* New Hungarian govt to ban fx loans, tax banks
* Hungary bank sector profits widened in 2008/09 crisis
* Measures likely to stifle loan growth, raise bad debts
* Bank shares' sharp decline has priced in effects
By Boris Groendahl and Marton Dunai
VIENNA/BUDAPEST, June 9 (Reuters) - Hungary's mostly
foreign-owned banks face pressure on earnings, revenue and asset
quality as a new centre-right government plans to tax them
heavily and take away their main lending growth engine.
Hungary's new prime minister, Viktor Orban, vowed on Tuesday
to introduce a levy on banks and other financial institutions to
fund tax cuts for everybody else, and to ban foreign currency
mortgages, the toxic asset of choice for Hungarian banks and
borrowers. []
The banks eventually proved a target too easy to be missed
for Orban's populist streak: their profits expanded even while
Hungary teetered on the brink of collapse, even though the
credit boom they had fuelled with cheap foreign currency loans
was at least partly to blame for the country's problems.
However, Hungary may pay a steep price for the moves because
they could tighten already scarce credit even further and weigh
on economic growth which has just started to pick up.
"A ban on FX loans combined with the new bank tax is likely
to hammer credit growth significantly in Hungary in a situation
where credit growth is already very lacklustre," said Lars
Christensen, an economist at Danske Bank.
Hungary's biggest bank with roughly a quarter of the market
is domestically owned OTP <OTPB.BU>.
The next six banks in the pecking order are units of KBC
<KBC.BR>, Erste Group Bank <ERST.VI>, Intesa Sanpaolo <ISP.MI>,
Raiffeisen International <RIBH.VI>, BayernLB [] and
UniCredit <CRDI.MI>. []
Shares in the banks geared most towards Hungary -- OTP,
Raiffeisen and Erste -- had dropped sharply in the sessions
ahead of Orban's announcement, and analysts said the drop had
more than anticipated the earnings impact.
"This is more than priced in," said Macquarie bank analyst
Pedro Fonseca. "The valuations are very eye-opening, I'd
certainly use the opportunity to invest in the banks."
Erste, KBC and Raiffeisen were all among the top gainers in
the FTSEurofirst 300 <> on Wednesday. OTP retreated
slightly after rising on Tuesday.
DETAILS SCARCE
While details remain scarce, Orban said he would keep the
bank tax for three years and aimed to raise 200 billion forints
($1 billion) this year alone. Hungary's banking sector had 306
billion forints in pre-tax profits in 2009.
Hungary had originally budgeted for 13 billion forints in
bank taxes before the increase.
The government expects financial sector profits of some 500
billion forints this year, Orban said. That figure might prove
elusive as bank profits last year got an enormous boost from
trading profits which are unlikely to be sustainable.
Some banks might also find it difficult to meet tighter
capital adequacy criteria in the face of dwindling profits,
which might force some of them into the red, the chairman of the
Hungarian Banking Association said. []
Orban said he would talk to banks about how to design the
levy, which would also apply to insurers and leasing firms, but
said the headline amount was not negotiable.
On top of this stiff -- albeit temporary -- hit, banks will
also have to factor in lower revenue growth as the fx loan ban
will make lending more expensive and more difficult to get for
borrowers and therefore to further suppress credit demand.
Both corporate and retail borrowers in Hungary are heavily
addicted to Swiss franc and euro-denominated credit. Banks have
been happy to oblige as they earn a higher spread with fx loans
and can charge extra fees for the handling.
"FX mortgages are one of the most profitable products for
the banks, with margins nearly twice as large as in forint
mortgages," said Peter Vidlicka of brokerage Wood & Co.
"So, the ban will not only slow down new lending but will
also reduce net interest margins going forward," he said.
The practice has already before Orban's drastic step been on
the top of policymakers agendas because it made the country
vulnerable and limited its policy options in times of crisis
because it could not opt to devaluate out of it.
However, while Orban's ban may have a drastic impact on
already sluggish credit growth, it will not do much to remove
the vulnerability because the loan stock won't go away quickly.
Some 70 percent of all existing household loans are
denominated in foreign currencies, a big default risk for the
banks in the event of a sharp fall in the forint.
With a large part of that being mortgages with an average 13
to 14 years to maturity, this stock will decline only very
slowly, Hungary's central bank has said.
"If there was no more new lending in foreign currency in
the future at all ... foreign currency loans would decline by
around 13 percent by the end of 2011, and then the decline would
decelerate," the central bank said in an April report.
ASSET QUALITY
Another hit could be in stock for the banks if the bad debt
expansion accelerates again rather than slowing down because the
new government's measures do not boost growth as hoped, while
fiscal tightening holds back the economy.
Hungary's central bank expects bad debt to peak this year,
but Hungary's banks have been restructuring loans to avoid
letting them become non-performing, and if the economy went down
again, those restructured loans could eventually go bad.
With the exception of domestic banks OTP and FHB <FHBK.BU>,
the combined Hungarian impact on its own will be relatively
small for the dominant western banks in the country, most of
which have a broad portfolio in the region.
However, for Austria's Erste and Raiffeisen in particular,
Hungary is not the only problem spot. Erste is also the biggest
bank in Romania, another IMF-supported country with a fx lending
habit, while Raiffeisen has an ailing Ukraine business.
Both have their bright spots too -- Erste in the Czech and
Slovak republics and Raiffeisen in Russia -- but analysts said
banks' portfolio mix would move more into investors' focus.
"If you have a good portfolio of operations, profits from
the 'good' countries should help offset losses from the
underperforming countries," said Stefan Nedialkov, a banking
analyst at Citi.
(Reporting by Boris Groendahl, Editing by Sitaraman Shankar)
