By Margit Feher
BUDAPEST--A new law designed to compensate Hungarian retail bank
customers for unforseen interest payments on existing loans could
see banks losing more than a quarter of their total capital,
credit-rating firm Moody's Investor Service said Thursday.
Moody's said around 2.6 billion euros ($3.54 billion), or up to
28.3%, could be lost if the law is passed in its current form by
the country's head of state Janos Ader. Such a loss would reduce
the banking sector's capital adequacy ratio to 12.5% from 17.4% at
the end of last year. The capital adequacy ratio is a key indicator
of banks' financial well-being.
Under the new law, banks are required to compensate retail
customers for unilateral increases of interest and fees on loans
disbursed over the past 10 years. The law also orders banks to
refund foreign-currency borrowers--mostly on mortgages tied to the
Swiss franc--and the gains that the banks have made since 2004 on
the spread between the buy and sell rates of the foreign
currency.
Among the Hungarian banks Moody's rates for their credit
quality, mortgage bank FHB Nyrt. (FHB.HU), Erste Bank Hungary Zrt.,
a subsidiary of Austria's Erste Group Bank AG (EBS.VI), K&H
Bank Zrt., a unit of Belgium's KBC Group NV (KBC.BT), and Hungary's
biggest lender OTP Bank Nyrt. (OTP.BU) risk paying the largest
amounts in compensation, it said.
KBC said earlier this week that it will have to set aside at
least EUR162 million in the second quarter because of the impact a
the new law. OTP said the compensation payments to clients will
reduce its pretax profit in the second quarter by a
higher-than-expected 25 billion forints. Erste Bank Group AG said
it expects to book a net loss of EUR1.4 billion this year as a
result of higher provisions in Romania and Hungary. Austrian peer
Raiffeisen Bank International AG (RAIFY) will take a charge of up
to EUR160 million, it said.
Previous measures taken by the Hungarian government over the
past four years to tackle the burden of households'
foreign-currency debt have resulted in bank-sector losses and
"proven unsuccessful at containing the deterioration of banks'
retail portfolios," said Simone Zampa, Vice President, Banking at
Moody's..
With this latest government measure and if the debt service is
significantly reduced as a result of another government step
expected later this year, "borrowers debt payment capacity and
discipline could be gradually restored" on condition borrowers'
confidence in the banking sector improves, Moody's said.
Write to Margit Feher at margit.feher@wsj.com