Hungary: Better economic and operating environment ahead for banks

23 February 2015 | newsletters

On 9 February 2015, Erste Bank Hungary entered into an agreement with the Hungarian Government and the European Bank for Reconstruction and Development (EBRD). Pursuant to the agreement, both the Hungarian Government and the EBRD will participate in Erste Bank Hungary’s capital increase and will each acquire a 15% of the share capital of the bank, which is part of the Vienna-based Erste Group. With the planned increased capital, Erste Bank Hungary has committed to increasing its lending activity in certain sectors (public, energy, and agricultural sectors) that the Hungarian Government views as strategically important. It is envisaged that Erste Bank Hungary will provide credit facilities in the aggregate amount of approximately EUR 550 million for the above-mentioned sectors.

Furthermore, EBRD and the Hungarian Government agreed that the Hungarian Government will gradually reduce the banking tax as of 2016 until 2019 to a level that matches the EU average and make no additional efforts to acquire further interests in the country’s financial sector. The Hungarian Government also undertook that it will within three years sell its existing stakes in the Hungarian financial sector, most notably those that it has recently acquired in Budapest Bank (formerly a member of GE Capital Group) and MKB Bank (formerly a subsidiary of Bayerische Landesbank).

The Hungarian Government also agreed to refrain from passing any new law – unless required to do so by European Union legislation – that would have a direct negative influence on the profitability of the financial sector. Among other measures, the Hungarian government will help – by way of adoption of new laws – the financial sector to build down their non-performing loan portfolios. The government also promised not to introduce regulation on either private bankruptcy (the concept of which is not currently present in the Hungarian legal system) or the retroactive termination of contracts, without prior consultation with the Hungarian Banking Association.

In turn, the EBRD undertook to participate in the settlement of the problems caused by non-performing loans (the details of that undertaking have not yet been revealed), to participate in share and bond transactions enabling the Hungarian Government to divest its stakes in the Hungarian financial sector, and to provide facilities enhancing the lending activity of the Hungarian banks in the corporate sector.

To sum up, the agreement between the EBRD and the Hungarian Government seems to be a guarantee for the financial institutions operating in Hungary that they can expect to enjoy a more secure and financially more beneficial legal and economic environment in the coming years.