2 Austrian Banks Cannot Pay Interest On Public Capital Infusion

Monday, July 27, 2009

In contrast to the optimistic utterances from Austria's central bank the Austrian Treasury fears that its public capital infusions may turn into large write-offs. According to a spokesperson from the finance ministry it is expected that Oesterreichische Volksbanken AG (OeVAG) and the Hypo Alpe Adria Group will not be able to pay interest on its capital injections, Austrian Press Agency APA reported on Monday.
OeVAG had received €1 billion in subordinated capital at a rate of 9.3% in April but will not report a profit for the running year. OeVAG issued a profit warning on Monday after Moody's Investors Service had assigned an A3 rating to the Participation Capital Certificates to be issued by OeVAG. The rating is three notches below the bank's Aa3 senior debt and deposit rating and at the same level as the bank's A3 baseline credit assessment (BCA) and C bank financial strength rating (BFSR). Moody's says that the A3 rating for the non-cumulative, perpetual non-call 10-year Participation Capital Certificates to be issued by OeVAG reflects the deeply subordinated nature of the securities.
Hypo Alpe Adria has already missed the first 8% interest payment on its state capital of €900 million that saved it from insolvency in late 2008. The rather small bank had lost several hundred million Euros in 2004 due to speculative trading and has since changed ownership. Germany's Bayerische Landesbank holds now a majority stake. After reporting a marginal profit in Q1 2009 Bayern LB CEO Michael Kemmer had warned last week that he expects massive loan write-offs in Central Eastern Europe (CEE) in the second half of 2009. According to Austrian banking law interest on so called "Partizipationskapital" has only to be paid if the respective bank is profitable.
The sky won't cave in on Austria today, but these are new signs that the worst is yet to come as bankers chit-chat about a rapid deterioration in their CEE subsidiaries, expecting huge loan write-downs.
Raiffeisen International, Austria's biggest bank in CEE had received a capital shot of €1.25 billion from its 70% owner Raiffeisen Zentralbank AG last week after a capital note exchange offer was rejected by investors.
This was not Raiffeisen's own money but a first draw from an officially announced government package of loans and state guarantees with a volume of €100 billion. This figure may become outdated though. Last month Bloomberg cited from EU internal documents that Austria's banking sector may need as much as €165 billion in rescue funds. I only wonder whether Austria can find these mind-boggling sums and at what price.
It is only my guess as half year results have not been published by most Austrian banks as of today, but there will be a painful blood-letting in the next months for all Austrian banks resulting from their overexposure in CEE.
Seeing the wave of bank closures in the USA it is a mystery to me how all European banks are still standing upright. Whereas US banks have "only" been overexposed to reckless mortgage lending and now trip over credit card loans Europe's banks fight at still more frontiers. They not only invested heavily in defaulting US debt, spurred a continent wide property bubble and ventured into CEE loaning where all experts say the big default wave will gain speed in the remainder of 2009.


Wikinvest Wire