Austria's Erste Group raised risk provisions in Hungary from €180.0bn to €701.3bn in Q1-Q3 from the same period a year earlier because of an early repayment scheme as well as political uncertainty and the economic outlook, Erste said in its third-quarter report on Friday.
Erste Group Bank CEO Andreas Treichl admitted that the bank itself committed mistakes in Hungary, and that, in a worst case scenario, it may be forced to write down the bulk of their Hungarian foreign currency denominated lending stock. He also said they do not expect their Hungarian operations to make any significant profit in the coming years.
The group generated €531.7m net losses after minorities in Hungary in the first nine months against an €9m loss one year earlier, and they plan an up to €600m capital increase.
Commenting the group's results in the nine-month statement, Treichl said that "...In Hungary we have started a strategic review with the aim to reposition our bank towards extending local currency loans funded by local currency deposits".
"We ourselves also have committed mistakes in Hungary", and legislation adopted by the (Hungarian) government aggravated the mistakes committed by the bank, Treichl said in a letter to investors, in an apparent reference to an early repayment scheme which gives forex mortgage borrowers the option to fully repay their loans at discounted exchange rates.
"In the worst case all this may force us to write down a significant part of our foreign currency denominated lending stock", the CEO wrote.
Speaking at a press conference on Friday Treichl made it clear that the group "does not count on Hungarian operations to be very profitable in the coming few years".
Net interest revenue rose €15.4m or 5.3% to €303.1m although mainly on higher unwinding effect which also boosted risk provisions, the nine-month report said.
Net fees and commission income improved slightly to €73.8m. A €5.4m rise in costs, to €158.1m, included the expenses related to the establishment of a new unit, a building society, in Hungary.
Operating results in Hungary rose €5m to €233m. The cost-to-income ratio rose slightly, to 40.4% from 40.1% in January-September 2010.
Detailing risk provisions, Erste said that a €200m provision was set up to cover expected losses resulting from the forex loan repayment scheme, which allows full early repayment of forex mortgages at a discounted exchanged rate, Erste explained in the report. A further €250m in provisions were made "in view of the economic outlook and the uncertain political climate in Hungary", it added.
Erste said 4,499 clients had declared their participation in the early repayment scheme by October 26. It said 20,967 clients had said they were interested in the scheme.
Erste's Hungarian unit paid €40.8m in bank levy in the first nine months of 2011 as against €36.3m paid a year earlier.
And "In view of the current earning developments and forecasts for the Hungarian economy, all goodwill still on the books in the amount of €312.7m was written off...", the nine-month report said.