Bloomberg News

Austria’s Banks May Need Extra $5.5 Billion, Duchatczek Says

October 17, 2011

(Updates with banks’ comments in fourth paragraph.)

Oct. 17 (Bloomberg) -- Austrian banks may need as much as 4 billion euros ($5.5 billion) in additional capital if the European Union orders banks to clean up balance sheets and bolster capital buffers in a recapitalization program.

That amount is an “upper limit” for Erste Group Bank AG, Raiffeisen Bank International AG and Oesterreichische Volksbanken AG, Austria’s central bank Vice Governor Wolfgang Duchatczek told reporters in Vienna today. As “there is no consensus among the leaders in Europe yet,” the terms of a recapitalization remain unclear before the summit of EU government heads scheduled for Oct. 23, he added.

Austrian banks face slowing economies and rising bad debts in eastern European countries including Hungary and Romania, where they are among the biggest lenders. That is hurting their plans to bolster capital levels with retained earnings. Erste and Volksbanken both warned last week that they will report losses this year, while Raiffeisen said it will remain profitable amid a weaker second half. All three got state capital in 2009.

Duchatczek was speaking on the fringes of a ceremony in which European Central Bank President Jean-Claude Trichet was awarded a medal by Austrian President Heinz Fischer. Spokespeople for Erste, Raiffeisen and Volksbanken declined to comment on Duchatczek’s remarks.

Estimate Parameters

The estimate of a 4 billion-euro deficit is based on data requested by the European Banking Authority and assumes a writedown of sovereign debt holdings to market prices, Duchatczek said. He declined to elaborate on other parameters. Three people briefed on the estimate said that it’s based on a “worst case” minimum core Tier 1 capital ratio requirement of 9 percent. The people declined to be identified because the plans are private.

Central banks and the Group of 20 finance ministers have set an Oct. 23 deadline for the delivery of a plan to avoid a Greek default and bolster Europe’s banks. Officials are exploring the creation of an EU-level backstop which is capitalized by the European Financial Stability Facility rescue fund, people with knowledge of the discussions said last week. It would take equity stakes in banks and guarantee bank liabilities.

This proposal is controversial in Germany, which so far has called for bank recapitalization on a country-by-country level. Austria has 6 billion euros that are still unused for capital measures under its bank stability program, the finance ministry said last week. Erste has received 1.2 billion euros from this program, Raiffeisen 1.75 billion euros and Volksbanken 1 billion euros.

Nationalization Looms

The banks got this capital in the form of non-voting, non- tradeable “participation capital,” which is as risky as equity while it doesn’t rise in value like common shares. That’s why Austria’s ruling Social Democrats favor injecting common stock should there be a second round of capital aid.

“It’s the prevalent view in the Social Democratic Party that there only is nationalization,” senior Social Democrat lawmaker Jan Krainer was quoted as saying in Vienna-based Kurier yesterday. “The banks will only get tax money in return for ownership rights.” A spokesman for Social Democrat Chancellor Werner Faymann said there was currently no request for capital and declined to elaborate.

Austria has the right to nationalize Volksbanken, which hasn’t paid a dividend on its state capital since it received it in 2009. Finance Minister Maria Fekter of the co-governing conservative People’s Party has said her desire to exercise that right is “very limited.”

--Editors: Jon Menon, Steve Bailey

To contact the reporter on this story: Boris Groendahl at bgroendahl@bloomberg.net

To contact the editor responsible for this story: Angela Cullen at cullen8@bloomberg.net


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