* Sector to post 6-7 pct ROE vs 9-10 pct expected this year
* Six banks preparing to sell large chunks of sour mortgages
* Sales could slash non-performing loan rate to 12-13 pct (Adds detail, more comments)
By Gergely Szakacs and Marton Dunai
BUDAPEST, Dec 29 (Reuters) - Hungary’s banks are on course for a profitable 2017, continuing their recent recovery, with six lenders preparing to sell large chunks of distressed mortgages to clean up their books, the head of the industry’s association told Reuters.
Banks were hit hard by the populist policies introduced by Hungarian Prime Minister Viktor Orban after he came to power in 2010, which included a big windfall tax on lenders and a drive to reduce foreign ownership in the sector.
But after a landmark agreement in February 2015 in which the government agreed to cut the bank tax and improve cooperation with the industry, lenders turned a corner.
“I am not saying we are set for seven years of prosperity, but this year we have embarked on a course of normalcy and this will continue next year,” Hungarian Banking Association Chairman Mihaly Patai said in an interview on Thursday.
He said regular co-operation with the government and the central bank marked a positive change in relations, expressing hope that the authorities would tame their “creativity” after the sweeping reforms affecting the sector in past years.
Orban’s right-wing Fidesz party has a firm lead in opinion polls ahead of an election due in the spring of 2018.
Patai, who is also the head of UniCredit’s local subsidiary, Hungary’s second-biggest lender by assets, said the sector could post an average return on equity (ROE) of 6-7 percent next year.
While that would be down from an expected 9-10 percent in 2016, profits this year were boosted by one-off factors, such as the large-scale release of provisions linked to problematic foreign currency loans, that will not be repeated next year.
Patai said the next big turning point for the sector would be the sale of a large stock of distressed mortgages to specialised investors, getting rid of toxic assets that have weighed on lenders’ balance sheets since the financial crisis.
About six banks are preparing to sell hundreds of millions of euros worth of such assets to foreign players, including U.S. investors, who stayed away from the local market during a previous real estate boom in the past decade, he said.
“This will highly improve the 2017 quality indicators of the banking system,” Patai said in his office in central Budapest, adding the deals could cut the local retail non-performing loan rate to 12-13 percent from the current 18 percent.
Erste Bank, Hungary’s sixth-largest lender by assets, sold a large part of its sour mortgages to Sweden-based credit management services company Intrum Justitia in a deal worth over 19 billion forints ($64 million) in October.
Patai said further challenges for banks included record-low interest rates, as well as the possibility that some players will take on riskier loans due to growing competition.
He added that in the run-up to the 2018 election, no major merger and acquisition activity was expected apart from the planned privatisation of state-owned Budapest Bank.
$1 = 296.79 forints Writing by Gergely Szakacs; Editing by Mark Potter