Volksbank State Aid Refund Said to Be at Risk on Capital Concern

Oesterreichische Volksbanken AG (VBPS)’s planned repayment of 300 million euros ($409 million) of state aid this year may fail as regulators are concerned the lender’s capital is insufficient, three people familiar with the situation said.

Volksbanken, one of eight lenders that failed the European Union’s bank stress test in July, is unlikely to get approval by the central bank for the capital refund, the people said. That’s mainly because the bank scrapped its 2011 profit forecast, and because its asset sales didn’t go as well as planned, said the people, who declined to be identified because the process is private.

Austria’s fourth-biggest lender “is focused on capital strengthening and risk reduction above everything else,” a spokesman for Volksbanken said today. The central bank and the financial watchdog FMA declined to comment. The possible failure to repay was first reported by Austrian daily WirtschaftsBlatt today.

The cooperative lender, which got 1 billion euros of state aid in 2009, is selling assets to repair its balance sheet and replenish capital. Its revamp is being closely monitored by supervisors after it failed this year’s round of EU stress tests because regulators found it had insufficient capital, the central bank said July 15.

Target Miss

Since then, Volksbanken said Aug. 25 that it wouldn’t be able to meet its 2011 target of posting 100 million euros in profit after writedowns on Greek government bonds, and because the planned sale of a stake in Raiffeisen Zentralbank Oesterreich AG was unlikely to go ahead this year. It also agreed to sell its eastern European business at a loss on Sept. 8 and didn’t manage to sell its Romanian unit as part of the deal.

These developments, along with the volatile environment for European banks overall, may prompt the central bank to block the aid repayment, the people said.

Failure to repay the first tranche of state capital this year means that Volksbanken would trigger two conditions that allow Austria to nationalize the bank if it wishes. The other is that it won’t pay a dividend for the state capital for the third time in as many years. Finance Minister Maria Fekter said Sept. 2 that her desire to nationalize the lender was “very limited.”

Erste Group Bank AG (EBS), Austria’s biggest lender, yesterday said it wouldn’t meet its goal to refund 1.2 billion euros of state aid this quarter, although it still aimed to repay it as soon as it got regulatory approval.

To contact the reporter on this story: Boris Groendahl in Vienna at bgroendahl@bloomberg.net

To contact the editor responsible for this story: Angela Cullen at acullen8@bloomberg.net