At the end of last year itself, it released over HUF 120 billion in funds by the mother bank, whereas early this year it had to implement another capital increase of HUF 80 billion in MKB. In 2011, as a result of the staggering writeoffs and capital injections sustained at MKB, BayernLB itself posted a loss. Compared to the whopping negative figures it served as little solace that between 2004 and 2009 the Hungarian financial institute produced a profit of HUF 77 billion.
This is a clean cut in order for us to get rid of the problems related to the heritage of BayernLB, Bavarian finance minister Markus Soeder acknowledged during the announcement of the deal. Johannes-Joerg Riegler, CEO of BayernLB, added only that since 1994 the Bavarian bank spent two billion euros on MKB. As a result of the capital increase related to the sale, this year in fact BayernLB will again post a loss.
The point is that we no longer need to pump fresh money into MKB, Markus Soeder pointed out while calling the Hungarian state a fair player but a tough negotiating partner.
One third of bad debts
„The state may have done a bad deal given that the portfolio of MBK was full of bad loans and uncollectible claims which will now have to be settled from taxpayers’ money, Levente Pápa, a Board member of Együtt-PM, commented on the transaction in a communiqué. However, analysts tend to view the transaction positively. For example, portfolio.hu puts the company value of the financial institute at HUF 135 billion and when comparing it to the HUF -67 billion purchase price (in view of the capital increase also) a profit of around HUF 200 billion is generated. The main question is whether this amount will cover the loss to be incurred in the coming years. Based on the numbers of the past four years the answer would clearly be „no”. Still, the past years have also improved the finances of the financial institute. To illustrate, MKB closed the first quarter of this year with a mere loss of EUR 9 million in contrast with the 61 million loss year-on-year. The management uncovered significant internal savings at the financial institute by slashing the number of branches from 88 to 80 and reducing their operating costs from HUF 55 billion in 2012 to HUF 50 billion last year and HUF 44 billion this year. In addition, as a result of the multiple capital increases MKB has relatively high own equity amounting to HUF 300 billion.
It nonetheless remains a fact that MKB is one of the banks with the worst loan portfolio in Hungary. Its non-performing loans are at 30 percent of the HUF 474 billion volume, for which the bank has an obligation to create provisions of over HUF 100 billion. This is due to the fact that MKB, similar to Erste, CIG, and Raiffeisen with severe losses, was at the forefront in issuing foreign currency loans prior to the onset of the crisis. What’s more, MKB was a key player in the so-called project property lending, a sector that suffered the biggest pounding by the international financial crisis. The duration of these gigantic loans financing shopping malls, office buildings, and residential buildings of course is still another 8 to 10 years, while the value of collateral has continuously declined over the past few years. Another drawback for the bank is that although its balance sheet total fell from HUF 2733 in 2010 to HUF 1895 this year owing to the downsizing of the past years (which also meant a substantial shrinkage in lending), the bank tax is still due according to the 2010 basis under the relevant legislation, in other words they still have a payment obligation of HUF 13.6 billion. On top of this, as a result of new government decisions the bank also had to pay HUF 8.7 billion in transaction tax and HUF 4.5 billion in surtax last year. An additional burden is that as a financial institute with a high volume of foreign currency loans, MKB will be exposed to the new compensation burdens adopted on the heels of the FX margin and unilateral contract amendments at an above average level, which according to analysts’ estimates may be as high as HUF 50 billion. On this subject, the bank recently announced in fact that it would prove the legality of the contracts in court- the entry of the state owner will most likely relieve the bodies of this lawsuit.
Relations to be disrupted
Nevertheless, the expected losses of MKB will be significantly curtailed by news suggesting that the National Bank intends to set up a „bad bank” for the takeover of non-performing property loans of financial institutes. Although details on its implementation are still sketchy, according to estimates this could cause the bad loans of banks to decline to at least 10 percent. Although there will be no such thing as a „free lunch”, the banks will most likely sustain exchange losses when determining the handover exchange rate, whereas through the transaction MKB could for example see the release of provisions of tens of billions of forints, not to mention the elimination of the loss spiral.
Demokrata said, the government is deploying a new economic model, part of which is that fifty percent of the banking system should be Hungarian owned, prime minister Viktor Orbán said two years ago. However, both the profession and the man in the street found its implementation unlikely in a short term (Demokrata, 2012/30). In his address in Tusnádfürdő last weekend, the prime minister nonetheless was proud to announce that by acquiring MKB the ration of Hungarian ownership within the banking system exceeded 50 percent. Minister for national economy Mihály Varga was somewhat more cautious in his assessment: he claimed the government took a major step in making it come close to 50 percent.
Compared to the situation of over a decade ago, when the ratio of Hungarian ownership barely reached 20 to 30 percent, it is a major change that the 50 percent hinges on what we consider as a Hungarian bank. For example, according to a calculation of portfolio.hu, the transaction meant that the ratio of Hungarian banks has risen above 50.5 percent in the Hungarian market. This is because by acquiring MKB, Hungarian banks increased their market share by 6.1 percent. However, the specialist internet portal considers MFB, Eximbank, and KELER, all of which fulfill state roles, as part of the Hungarian banking system, which together have a market share of 5 percent. And it considers as Hungarian OTP, with a seat in Budapest and reaching 25 percent of the market, despite the fact that the owners of the share books are foreign companies and persons to an extent of app. 50 percent.
Yet regardless of the way of calculation, the acquisition of MKB is a spectacular coronation of the state undertaking major efforts in recent years in increasing the Hungarian ownership share in the banking system. As it is well-known, in 2012 and 2013 the state-held MFP and later Magyar Posta bough out Takarékbank from its German owners in two steps and during the course of last year Magyar Posta also raised the capital in the financial institute. In mid-2013 the state acquired a major stake in two small banks, Gránitbank and Széchenyi Bank. Subsequently, early this year Széchenyi Bank made a bid for the Hungarian network of Raiffeisen Bank counting as the sixth largest and advertised as being for sale. However, due to the low price bid this transaction failed.
MKB should never have been sold to foreigners, Viktor Orbán also pointed out in his speech in Tusnádfürdő.
For the banking systems in Hungary it turned out that it is not indifferent who the owners of the banks are, given that during the onset of the crisis the banks in foreign ownership pulled out a significant amount of funds from the Hungarian banking system, Mihály Varga justified the increase of Hungarian share. He added that the goal of the government was to create a solid banking system active in lending.
National assets being expanded
Adding impetus to lending is of key importance to Hungary as without loans, consumption cannot substantially gather momentum, and nor can economic growth. From this perspective MKB, which is at the forefront of lending, can give a major boost to the processes. As it is, corporate loans turn into investments and workplaces. Provided that the financial institute, contrary to the practice of recent years, does not restrict its funds destined for the Hungarian lending market but seeks to augment lending.
For its part, MKB has a 12 percent market share in the corporate segment. In other words, they could even complement each other through the savings cooperative integration founded on the Takarékbank, the ten dozens players of which the state would like to prod toward the boosting of retail lending. Incidentally, Sára Nemes Hegmanné, state secretary of the Ministry for National Development, said in connection with the acquisition of MKB that this was a part of the strategy aiming at the reinforcement of the banking sector, where it would be desirable that the state attain a decisive, 30 percent share within the sector. All of which is a novelty given that so far the goals only called for the reinforcement of Hungarian ownership and not state ownership.
While according to one’s hopes the establishment of a Hungarian owned banking system will one day affect the economic growth of the country positively, from the point of view of state finances it represents immediate pitfalls.
Demokrata said, llthough according to EU rules the acquisition of profit-making companies by the state does not increase the result-oriented deficit of the subject year (because in exchange for the purchase price state assets increase), such transactions nonetheless increase state debt. Yet it is precisely the state debt, the increase of which prompted Brussels to warn our country that it could once again be subjected to the excessive deficit procedure (Demokrata, 2014/28). Although the purchase price of HUF 17 billion is not a major item in terms of the country’s budget (the newly levied advertising tax could bring just as much), analysts predict that the raising of this could have played a role in the ministry freezes announced two weeks ago and amounting to HUF 110 billion. According to the latest data of the Hungarian National Bank (MNB), Hungary’s state debt amounts to 84.6 percent of the GDP. Although the government promises to return it below the level of 79 percent by the end of the year after the temporary rise, an analyst of Nomura foresees in his latest analysis that it will remain at 85 percent. This is because the government is enriching state assets not just with the aforementioned banks. In order to „reconquer” the country it has solidified Hungarian positions in other strategic sectors as well, through ever braver acquisitions over the past one year. In the first six months of 2014, Magyar Gáz Tranzit Zrt. came under state ownership, along with AVE, a company involved in waste disposal service, Welt2000 Kft. owning the coding system of EU grants, the broadcasting company Antenna Hungária, and the wholesale gas utility business of E.ON. But equally significant are the stakes acquired in Főgáz, Mahart, or Panrusgáz, the company in charge of the international sale of gas, in the second half of last year, not to mention the acquisition of the commercial storage facilities of E.ON. As stated in the summary of Nomura, MKB is the 19th company with which the Orbán-government is enriching state assets.
“The acquisition of MKB is yet another step that reinforces Hungary’s economic independence”, the Fidesz caucus commented on the transaction in its communiqué. The banking profession itself presumes that further developments are expected shortly – Mihály Patai, president of the Hungarian Bank Alliance previously signaled that the goal of a banking system 50% Hungarian owned could be achieved as early as this year. On account of the government actions for aiding those with foreign currency loans, other foreign banks have also signaled a potential exit from the Hungarian market.
Photo: MTI – Lajos Soos
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