REUTERS SUMMIT-Some of Hungary's banks will need capital hike after refunds, official says

* For other news from Reuters Eastern Europe Investment Summit, click on http://www.reuters.com/summit/EasternEuropeInvestment14

* Some banks to need hundreds of millions of euros each

* Political commitment to convert FX mortgages next year

* Below-market conversion would pose stability risks

By Krizstina Than and Gergely Szakacs

BUDAPEST, Sept 29 (Reuters) - Some banks operating in Hungary will have to raise capital by hundreds of millions of euros each after they settle refunds on past loans with customers, Economy Ministry state secretary Gabor Orban told Reuters.

Hungary's parliament passed a law last week that will force banks to compensate their clients for past charges on loans that courts and the government found unfair. This is expected to cost banks about 1 trillion forints ($4 billion), Orban said at the Reuters Eastern Europe Investment Summit on Monday.

He also said there was a strong political commitment to convert households' foreign currency loans into forints, which could happen in the first quarter, or first half of next year.

Prime Minister Viktor Orban wants to eliminate the originally low-interest foreign currency loans, most of them denominated in Swiss francs, which many Hungarian families took out prior to 2008, when exchange rates were more favourable.

Getting rid of foreign currency mortgages would reduce Hungary's vulnerability to external market shocks and could boost domestic demand -- but could also impose further losses on banks if the conversion is done below market exchange rates.

State secretary Orban said the conversion will be limited to mortgages: only home loans and home equity loans will be involved, which means a total stock of 12 billion euros. This will be reduced by the loan refunds, so 9 to 10 billion euros worth of mortgages will be converted, he said.

The government has not yet made a decision on whether the conversion would be done at the spot market exchange rate or below it. But Orban said converting below the market rate could pose some risk to financial stability and this should be taken into account.

"I think this would risk financial instability to some extent and this might be one of the considerations in the decision. It would complicate banks' capital adequacy issues and this has to be taken into account when making the decision," he said.

State secretary Orban also said the bank tax, which Viktor Orban's previous government levied on banks in 2010 based on their 2009 balance sheet, will remain in place in its present form next year.

"The bank tax is high in international comparison and in the very long term it cannot stay that way, it's clear. But that's not to say that in the near future it can change," he said.

Banks operating in Hungary include Austria's Erste and Raiffeisen, Italy's Intesa and UniCredit (Milan: UCG.MI - news) , as well as Hungarian lender OTP.

PICKING UP THE PIECES

Orban said once the loan refunds and the conversion is out of the way, and a bad bank is set up to clean loan portfolios, banks operating in Hungary will have a better idea of the future and also the worth of their own business -- enabling them to decide whether they stick with Hungary.

He said the foreign currency loan conversion, unless it is done significantly below market rate, should not affect the banking system's capital position further.

"They are not in a position today to decide if they want to stay or leave. They will have more clarity I am sure next year, or in a few months' time," Orban said.

When asked if the government would be willing to step in as a buyer if some foreign banks decided to exit, he said:

"Like the example of MKB showed, if there is a bank that's looking to leave, the government is there to pick up the pieces."

German state-backed lender BayernLB decided to sell its Hungarian MKB unit to the Hungarian government in July.

Orban said for those who stay, new legislation on consumer loans will create a fair banking environment. He said the Justice Ministry was drafting a bill that would import best practice from Germany and Austria to regulate consumer loans.

"So if and when the fair banking system is created, then banks should have the confidence... to clean up their operations, raise capital and have viable business plans, which currently they don't have," Orban said.

He said it was "unusual" for a small market like Hungary to have 7-8 large banks with 5-8 percent market share each.

"In that sense a concentration is probably unavoidable," he added. So far all of foreign banks have said they intended to stay in Hungary.

Follow Reuters Summits on Twitter @Reuters_Summits (1 US dollar = 246.4 Hungarian forint) (Writing by Krisztina Than; Editing by Ruth Pitchford)