Austria's Erste Group on Monday said it expects Erste Bank Hungary to rack up a loss of about €500m in 2011 because of the direct and indirect effects of an early FX mortgage repayment scheme as well as the adaptation of its business strategy.
Erste Group said it expected to write down €312m of goodwill and make additional risk provisions of HUF 450m related to its activities in Hungary. The measures will be taken because of "unprecedented government intervention in the Hungarian banking market, an increase in the target non-performing loan coverage ratio and deterioration in asset quality", Erste Group said. The goodwill impairment does not impact regulatory capital or tangible equity, it added.
Erste Group said its unit in Hungary would be "repositioned with a view to establish a bank that is more resilient to political event risk".
Erste Group said it would create a provision of €200m to cover expected losses from a government scheme allowing early repayment of foreign currency-denominated loans at discounted exchange rates. The provision assumes an exchange rate loss of 25% and a participation rate of 20%.
Erste Bank Hungary will challenge the legality of the scheme, but it will also offer existing clients without sufficient savings to repay their FX loans forint-based refinancing, Erste Group said.
Another HUF 200m in risk provisions will be set aside as the bank sees its NPL target rising to 62% "in light of the deteriorated legal certainty and economic prospects", Erste Group said.
Altogether, up to €600 m will be injected into Erste Bank Hungary, the parent bank said.
Erste Bank Hungary will focus in the future on lending in local currency funded from locally sourced liquidity, Erste Group said. It will also cease its cooperation with external sales agents. "This could lead to market share losses in the short term, but over time reduce the requirement for parent company funding and thus minimize Erste Group's exposure to political event risk," Erste Group said.