Austria Said to Mull Adding Volksbanken Assets to Bad Bank

Sep 01, 2014 11:45 am ET

(Updates with Hypo Alpe bailout in ninth paragraph.)

Sept. 1 (Bloomberg) -- Austrian regulators are considering moving non-performing assets of Oesterreichische Volksbanken AG into a bad bank that’s being set up for nationalized Hypo Alpe- Adria-Bank International AG, two people with knowledge of the situation said.

Assets including OeVAG’s Romanian unit, corporate and real estate loans could be moved, said the people, who asked not to be identified because the discussions are private. That would improve capital ratios and reduce the need for writedowns if the group of cooperatives led by OeVAG failes the European Central Bank’s Comprehensive Assessment next month, they said.

Volksbanken-Verbund, the combination of OeVAG and the roughly 50 regional cooperative banks that own it, will fail the health check the ECB is conducting before it begins to supervise euro-area banks on Nov. 4, Der Standard newspaper said last week. It may have a capital shortfall of 600 million euros ($788 million) to 800 million euros, the newspaper said. That range is probably accurate, one of the people said.

The bad bank move is one of the options circulated by Austrian bank regulators to deal with those capital needs. It has yet to be discussed by the government led by Chancellor Werner Faymann, which underwent a major reshuffling today, including the appointment of new Finance Minister Hans Joerg Schelling, who is also OeVAG’s supervisory board chairman.

Capital Gap

Finance Ministry spokeswoman Michaela Berger had no immediate comment. Schelling will step down as OeVAG chairman, she said. OeVAG spokeswoman Petra Roth said the bank had no comment as the ECB’s test results aren’t known yet.

OeVAG said last week its ability to sell bonds to address a looming capital shortfall is “limited.” The bank, whose first- half loss tripled to 203 million euros, cut its wind-down portfolio by 20 percent to 5.7 billion euros this year.

Filling the capital gap with support from the government would hurt investors, as the European Commission would require that shareholders and junior bondholders contribute to cover OeVAG’s losses before the asset move, the people said. OeVAG’s regional owners, which also hold junior bonds that would be forced to take losses, may struggle to survive the hit, depending on their volume, they said.

The commission may rule out further aid because OeVAG, based in Vienna, has already received two direct cash injections from the government since 2009, one of the people said.

Hypo Alpe

OeVAG and Hypo Alpe are the banks whose rescues have cost taxpayers in the Alpine republic the most since 2008.

Hypo Alpe, based in southern Austrian Klagenfurt, has so far required 5.5 billion euros in state aid after its expansion in the former Yugoslavia unraveled. Its Abbaubeteiligungs AG bad bank is due to be set up this week, with about 17 billion euros of assets to wind down.

OeVAG started the Austrian emergency rescues less than two months after the collapse of Lehman Brothers Holdings Inc. In November 2008, Austria nationalized its Kommunalkredit Austria AG, a municipality lender OeVAG co-owned with Dexia SA, which had strayed into credit default-swaps and other toxic assets. The next year, OeVAG got its first 1 billion-euro tranche of state aid. In 2012, it received another 250 million euro in return for the government taking a 43 percent stake.

Swelling Debt

The bank has shrunk its balance sheet by selling assets and shunning new business under European Union rules imposed in return for the state aid. Total assets fell from 79 billion euros in 2007 to 19 billion at the end of June after divestments such as most of its eastern European subsidiaries to OAO Sberbank in 2012.

The Sberbank transaction didn’t include the Romanian lender OeVAG co-owns with Germany’s DZ Bank and France’s BPCE Group. Volksbanken Romania required another capital injection this year, driving OeVAG’s first-half loss with a 128 million-euro charge. Rothschild is managing the unit sale.

Dealing with Volksbanken is complicated by the fact that the cooperative is ultimately owned by some 700,000 of its clients and that about 13 billion euros of retail deposits are held at the banks. When it was bailed out in 2012, Chancellor Faymann’s Social Democrats suggested that retail owners also share some of the losses. That plan wasn’t pursued at the time.

The government expects Hypo Alpe’s breakup and wind-down to widen the country’s budget deficit, with the debt level seen exceeding 80 percent of gross domestic product this year. That’s above the EU’s limit of 60 percent of GDP.