Bloomberg News

Austria May Be Unable to Fund Banks’ Units Abroad, S&P Says

November 09, 2011

(Updates with analyst comments in fifth paragraph, Austrian spreads in eighth.)

Nov. 9 (Bloomberg) -- Austria may not be able to provide enough capital to underpin its banks’ units in eastern Europe on top of their domestic business if they resort to state aid again, Standard & Poor’s Ratings Service said today.

“The Austrian government may not have the capacity to support all the foreign operations of the large domestic banks,” S&P analysts led by Markus Schmaus said in a statement. Austrian lenders including Erste Group Bank AG and Raiffeisen Bank International AG are the biggest lenders to borrowers in eastern Europe, according to the Bank for International Settlements.

Erste, Raiffeisen, nationalized Hypo Alpe-Adria-Bank International AG and other Austrian banks together lent $266 billion to governments, companies and households in the former communist part of Europe by the end of June, according to the BIS. That number doesn’t include UniCredit SpA’s Bank Austria unit, which holds the Italian lender’s eastern European business and is counted with Italy by the BIS.

The biggest eastern European exposures of Austrian banks are to borrowers in the Czech Republic, Romania and Hungary, according to the BIS. Total consolidated assets of Austrian banks were 1.14 trillion euros ($1.6 trillion) at the end of June, according to the central bank, or four times last year’s gross domestic product.

No Restriction

“If you take all of Austria’s banking assets together and compare the sum to GDP, you’re getting to a relatively high value compared with other countries,” S&P’s Schmaus said in a telephone interview. “This raises the question not just about the capacity of the state to support those banks, but also about its willingness.”

The government provided about 9 billion euros in capital and guarantees to the country’s banks in 2009 and 2010 and didn’t restrict the use of the funds to domestic operations. Erste received 1.2 billion euros, Raiffeisen 1.75 billion euros and Hypo was nationalized. The government still has 6 billion euros left to provide, the Finance Ministry said Oct. 13.

“If there was a broad and very severe global economic downturn, eastern Europe would be hit as well and the question would be, does the Austrian state want to support its banks including all of their foreign subsidiaries, and does it have the capacity for it,” Schmaus said.

AAA Rating

The extra interest Austria must pay investors to hold its bonds instead of German ones has soared this year, even as the country’s debt and deficit is below the European average and it is one of the six remaining euro-area countries with the highest credit rating. The spread over German 10-year bonds rose to the highest in more than two years today and stood at 132 basis points by 4:05 p.m. Vienna time, up from a low of 35.6 basis points reached in June.

Erste, Raiffeisen, Hypo and Oesterreichische Volksbanken AG have all said that they don’t plan to tap any more of the state funds. And while Greek, Belgian and Irish banks are selling some of their eastern European businesses, Austrian banks are staying put, Schmaus said.

S&P lowered Austria’s banking industry country risk assessment, or BICRA, to Group 2 from Group 3 today. A BICRA is scored on a scale from 1 to 10, with 1 representing the lowest risk and 10 the highest. The economic risk score was downgraded to 2 from 1, while the industry risk score was assigned as 3, S&P said in the statement.

S&P published updates of its BICRAs for 86 countries today, as part of a review of its global bank ratings methodology. Schmaus said the change in the assessment of Austria is only partially relevant for the credit risk of individual Austrian lenders.

“Austria is one of the few countries worldwide where the dominant banks have a lot of assets abroad,” Schmaus said. “The ratings for individual banks considers where they are active,” he said. “Austria makes up only about 50 percent of the total business for the three big names.”

--Editors: Zoe Schneeweiss, Douglas Lytle

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

To contact the editor responsible for this story: Angela Cullen at acullen8@bloomberg.net


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