Two Austrian Banks Tap Rescue Funds

UNCLAS SECTION 01 OF 02 VIENNA 001601 SIPDIS TREASURY FOR FTAT, OCC/SIEGEL, AND OASIA/ICB/ATUKORALA TREASURY PLEASE PASS TO FEDERAL RESERVE AND FINCEN TREASURY ALSO PASS TO SEC/E.JACOBS E.O. 12958: N/A TAGS: EFIN AU SUBJECT: Two Austrian Banks Tap Rescue Funds REF: (A) VIENNA 1571; (B) VIENNA 1534 and previous ¶1. SUMMARY: Erste Bank, Austria's second largest banking group, will receive an EUR 2.7 billion GoA capital injection under Austria's EUR 100 billion bank rescue package. Erste Bank, which just reported its best ever nine-month result, says it will use GoA funds to push its Tier 1 capital ratio to more than 10%. Another Austrian bank (Kommunalkredit, which provides state/municipal financing) will also resort to the GoA umbrella and appears to be in bona fide need. Rumors are that Austria's sixth largest bank, Hypo Alpe Adria, will also soon apply for a GoA capital injection. END SUMMARY. Erste Bank Goes for State Capital Injection -------------- ¶2. On October 29, the GoA finalized regulatory details of its financial rescue package (reftels). Immediately thereafter, Erste Bank (Austria's second largest banking group) confirmed early indications that it will make use of an EUR 2.7 billion GoA capital injection via non-listed, non-voting and non- transferable shares to be fully repaid after five years (at the earliest). The participatory capital securities, which are recognized as core capital pursuant to the Austrian Banking Act, will not dilute existing shares. GoA capital will earn fixed annual interest of 8%. ¶3. Erste Bank CEO Andreas Treichl stated that the bank is fundamentally sound, but will use the GoA money to prepare for a tougher economic outlook, to support economic growth in Austria and to maintain its international competitiveness. The transaction is expected to be completed before the end of the year. With the GoA capital injection, Erste group's Tier 1 capital ratio -- originally projected to increase from 7% at (end-2007) to at least 7.5% (end-2008) -- will now surpass the 10% benchmark by the end of 2008. ¶4. Erste Bank recently reported its best ever nine- months result: operating revenue of EUR 2.2 billion (up more than 23%),return on equity of 22.2% (13.6% when adjusted for the sale of its insurance business), continued strong deposit and loan growth in Central and Eastern Europe, and a strong liquidity position. For the full year 2008, Erste projects its operating revenues to grow by 15%; it expects a positive net result for the fourth quarter, despite poor market conditions and its write-downs related to itsIceland exposure. Kommunalkreditbank in Trouble -------------- ¶5. On October 26, the Austrian banking group Kommunalkredit, Austria's eighth largest group and a specialist in finance for public infrastructure projects (especially for local authorities and states) opened talks with the GoA MinFin on receiving support under the bank rescue package. The owners of Kommunalkredit are the Austrian Volksbanken AG (50.78%),the Austrian Association of Municipalities (0.22%) and the Belgian-French Dexia Credit Local (49.0%). Kommunalkredit is active in Austria, Bulgaria, Croatia, Czech Republic, Cyprus, Hungary, Poland, Romania, and Slovakia. The bank has no branches and no individual deposits; instead it provides long-term loans to communities and funds itself through bonds, short-term financing, and money market-related instruments Q all markets are severely affected by the crisis. Kommunalkredit has liquidity problems and will likely show a net loss of Euro 150- 200 million for 2008 rather than a EUR 70 million profit projected until recently. It also reportedly faces a potential EUR 200 million loss from business in Iceland and an unknown but major loss in Cyprus, through which the bank had channeled all its international capital market transactions not involving Austria, Switzerland and CEE. Hypo Alpe Adria Bank Likely to Resort to GoA Capital -------------- -------------- ¶6. Hypo Alpe Adria bank, Austria's sixth largest bank is rumored to be the next Austrian bank that will VIENNA 00001601 002 OF 002 apply for a GoA capital injection, in order to raise the bank's tier 1 capital ratio from 5.5% now to 9-10% by year-end 2008. Hypo Alpe Adria's shareholders are the Carinthia provincial government (16.0%),the Grazer Wechselseitige insurance company (26.5%) and the German Bayerische Landesbank (57.5%). NOTE: Hypo Alpe Adria has been named in several banking scandals since 2004 and was cited by regulators for accounting improprieties in 2006. GoA Finalizes Details of Its Bank Rescue Package -------------- -- ¶7. After Parliament's October 21 approval of the bank rescue package (EUR 85 billion to guarantee interbank lending and EUR 15 billion for equity injections into banks and insurance companies),the GoA on October 29 finalized procedural details. The bank rescue package will be administered by a new subsidiary of OIAG (the state holding and privatization company). The GoA appointed Veit Sorger (President of the Association of Austrian Industrialists) as CEO of the new OIAG subsidiary and as deputy CEO Hannes Androsch, a prominent industrialist and former Minister of Finance (1970-1981). COMMENT: Sorger is a leading conservative and Androsch a Social Democrat, reflecting Austria's consensus-based approach to this and other major economic challenges in recent decades. END COMMENT. GIRARD-DICARLO