It is highly likely that Széchenyi Bank - or more precisely the Hungarian state - will buy he Hungarian unit of Raiffeisen International Bank for a total consideration of one (1) euro. The management of RBI is to make a decision in this respect on Tuesday afternoon, local business news portal Napi.hu reported on Tuesday. The Raiffeisen saga will continue in Budapest on Wednesday when the government convenes for a meeting. The transaction and the consequent transition could be completed by the end of this year.
The Board of Directors of Raiffeisen International AG will decide today afternoon whether or not to divest its Hungarian unit. One of the bidders for the subsidiary is Hungary’s Széchenyi Bank, in which the state acquired a 49% stake in the summer of 2013.
Napi.hu has learned that it would pay one euro (cc. HUF 300) for the local Raiffeisen arm, which is more than 100 times bigger than itself in terms of total assets. In exchange the state would assume all of Raiffeisen Hungary’s liabilities, debts, non-performing loans, i.e. the Austrians could make a painless exit from the increasingly chaotic Hungarian banking system.
The question is which Raiffeisen items would be taken over by Széchenyi Bank and what would happen to the problematic assets. Banking experts speaking to Index.hu said it would be extremely competition-distorting if the buyer was allowed to cherry-pick the profitable items from Raiffeisen Hungary’s portfolio and it would also dodge the bank tax. Local business daily Napi Gazdaság reported today that it would not have to pay Raiffeisen’s share of the bank tax only if it acquired only some of its businesses and portfolios rather than the whole bank, given that the base of the bank tax is the end-2009 adjusted total assets of the subjects, and Széchenyi Bank did not exist back then.
RBI has received bids for its Hungarian subsidiary and these are currently under review, RBI spokeswoman Ingrid Krenn-Ditz confirmed a statement made by the bank in November 2013 on Tuesday. She, however, has not confirmed or denied any press report on the bid.
She declined to comment on a report by Napi Gazdaság that RBI’s Board could take a decision on the divestment of the Hungarian arm already today. Krenn-Ditz has not disclosed the name of the bidders, either.
"The bank has received bids for its Ukrainian and Hungarian interests, which are currently under review, but I cannot say more," she said.
Napi.hu said that if RBI nods on the bid the final say could be said by Hungary at the upcoming government meeting on Wednesday. The actual merger, however, could still take months and it needs an approval by competition watchdog GVH.
Raiffeisen’s total assets are 111 times larger than the balance sheet total of Széchenyi Bank (HUF 2,119.6 bn vs. HUF 19.6 bn), whereas its deposits are 93-fold of the latter institution (HUF 1,351.1 bn vs. HUF 14.6 bn).
Also, Széchenyi’s equity is 58 times smaller than that of Raiffeisen Hungary and 30 times as smaller than the loss Raiffeisen incurred in Hungary in 2012. Raiffeisen paid more in bank tax (HUF 7 bn) the year before last than Széchenyi’s entire capital.
According to end-2012 data, Raiffeisen had HUF 1,545 bn worth of customer receivables, HUF 424 bn of which were non-performing. As at 31 December 2012 accumulated impairment losses amounted to HUF 259.2 billion. Assuming that nothing is received from these NPLs and the size of bad debts do not rise further, the owner will get rid of HUF 164 bn worth of loan losses (at least according to 2012 data) if it practically gives the bank away. Of course, there are other expenses and revenues besides these losses but the prevailing conditions would not let Raiffeisen to make profit for quite some time.
The EUR 1 bid may also indicate that according to the would-be buyer Raiffeisen Bank’s currently worth is zero, which may be close to the truth. According to another interpretation, there is no detailed valuation behind the bid and it is mainly political reasons that drive the bidder.
With the usual valuation based on book value a 1x P/BV would give us a cc. HUF 100 bn fair value, but the parent bank provided the bulk of the capital over the past years simply to make up for the losses therefore this valuation cannot really be used. P/E is even more difficult: due to the constantly changing tax burden and the government measures related to FX mortgages Raiffeisen is worth as much as the cabinet let it to be worth.
All this, however, could mean that Széchenyi Bank, or more precisely the state standing behind it, will assume all the risks carried by Raiffeisen’s portfolio of NPLs. In an unpredictable environment this could force the state to burn up massive budget funds for years to come. In practice, though, it would be Hungarian tax payers that will pay for the losses the bank is to incur.
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