The latest proposal of the Hungarian government is that banks will pay a tax equal to 20% of mortgage interest subsidies (with a tax shield). We understand that this new tax is intended to replace the previous special banking tax (equating to 6% of net interest income, with a tax shield, or 8% of pre-tax profits).
Examining the impact of this latest proposal on the banks, it appears to be broadly neutral for OTP Bank but severely negative for FHB. The feedback from OTP Bank has been that it would expect to pay some HUF 13bn under the rules of the special bank tax in 2007 but HUF 14bn (20% of some HUF 70bn in subsidies) under the newly proposed tax, making the difference equal to less than 1% of net profit. The feedback from FHB is that whilst the bank would expect to pay less than HUF 1bn under the rules of the special bank tax, the cost of the tax on mortgage subsidies could reach HUF 5-6bn. This would equate to a difference equal to more than half of the bank's net earnings.
Whilst it now appears that the latest proposal is indeed official, its still difficult to believe the government will go through with it, given the detrimental impact on the net worth of FHB, a company in which the State has a 53% stake. Trading in FHB was suspended yesterday and we would expect the stock to trade down significantly when trading resumes, with investors left to weigh the probability the government implementing the new tax.