CEE bad loans may make Austrian banks struggle in stress tests

By bne IntelliNews October 23, 2014

bne -


Around a dozen Eurozone banks have failed stress tests and will need to find new capital, the European Central Bank will reveal on October 26, a report claims. Two Austrian banks with strong connections to Central and Eastern Europe may be included in that group.

Citing unnamed sources, Spanish news agency Efe reported on October 22 that at least 11 banks, from six countries, are set to fail the check on the levels of capital at Eurozone banks. Those of the 130 banks tested whose buffers fall below required ratios to withstand another economic crunch will need to raise new cash. The stress tests come ahead of a November 4 takeover of banking regulation by the ECB.

Three banks in Greece, three Italian lenders and two Austrian banks are among those that preliminary data showed had failed the tests, Efe said, according to Reuters. It gave no details of how much capital the banks would have to raise and said this could yet change as numbers could be revised at the last minute.

The risk that two Austrian banks may fail rings alarm bells in CEE, where Raiffeisen Bank International (RBI) and Erste are the second and third largest lenders. 

Erste was namechecked by EFE, and its share price dropped 1.4% in Vienna around midday. However, insistence by Erste that the report was false, backed by analyst suggestions that the bank should pass, enabled the shares to trim the loss to 0.85% by the close. 

Others were not so lucky as the report sparked selling across European banking stocks. RBI finished the day with a 1.4% loss. The euro also fell on the report, while the ECB has yet to comment ahead of the release of the test results on October 26.

After a pair of state bailouts in 2008 and 2009, Erste carried out a rights issue to raise €660m in July 2013. However, it's still struggling with bad loans - particularly in South Eastern Europe. Alongside other lenders it's also facing huge losses in Hungary, where it is being forced to refund borrowers for practices deemed "unfair" by the government. In June, Erste posted a quarterly loss of €1.03bn, and predicted a full-year loss of €1.6bn. 

RBI, which also raised capital recently to repay state bailouts during the global financial crisis, warned in September that it faces its first ever annual loss this year because of the costs in Hungary, and also the deterioration in loan quality in Ukraine. 

The pair is facing similar - though smaller - problems in struggling markets in the region, with Romania, Croatia and Serbia the major sources of bad loans. Berenberg analysts estimated recently that "there are €8bn of hidden losses on retail [forex] loans in CEE that may crystallise ahead of the ECB [testing]," with Erste the most exposed with expected losses of €0.9bn. RBI is likely to be hit for €0.6bn, they suggested.

Should Volksbank fail the test it would be less of a shock. An Austrian banking source told bne earlier this month that Volksbank was most at risk. Formerly Austria's fourth largest lender, all that remains is the domestic rump following three rounds of state aid since 2008. The final round saw it taken over by Vienna in 2012. Meanwhile, it sold its large CEE bank network to Russian state giant Sberbank, and continues to seek to spin off smaller businesses such as insurance across the region. 

The Vienna-based Sberbank Europe (formerly Volksbank International) and fellow Russian state giant VTB Bank will have to pass the ECB test from next year.

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