Interview: Bad bank for a good cause

The state-owned “bad bank”, designed to aggregate the non-performing loans in the Hungarian banking system, was created with the enthusiastic support of central bank governor György Matolcsy.

On the face of it, the idea sounds almost deceptively good: By selling their bad debts to one state-owned bank, commercial banks would finally be freed from having to find ways to dispose of properties on which they had foreclosed. Those banks could also avoid employing large “workout” departments to handle bad debts.

But there are concerns that a single, state-run bad bank will not get full value for the loans it handles.

In this interview, Csaba Kandrács, CEO of the newly formed Hungarian bad bank, MARK Zrt. (Hungarian Reorganization and Debt Management Office), seeks to allay these concerns as he explains how the bank will function.

Q: The role of MARK is often described using the international bank rescue term “bad bank”. But isn’t MARK actually doing something different from rescuing banks?

A: That is correct. Today in Hungary there is no acute financial crisis, and so there is no need for bank rescues. The banks are okay on their own. On the other hand, the ratio of non-performing loans is still very high six years after the start of the financial crisis. The banks cannot cope with that alone. The first generation asset managers dealt with cleaning the portfolios of the banks that had got into a difficult situation. MARK Zrt., however, represents the second generation of asset managers. We are a tool in the hands of the central bank that cuts the top 500 non-performing project finance loans out of the banking system. MARK is a pioneering institution in this sense.

Q: Bank and real estate professionals have expressed concerns that you will pressure banks into selling all of their non-performing loans for a pre-determined percentage of the book value. Is that true, or do you handle bad loans individually?

A: To confute all sorts of market rumors, I’d like to state that MARK is a market actor, and we will acquire real estate at market value. We are going to consider each deal individually and we will bargain on them accordingly. We will not compel any of our business partners to do anything. Quite the contrary, we will make irresistible offers. MARK is neither a state authority nor a fire sale speculator seeking to acquire real estate at liquidation value.

Q: So overall you believe that banks will be satisfied with your operations?

A: We strive for transparency above all, because we are serving a public purpose. The percentage of non-performing loans in the Hungarian banking system has been very high for a long time now. That is a macro prudential risk for the whole banking system. The leadership of the MNB [National Bank of Hungary] created MARK Zrt. so it can reduce this percentage by freeing the banks from those loans. The result is public benefit. The willingness of the commercial banks to make loans will increase as they don’t need to create provisions covering non-performing loans. They also don’t need to bother about foreclosed real estate. The benefit of MARK Zrt. will be that the banks can concentrate on giving new loans to material production companies, which boosts the economy.

A: This doesn’t mean business success in the ordinary sense. Regarding the big goal, boosting the economy, it is irrelevant whether MARK Zrt. is profitable or not. What is irrelevant will be in our balance sheet ten years from now. On a macro level, the profit of MARK Zrt. will be that we restarted the lending of the commercial banks. As far as my personal contribution is concerned, I will do all I can to make MARK Zrt. profitable by the end of the ten-year period that MNB has planned for us. However that will only be a profit on a micro level.

Q: Obviously the central bank has put constraints on your business operations. What are they?

A: Pre-eminently, the HUF 300 billion credit facility of MNB is available for ten years, which does not mean that we will spend all that money. I personally think that we have to spend at least HUF 300 bln for a breakthrough on a macro level. Another constraint is that we can only deal either with loans surpassing HUF 500 mln or with real estate that is worth more than HUF 200 mln. The reason behind this is that we should concentrate on major deals. By the end of June, I want to close consultations with the Hungarian Banking Association about the code of proceedings. Afterwards we will make requests for proposals from the banks: In the first round for major syndicated loans; a second round for hotel project loans will follow.

Q: How about an exit? What are your plans for the real estate you will acquire? 

A: We want to handle our future real estate assets in different ways. As for the best projects, they simply need to be finished. Then there will be those that need to be rethought, where a change of function will be needed, repositioning them on the market. Finally, yet importantly, there will be those that will be sold in a bigger portfolio together. This way new potential buyers may pop up who, because of economies of scale, wouldn’t be interested otherwise.

Q: Why do you think MARK’s newly formed staff will manage to succeed where their commercial bank “workout” predecessors failed?

A: I have deep confidence in our colleagues. Currently there we are 25 people at MARK, each of us are the best of our professions. At the peak of our operation, we will be a team of 65 people. Additionally we will be much more targeted and dedicated, because while the people at the workout departments had to make compromises, we don’t.