Aiming to Reassure, Austrian Bank Stress Tests Underline

UNCLAS VIENNA 001590 SENSITIVE - SIPDIS TRESURY FOR FTAT, OCC/SIEGEL, AND OASIA/ICB/MAIER TEASURY PASS TO FEDERAL RESERVE AND SEC/E. JACOBS C O R R E C T E D C O P Y (SECTION INFORMATION) E.O. 12958: N/A TAGS: EFIN AU SUBJECT: Aiming to Reassure, Austrian Bank Stress Tests Underline Need for More Capital REF: A) Vienna 1583; B) Vienna 0839 Sensitive but unclassified -- protect accordingly. ¶1. (SBU) SUMMARY: New "stress test" results for Austrian banks -- released the same day the GoA had to take over 6th-largest Hypo Alpe Adria/HAA -- show that major banks could withstand a "double-dip" recession but will need additional capital in the medium-term. The Austrian National Bank says major banks have performed better than expected this year (with the obvious exception of HAA) but face ongoing loan losses and must pursue structural change. In the highly adverse scenario (a deep recession in 2010/2011),major banks' Tier 1 capital ratios would stay above 4% excepting HAA (which would fall below 4%); capital at 4th-largest Volksbanken AG would edge close to that level. Markets are focused on how Volksbanken (which is not publicly listed) will shore up its capital after continuing to post major losses; another state equity injection cannot be ruled out. END SUMMARY. BASELINE SCENARIO: Another EUR 10 Billion in Write-Offs - - - - - - - - - - - - - - - - - - - - - - - - - - - - ¶2. (U) On December 14, the OeNB (Austria's central bank) published the results of its latest stress tests (whose methodology is reportedly in line with international best practice). As a group, Austrian banks have done better than expected since the first wave of stress tests (June 2009),with strong operating profits. Authorities expect additional loan losses and write-offs of EUR 10 billion (on top of the EUR 10 billion already written off). For its baseline scenario, the latest stress test assumes the following economic growth for the period Q3/2009 through Q2/2011: Austria 0.7% CESEE 1.5% Under the baseline scenario, the average Tier 1 ratio of Austrian banks would drop from 9.2% now to 8.8% in mid-2011; the six largest Austrian banks would average 8.3%, down from 8.8% today, based on their heavy exposure in CESEE (Central, Eastern and Southeastern Europe). HIGH-STRESS SCENARIO: EUR 20 Billion More Down the Drain - - - - - - - - - - - - - - - - - - ¶3. (U) In the highly adverse scenario, GDP in Q2/2011 is assumed to be 4.5% below the baseline scenario in Austria and 8.2% lower in CESEE. The stress scenario would cause a tripling of the non-performing loan (NPL) ratios to 8% in Austria and 16% in CESEE; write-downs would double to EUR 20 billion. More NPLs together with additional loan-loss reserves, lower operating profits, and rising risk-weights would drive up capital requirements, particularly as measured by Tier 1. As a result, the Tier 1 ratio of all Austrian banks on average would drop from currently 9.2% to 6.8% in 2010, that of the six major Austrian banks from 8.8% to 5.8%. These average rates are still above the legal minimum requirement of 4.0% and do not/not take into account that the GoA bank rescue pot still has EUR 7.5 billion which the GoA give use for equity injections without going to Parliament again. ¶4. (SBU) A closer look shows a mixed picture. Most of the six large banks would remain above these average rates, while one -- nationalized Hypo Alpe Adria, whose nationalization on Dec. 14 (Ref A) was not reflected in the stress test results),and some 30 smaller banks -- would likely fail to meet the 4.0% minimum requirement. Another big bank (Volksbanken AG - discussed below) would come close to the legal minimum. NOTE: Hypo Alpe Adria was nationalized just hours before the stress test results were published. END NOTE. ¶5. (SBU) The OeNB is stressing the following points: -- As a group, Austrian banks have adequate resources to deal with foreseeable risks; -- Austrian banks can withstand another recession; but -- The level and quality of bank capital must increase over the medium term. Central bank Executive Director Andreas Ittner (who oversees financial markets and bank supervision) said publicly that major Austrian banks will need capital to deal with coming write-offs; the crisis is not yet over. Ittner also predicted the crisis will accelerate consolidation in Austria's over-banked domestic market (NOTE: Austria has one of the world's highest density of banks and branches, with 867 banks total and one branch for every 1,630 residents). OeNB Director Philip Reading (responsible for financial stability and bank supervision) said Austrian banks will continue to meet regulatory minimums but are undercapitalized relative to international competitors, particularly those active in CESEE. All Eyes on Volksbanken - - - - - - - - - - - - ¶6. (SBU) Volksbanken AG, Austria's fourth largest bank, is reportedly in a shaky position but not nearly as weak as Hypo Alpe Adria prior to its nationalization this week. For 2009, Volksbanken expects a loss of up to EUR 1 billion (its loss for the first three quarters was EUR 606 million). The bank took EUR 1 billion in state equity in April 2009; its Tier 1 ratio at the end of September 2009 stood at 9.1%. Volksbanken has announced it will sell four subsidiary banks and is considering a strategic partner -- however, it is unclear who (if anyone) would want to buy those assets: a leading Austrian banker opined to us last week that Volkbanken's CEE assets have no market value. ¶7. (SBU) COMMENT: Volksbanken leadership said publicly this week that the bank will not take additional state equity, but we surmise that any additional deterioration would probably push it in that direction. END COMMENT. EACHO