Austrian Banks May Be Less Stable Than Their Figures Show

Monday, November 16, 2009

All cannot be well in the Austrian banking sector despite opposite announcements from the banks themselves. Although Raiffeisen Zentralbank (RZB), Unicredit subsidiary Bank Austria and Erste Group reported operating profits in Q3 2009 only last week (click links for quarterly reports in English,) latest events from the past weekend keep me suspicious that Austria's banks, endangered by their failing ventures in Central Eastern Europe, are far away from the financially stable positions they wish for themselves. 2 Austrian banks have already failed to pay interest on their capital injections from the Austrian government in July.

Banks Want to Keep Unlimited State Guarantees Until 2011
According to a (German) report on the website of Austrian TV broadcaster ORF banks now ask for an extension of the state's guarantee to cover all deposits at Austrian banks. This unlimited warranty was scheduled to expire by the end of 2009, only to be replaced by a warranty that will cover all bank deposits up to €100,000 per bank and account holder. According to a spokesman from the finance ministry the new scheme will cover 98% of all deposits in Austria.
Austria has long been known to be the country where foreigners can discreetly park their money. Austria strongly refuses any further loosening of its banking secrecy law, fearing that this may lead to a competitive disadvantage. Both Italian and Russian tourists can be seen frequently depositing money in their Austrian accounts or buying gold. One need not identify themselves when buying gold for up to €15,000 and bank clerks have a traditionally bad memory for faces here.
Austria has so far admitted that the banking crisis may cost taxpayers up to €100 billion. But a Bloomberg report based on internal EU figures arrived at a total cost of €165 billion or more than €20,000 for every Austrian inhabitant.
The ORF story names Bank Austria CEO Willibald Cernko as the cheerleader for a number of banks who would like to see the unlimited warranty run until 2011, indicating that the banking sector in Austria may only see the worst in the medium term future. Anecdotal evidence has it that banks have essentially stopped lending to the private sector and small companies and do not plan to come back to the credit business anytime soon.
In line with the recovery of the Vienna Stock Exchange the 2 listed banks Raiffeisen International (RI) and Erste Group have strongly recovered this year. Erste, which first fell some 90% from more than €60 to €6, recovered to €30 whereas RI, which once traded above €120, fell to less than €14 and has now recovered to €46.
Erste Group needs to hold its shares close to €33, the price at which they are booked into the assets of their largest shareholders.
Raiffeisen International may pose the same problem for its large shareholders as the sunken share price diminishes their ability to use the shares as collateral for other investments. RI is 70% owned by RZB.
Erste Group CEO Andreas Treichl announced a few days ago that the bank would issue new shares in order to raise €1.65 billion in equity and would focus the offer on retail investors. Industry insiders see this as a sign that Erste Group failed to convince institutional investor to buy the issue, not exactly an encouraging sign in these days.
Bank Austria is likely to face problems in connection with some feeder funds that filled the pockets of the so far biggest Ponzi schemer, Bernie Madoff. Media reports put the damage between €350 million and €4.5 billion. I am still in research mode on this as the range is a bit too wide for my taste. But there will probably fire where one sees only smoke so far.
DISCLOSURE: Not so mad as to own Austrian bank shares.

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