Top Manager in Discussion: László Balázs, Chairman-CEO of Volksbank Hungary
Magyarországi Volksbank regards itself as a bank for small- and medium-sized enterprises (SMEs) first and foremost. It is no surprise therefore that the bank is up in front when it comes to topics such as the recently agreed package for beleaguered foreign-currency borrowers and the Széchenyi Card. The Budapest Times spoke to chairman-CEO László Balázs about how the bank’s business clients are faring and his assessment of the government’s economic policy.
“Clients are beginning to invest more, including by making use of EU funds. The government’s tax policy is certainly also having a positive impact on companies’ willingness to invest. As a result firms have more money at their disposal. Their tax rates are now sufficiently bearable that there is less motivation to ‘optimise’ their tax burden by setting up offshore companies. That means more money will stay in Hungary, “ said László Balázs, Chairman-CEO of Volksbank Hungary.
How satisfied are you with the recently hammered-out compromise to support hard-pressed foreign-currency borrow-ers?
We worked together with the Banking Association for several months to draw up a compromise proposal that is acceptable to all parties. I believe that we have succeeded. It is now possible for effective help to be given to customers who are unable to service their loans or are having severe difficulties doing so because of the weak forint exchange rate to the Swiss franc in particular. There are three ways that can happen. A system has been developed for customers struggling to make their repayments that allows them to take advantage of a fixed exchange rate for a period of 36 months that is more favourable than the actual exchange rate as a rule. That will lower those borrowers’ monthly instalments significantly. It’s true that in three years’ time they will have to face the market exchange rate again but the package gives them breathing space to get their finances in order by then. It is hoped that Hungary’s macroeconomic situation will improve during those three years, which would naturally have a positive bearing on the exchange rate and the financial situation of borrowers.
What about customers who are far from able to make their repayments?
First they can endeavour to settle their arrears, so that they can then benefit from the fixed exchange rate system. If that is unmanageable they can consider two other options. They can try to exchange their home for a smaller one, which would reduce their monthly instalments. An interest rate subsidy helps those moving into smaller homes. If even that fails they can go from being owners to renting their home back. While they would not be living under their own roof in terms of ownership, at least they would not lose their home. That is of great importance for two reasons. One is that the moratorium on foreclosures, which has threatened a significant part of the banking system, can be progressively lifted. The other is that it serves to prevent people from ending up on the street. We need to be mindful of both economic and human considerations. I believe that the package is beneficial both for the banks and for borrowers under the current circumstances. Various protection mechanisms are designed to avert the worst-case scenario of people losing their homes entirely. For the model to be feasible, all the parties involved, i.e. the banks, the state and foreign-currency borrowers, must shoulder certain burdens.
What are the burdens for your bank?
According to the fixed exchange rate model, customers will have to pay the difference between the set rate and the market exchange rate at the end. Until then the banks cover the costs, which means they are effectively granting the customer a special loan. The state stands surety for the loan through Garantiqa but not for free: we pay for the loan guarantees. Those are acceptable costs for us if we compare it to total default. In Hungary there are now around 100,000 foreign-currency borrowers that are in arrears with their payments by more than 90 days. That is ten per cent of the total number. Until the compromise that percentage was continuing to grow and the problem would have surely reached a point at which it would have been difficult to bring under control. Such a ticking time-bomb would of course have been fatal for the national economy. The package is not a magic bullet but we have won some valuable time as a result. The conditions are now conducive to the number of non-payers falling, rather than continuing to rise.
Why did it take so long for the package to be agreed?
Several months of hard work, in which Magyarországi Volksbank was also heavily involved, preceded the compromise, which may seem simple on the surface. The art was in developing a solution of general applicability based on a large number of individual problem cases. Of course the banks devised solutions for distressed foreign-currency borrowers even before now, but they did so individually, on their own initiative. Magyarországi Volksbank restructured the loans of dozens of our customers. But a global, standardised solution is far better than a plethora of one-off solutions. It is of great importance that against this background the moratorium on foreclosures can be lifted in a way that is socially acceptable. Delaying that step any further would have delivered yet another blow to the mortgage market.
The moratorium is being lifted very cautiously. Is the state treading too lightly in your opinion?
No. It’s true that the moratorium on foreclosures is being lifted in stages – high-value homes from 1 July and other homes from 1 October – and is tied to strict quotas but the banks willingly accepted those conditions. It is in nobody’s interests for property market prices to hit rock bottom, which is what would have ensued if the moratorium had ended all at once.
To which borrowers does the protection from foreclosures apply?
It is only for borrowers who took out a loan before the crisis under markedly different exchange-rate circumstances. Borrowers who take out a mortgage now and get behind on their payments cannot make use of the package; in those cases only the laws of the market apply.
The state has at least taken measures to prevent Hungarians from getting burnt once again by speculating in foreign-exchange loans.
Yes, the new regulation that banks may grant foreign-currency loans only to customers whose salary is 15 times the minimum wage is virtually synonymous with a ban on foreign-currency loans.
Why didn’t the state protect citizens “from themselves” earlier?
Nobody was under any compulsion to take out a foreign-currency loan. Forint loans were also available. However, a majority of grown adults chose the former opinion. I find it wrong to rebuke borrowers, the state or the banks in hindsight. Barely anyone predicted a crisis of this dimension and with such consequences. Everyone has learnt from these painful experiences.
The virtual ban on foreign-currency loans hints that the state is not convinced its citizens have taken that lesson on board.
It is better to be safe than sorry. Under the circumstances it is certainly preferable to stem a further proliferation of foreign-currency loans.
The Széchenyi loans, on the other hand, are very much encouraged.
Yes, certainly. They are a clear success story. The programme began a little under seven years ago with current asset loans. The idea was to support SMEs that were creditworthy, but banks were not willing to finance either because they had not been on the market long enough to present the appropriate figures, or because they were lacking in securities or own funds. Without any loans at all such companies would only have been able to achieve very modest growth regardless of the quality of their business plans. The Széchenyi loans are designed to provide firms in that situation with the necessary liquidity. The state acts as surety for 80 per cent of the loan amount through Garantiqa. Increasing the credit volume with manageable risk is attractive to all parties. The popularity of such loans speaks for itself. We are now one of the three largest lenders in the Széchenyi Card programme. The Széchenyi Card is available in all our 62 branches. Széchenyi loans are now also available with a maturity period of three years and the investment loans have an even longer maturity. The range of Széchenyi loans will be completed this summer with a special construction for agricultural firms; we hope that our bank will be among the first to award those loans.
What is your view of the government’s economic policy?
I think the direction taken is essentially correct. Specific measures such as the New Széchenyi Plan indicate that the government is not simply paying lip service to its long-avowed intention of shoring up Hungarian SMEs. It is also good that the government is determined to get the state debt down to a sensible level. That will have a positive effect on Hungary’s financial standing and that of investors.
Let’s talk about the bank tax.
I very much hope that it will be levied for the last time in 2012. The funds that lose as a result have deprived our bank of considerable liquidity. If the economy is to grow, then it needs a banking system with sufficient capital. Before the crisis the capitalisation of the Hungarian banks was very good, which is why they emerged from the crisis relatively unscathed. Their capitalisation and therefore their loan-granting ability are significantly weaker at present. Higher reserves, the very high bank tax and compliance with the Basel III capital adequacy requirements now pose additional burdens.
Did you also voice that hope during your recent negotiations with the government about foreign-currency loans?
No. We didn’t want to link the two matters. The issue was to alleviate the troubles of foreign-currency borrowers. The bank tax is a separate question.
Are you negotiating with the state about the future of the bank tax?
No, not right now.
How are your business clients faring?
Things are gradually improving. They are beginning to invest more, including by making use of EU funds. The government’s tax policy is certainly also having a positive impact on companies’ willingness to invest. As a result firms have more money at their disposal. Their tax rates are now sufficiently bearable that there is less motivation to “optimise” their tax burden by setting up offshore companies. That means more money will stay in Hungary.
What would you include in the National Reform Programme?
I believe it is very important to support investments in research and development. There should be stronger tax incentives for that, for example a reduction in social security contributions. That is also one of the ways in which the training of skilled workers can be encouraged. As to training the required manpower, I would welcome greater cooperation between educational institutes and companies. That could extend to agreeing on syllabuses. Supporting SMEs by means of state loan guarantees is also very important.
How is business for your bank?
We managed to grow again last year in terms of our most important customer group, SMEs. That was due in no small part to the fact that we didn’t stop financing that sector despite the crisis. Even in the most difficult months we ensured that our clients had accessibility to loans. We intend to continue growing along that track.