With each day gone the enhancement of credit business is considered more and more important, being a basic pillar of sustainable economic growth. However, this is only wishful thinking for now; the situation looks like, despite all the partnership agreements made, the Orbán government and the financial institutions are still not rowing in the same boat.
We can’t even blame the “evil multinationals” for the differences of opinion any more, since Hungary managed to change the ownership structures of the banking industry in a series of reckless and expensive transactions. Based on the total assets around 55% of the sector is in Hungarian hands today. In 2013 the situation was the other way around, and at the time of the global economic crisis the foreign institutions even held two-thirds of the shares in the sector.
Experts have repeatedly pointed out that the high ratio of foreign ownership was a really lucky factor, since the western large banks did not want to give up on the Hungarian market during the crisis; they rather filled up the capital stock with millions of euros.
This backed up the logic of the unorthodox economic policy followed by Prime Minister Viktor Orbán, placing a higher financial burden on the “rich” foreign companies, which could have chosen to turn their backs on the country as a reaction to the special taxes on the banking sector. During the crisis the state would have had to cover for these losses, which would have finally led to bleeding out the institutions in a more cost-efficient way.
Big fish caught in 2014
The owners of the foreign banks gave up first, since they could never achieve a significant position in this country, or because they had to purge their own balances due to the crisis. After 2008 WestLB, Allianz, Volksbank and DZ Bank (Takarékbank) all retreated both from a German and from an Austrian point of view.
The last two were always considered as middle-sized banks in Hungary, while Volksbank was privately sold to the Russian Sberbank, and Takarékbank was already in the process of strengthening the position of the Hungarian state – here specifically through the takeover of control in the savings bank sector.
However, the Hungarian state caught the big fish in 2014. At that time the consolidation of small Hungarian banking institutions, led by oligarchs, who managed to rise during the wild growth course, was already going on in full swing, parallel to the consolidation of the savings banks and the new Postbank (FHB).
With the acquisition of MKB Bank Orbán wanted to show to the whole wide world that the Hungarian state is strong enough to take the fate of the banking sector in its own hands too. This bank was two and a half times as large as the Hungarian business of Citibank, which was just recently taken over by Erste. The balance sheet amount of close to HUF 2000 billion was considered part of a painful consolidation process, during which the previous owner BayernLB burned around EUR 2 billion, while the quantity of loans extended decreased to half, for example.
Orbán did not pay a low price for MKB for sure, since the really modest transfer fee of EUR 55 million can’t make us forget the skeletons in the closet (according to the financial authority, MNB, the portfolio of bad credits still can easily amount to EUR 700-750 million).
Where is the hoped-for consensus?
Considering the current financial situation of the Hungarian state the purchase of Budapest Bank (BB) appears to be particularly incomprehensible. Orbán paid a flat USD 700 million for this institution run by GE Capital in a firm and efficient way. The Hungarian state already earned a profit of HUF 16 billion in the first semester of 2015. This way seven years should be enough to earn back the investment, however the bank has to keep performing at least as well.
Orbán’s true motivation for this expensive purchase continues to remain a mystery. He has been keeping the budget deficit strictly under the limit of the Maastricht criteria for years, and without the acquisition of Budapest Bank he would have been able to give the amount of one, two years of savings to healthcare, for example.
It’s rumoured that MKB and BB will be unified in a super bank – this way the balances would nicely “compensate” each other. With a balance total of almost HUF 3000 billion this would create the second-largest bank in Hungary, well ahead of the five foreign institutions (K&H, UniCredit, Raiffeisen, Erste and CIB), which apparently are still hoping with unbroken optimism that they can reach consensus with the government.
Erste Bank even invited the Hungarian state to take over 15% of their shares. OK, this deal has been made possible with the mediation of the European Bank for Reconstruction and Development, which also wanted 15%. All this was announced in February with a lot of lamentation, since when we have not heard much about the deal.
The entry of the state into the business was only part of the package, which the unusual business partners have put together since then. There was a moment, which is decisive for the whole sector, when the Hungarian government undertook in a letter of intent that it would reduce the special tax on the banking sector in two parts in 2016 and 2017 to about half of the current amount.
Erste and Raiffeisen alone lost around EU 1.5 billion due to the special tax – as Orbán sees it, this is still less than the extraordinary profits they earned, especially through lending credits in foreign currencies.
Not even the “zero credit” succeeded
Of course, the government is not just giving away gifts to the banking sector out of brotherly love: Orbán demands a clear growth in credit business in return.
Only Erste Bank wants to lend EUR 550 million of fresh loans within three years, for topics such as energy efficiency, the agricultural sector and for civil servants.
Fidesz managed to turn the citizens against the banks but with time they had to realise the catalyst functions the financial institutions are fulfilling and how very necessary credit is for oiling the capitalist economic structure.
The Hungarian National Bank (MNB) has released a flood of cheap credit, being ready to provide between HUF 2000 and 3000 billion in its Credit Program for Growth in recent years. However, with a base interest rate fixed at a maximum of 2.5% within the year, even this program, which was fine-tuned to the market demand in two stages, has only succeeded in handing out HUF 1700 billion up until now.
The program will conclude at the end of the year and for the moment there is no talk of continuation. (Possibly only because they would like to intensify the demand in the last minutes before closing the program, since until this time only 26,000 companies have used the one-of-a-kind opportunity.)
Real economy with less optimistic growth prospects
The commercial banks complain on the other hand that they are able and ready to hand out credit in large amounts – only there are hardly any corporate customers that are creditworthy under the current economic conditions, and who are also willing to apply for it. The great investment boom of 2014 seems not to continue; the whole economy is bumping up and down apart from the cases of some productivity islands.
László Csaba, professor of economics, practised unveiled criticism of the Hungarian entrepreneurial sector in his interview with the daily newspaper Magyar Hírlap: “I know that there are a whole lot of bank instruments with favourable interest rates at the moment. However, the stakeholders – especially of smaller companies – are still waiting for alimonies.”
His thought points to the philosophy of economic recovery, which needs more initiative and risk-taking from the side of companies. The professor correctly noted that the latter made a less optimistic assessment of the growth opportunities than the one made in governmental circles.
In order for the real economy to realise such a dynamic investment increase as the government is expecting, the actors of the economy are expecting in return that the state takes an even larger share of the relevant risks than up until now. Cheap credit alone does not seem to be sufficient for most as motivation for new investments.
Foreigners welcome at MKB
The Hungarian government would like to involve foreign investors in the reprivatisation of MKB planned before the end of this year. The Hungarian National Bank as seller “prefers an ownership structure, which secures that MKB becomes a stronger and more independent actor in the Hungarian banking sector and will not be absorbed in a merger,” Ádám Balog, a CEO of MKB, explained. A certain proportion of foreign share would be especially desirable. The state would like to keep at least 10-20% but a maximum 49% of the commercial bank’s shares.