György Matolcsy’s cousin, lieutenant buy shares on credit in bank recapitalized at taxpayer expense

May 6, 2017

Translation of Éva Várhegyi’s article appearing in the May 4th, 2017 edition of Magyar Narancs under the title “Matolcsy’s people among the new owners of MKB Bank: It became Hungarian in all respects” (pp. 14-15)

Turning Hungarian in every way

The ill-fated MKB Bank has two new owners, both of them Hungarian, and both of them from within the orbit of György Matolcsy. What will this deal achieve, and for whom? Here we summarize the romantic tale of nationalisation, restructuring and privatisation, fleshed out with a thick layer of state money and agreeable straw men.

In the summer of 2014, the Hungarian state paid 17 billion forints to acquire MKB Bank from Bayerische Landesbank – running at a massive loss and dragging behind it a real estate loan portfolio whose poor quality was legendary – or rather from its 94% owner, the free state of Bavaria. There was nothing to justify the purchase of the fifth-largest Hungarian financial institution beyond the desire to acquire a bank, just as the owner Bayern LB was being squeezed by the pressure to sell (it had to divest its Hungarian subsidiary by the end of 2016 because of support it had received from the EU).

A few months later, in December 2014, the Hungarian National Bank (MNB), led by György Matolcsy, got to work on the bank in the name of “resolution”. It was revealing that the Hungarian parliament, keen to meet the expectations of the EU, had already adopted its resolution bill by the summer, whereupon the MNB was able to set up its Resolution Fund before the European Banking Authority could prepare its guidelines. The law states that the fund can bring under resolution banks that are suffering an insolvency crisis. It was strange, therefore, that it pounced first on MKB: barely six months earlier, before the nationalisation, the MNB had approved the scale of recapitalisation (83 billion forints) by the bank’s owners. The central bank also acknowledged its satisfactory capital and liquidity situation, and justified its move as the “necessary acceleration of restructuring”.

The Resolution Fund, which operates with payments from financial institutions, did its job. As it wrote in a statement on 30 June 2016, headed Magyar Nemzeti Bank closes the restructuring of MKB after a successful market-based sales procedure, the first step was to separate “the toxic commercial real estate loan portfolio of the bank representing significant exposure and responsible for its critical situation”, then it sold assets totaling 130 billion forints on the market for nearly 100 billion forints. From earlier statements it also turned out that in the second phase, assets with a gross value totalling 213 billion forints that could not be sold on the market were transferred in to the Resolution Asset Management Company at an economic value of 96 billion forints – although the market value was 64 billion – thus the state put up the 32-billion-forint difference.

The central bank’s statement also revealed that the “closing step of the resolution actions” was the sale of shares in the bank, which went in the ratio 45:45:10 to Blue Robin Investments SCA, Metis Private Capital Fund and Pannónia Pension Fund. The price was 37 billion forints, of which the 32 billion left after tax just covered the state support, so the Resolution Asset Management Company did not make a loss.

Win-win

Reading so much good news, we should be able to relax. It clearly went well for all involved: the state covered its expenses and one of the most significant institutions on the Hungarian banking market returned to private hands, so any possible future losses would not be borne by taxpayers and savers. But the scant information available does not reveal how much public money was really swallowed up by the acquisition, resolution and sale of the bank. Details of the process beyond those listed above remain obscure for reasons of business secrecy. For example, the real value of the assets – mainly real estate – transferred to the Resolution Asset Management Company for sale.

The identity of the bank’s new owners provided cause for public disquiet (for details see Magyar Narancs, 7 April 2016 and 7 July 2016). The MNB had promised to offer at least 51% of the shares in a public tender, with foreigners also featuring in the preferred ownership structure, and that it might later be sold on the stock exchange. However, the only details we have about the sale is that only three of the original seven bidders made offers meeting the required conditions, and from these the seller chose the consortium offering the highest price. Interestingly, that consortium offered precisely the 37 billion forints with which the resolution business just broke even.

Information about the opaque ownership structure and doubtful financial expertise of the members of the consortium that purchased the bank was certainly not reassuring (see Magyar Narancs, 16 June 2016), not least because well capitalised owners with a good reputation and no conflict of interest are especially important for banks that handle the finances of the wider public. By contrast, Minerva Capital Fund Management had launched its Metis Private Capital Fund just a few days before it put in its bid, although it had pumped 42 billion forints from mysterious sources into it by the time the MNB reached its decision.

We have even less information about the other major shareholder, Blue Robin Investments, whose background is in Singapore but which is registered in Luxembourg. Although Mr. Rakesh Kumar Aggarwal turned up in the flesh to represent the firm, one was reassured neither of a good business reputation nor of the company having the necessary capital. Indeed, this newspaper discovered that by the deadline for bids, Blue Robin – set up four days earlier with capital of a couple of million forints – had not even been registered, and later it would remain unclear how the firm would cover the 16.6 billion forint sales price (see magyarnarancs.hu, 5 April 2016). The MNB deflected this newspaper’s questions about the ownership background and request for details of the resolution with the reasoning used by its foundations: namely, MKB’s public ownership status ended when the Resolution Asset Management Company became the principal owner. However, according to the courts, the MNB is providing a public service by acting as a resolution authority, which “is grounds for the requirement to release information in the public interest”.

Hungarian, but whose?

Nor does this requirement end because one of the mysterious owners, Blue Robin, was recently acquired by a company belonging to two well-known local figures, and thus on paper the bank came under true Hungarian ownership. There had already been a step towards “magyarisation” when the “foreign” firm transferred a 15% share to bank staff in the framework of an employee share scheme. Two-thirds of the remaining 30% stake (20.19%) was bought by Ban Konzult, owned by Tamás Szemerey, and one-third (9.81%) was bought by Promid Invest Zrt, owned by the former deputy head of the MNB, now MKB director, Ádám Balog.

So the picture is starting to emerge, although some points remain unclear. The main aim was clear from the beginning, and I wrote about it in August 2014: “there will be a price for which the stripped and downsized bank will go… But even in that case there will be the question of which politico-business group’s empire would be adorned with the jewel.” It appears that several circles are sharing in the bank, but we can only speculate about the participants. For example, about who is really behind Minerva fund management, which set up the Metis fund, and what money was used shortly after to fatten up the fund. The two names chime with that of the foundations set up using MNB profits at around the same time, Pallas Athena, fuelling the suspicion that the fund manager perhaps invested this same money in the funds. According to a report by the since neutralised news magazine Figyelő, a business partner of Lőrinc Mészáros may have been behind the capital fund (this much could really go to Orbán in exchange for giving the MNB president a free hand in the use of almost 300 billion forints). Of course, this is all merely speculation.

Behind Szemerey and Balog looms the figure of György Matolcsy, without whom neither of them would be in their current positions. The cousin, Szemerey, saw his NHB Bank fattened up by central bank refinancing and the deposits of MNB foundations (and might also have got the clients of the collapsed Buda Cash). As for Balog, thanks to Matolcsy’s favour he was able to advance to the position of MNB deputy president, then CEO of MKB. The kingmaking central bank president, who oversees the financial system as well as running the monetary authority, can do a lot in the interests of the bank that can now be linked to him in several ways. He can use monetary tools to help it access liquidity at a favourable price when credit on the interbank market would come with worse conditions (such as the forint liquidity swap tool introduced last autumn), and supervisory rigour can be remodelled in line with its interests. The power concentrated in the MNB already contains the risk of a conflict of interest, especially if family and friendly ties (and who knows what else) link the all-powerful governor to the director or owner of a financial institution.

The government is also helping the bank, especially in an economy where the level of state intervention is growing. The financing of state businesses is attractive to all financial institutions: it is no coincidence that banking chiefs are muted in their criticism of the government. Despite the Hungarian economy staggering out of its crisis, and the fact that the bank tax has been reduced, it is still difficult to keep a bank running at a stable profit. Nor with slowly increasing interest rates can one expect to see growth in the interest rate that is their main source of revenue, while more stringent capital requirements and digitalisation will entail further costs.

The jump in bank profits last year was due in large part to the release of provisions. Presumably this also pulled into the black the long-time loss-making bank that was stripped during its restructuring, so it is good for the MKB to have the government’s wind in its sails. Its director Ádám Balog, in his late thirties, is not paying the 4 billion forints he needed to acquire his ownership stake from his salary as deputy head of the central bank or CEO of MKB, but – who knows how he got it – from credit, which he will be able to pay off in instalments from bank dividends. And Szemerey presumably did not pay his 8 billion from the profits his bank has made to date.

Naturally, anyone who put so much effort over almost three years into acquiring MKB certainly did not want just to pin it to his hat as decoration, but saw good business in it. If only because of this we can be sure the bank will turn a profit, one way or another.