KA Finanz AG, the so-called bad bank of a nationalized Austrian lender, will continue to reduce assets gradually rather than liquidate them at once even after that strategy caused a hit for taxpayers on Greece’s debt swap.
KA Finanz, which was split off from municipal lender Kommunalkredit Austria AG to warehouse its risky assets, would lose 2.5 billion euros ($3.3 billion) if it sold loans and securities and replaced credit-default swaps immediately to eliminate future risk, Chief Executive Officer Alois Steinbichler told journalists in Vienna today. The strategy to keep assets on the books led to a 1 billion-euro loss for KA Finanz in Greece’s debt swap in March.
“A wind-down bank isn’t supposed to take a lot of capital and get rid of the risk as soon as possible by realizing losses,” Steinbichler said. “It’s a permanent balancing act where you see how much in losses you can realize without raising new capital” from taxpayers, he said.
KA Finanz’s predecessor, Kommunalkredit, was nationalized in 2008 when it was near collapse after the Lehman Brothers Holdings Inc. bankruptcy. While Kommunalkredit continues as a municipal lender and must be returned to private ownership again by June 2013, bad bank KA Finanz took on securities, loans and swaps that aren’t part of that main business and is winding down those assets.
KA Finanz reduced its holdings by about 11.5 billion euros since Kommunalkredit’s nationalization to 17.7 billion euros by March 31. More than 6 billion euros of assets were sold, while the rest was redeemed or expired. Spain, Portugal and Ireland are among the largest remaining risks with 832 million euros at stake for KA Finanz in Spain alone, Steinbichler said.
The biggest holdings are in swaps Kommunalkredit wrote mostly from 2005 to 2007. By March 31, it still insured about 8.3 billion euros of debt, including 627 million euros of Portugal’s and 663 million euros of Ireland’s, according to its annual report. The market value of the swaps, equaling the cost of terminating the contracts, widened to 1.37 billion euros by the end of 2011 from 1.02 billion euros a year earlier, even as the portfolio shrank.
Austrian taxpayers have propped up KA Finanz with a net 1.9 billion euros of cash and guarantees, more than half of which had to cover the Greek loss. Remaining capital from its previous owners, Oesterreichische Volksbanken AG (VBPS) and Dexia SA (DEXB), was wiped out in a capital reduction last week. Steinbichler said the cut was “on firm legal ground.”
KA Finanz’s sister Kommunalkredit said business in the first quarter supported its expectation to report a profit this year after a net loss of 148.8 million euros in 2011, which was also driven by a writedown of 176.3 million euros on Greek government bonds.
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