bne IntelliNews -

The Hungarian government has signed a preliminary agreement to buy Budapest Bank from GE Capital, officials said on December 4. The acquisition will move the state another step closer to its ambition to raise domestic ownership of the banking sector to as high as 70%. 

The purchase price for the country's eighth largest lender will be determined after the completion of due diligence in a few weeks, Economy Minister Mihaly Varga said. The deal is expected to be finalised by mid-2015. 

"The government and GE have reached a decision on the purchase of Budapest Bank," Varga said according to the Financial Times. "We have today signed a pre-contract agreement and the process will be concluded within the first half of 2015. The Hungarian Development Bank will provide the capital needed."

The US corporate giant put Budapest Bank up for sale in October. It is also pushing to sell Polish lender BPH. The Hungarian state's purchase of Budapest Bank, which concentrates on retail banking and SME lending, has been an open secret for over a month.

For Budapest, the acquistion is the next step in a strategy to have up to 70% of the banking sector in Hungarian hands. The process has been sluggish as many foreign owners are loathe to sell because of the low valuations.

"We have reached an important day," Varga said. "This decision also means the regaining of our economic sovereignty." The minister claimed the government will aim to sell the bank within a year or two, adding that a a decision on a potential merger with MKB will be taken later.

In October the state closed a deal to acquire the country’s fourth largest bank, MKB, paying €55mn. Germany's BayernLB, which also agreed to waive €270mn in claims, had to offload the bank by the end of the year to meet the conditions of a 2009 bailout. 

Varga suggested that Budapest Bank deal should intensify competition and invigorate lending. Critics point out that bank lending has dropped, leaving the central bank's "Funding for Growth" scheme as the only meaningful credit provider in the country. 

Lenders in Hungary have been under pressure since ruling Fidesz came to power in 2010. In addition to paying Europe’s highest bank tax, the introduction of a financial transaction tax and a relief scheme for mortgage borrowers, the government is now forcing banks to compensate borrowers for credit practices deemed unfair, leading to huge losses.

Banks are also expected to incur losses as a result of newly-adopted legislation forcing them to convert $14bn of foreign-currency mortgage loans to forints. Yet, foreign banks that control some of Hungary’s largest banks insist they are not planning an exit.

In a recent statement, the European Commission warned that substantial state ownership in the banking sector has the potential to expose public finances to a contingent liability, as evidenced during the recent financial crisis.