Bawag in Talks With Cerberus About Capital Injection
Byron Haynes, the head of Austrian lender Bawag PSK Bank AG, is in talks about a capital injection with main shareholder Cerberus Capital Management LP as he prepares for new bank rules and the repayment of state aid.
Bawag, the country’s fourth-biggest bank, is required to replace about 170 million euros ($220 million) of hybrid capital it bought back in March with fresh funds that are compliant with new rules from the Basel Committee on Banking Supervision, Haynes said today in an interview in Vienna. The replacement can be in equity or in forms of hybrid debt, with the former being his preferred option, Haynes said.
“I’m in dialogue with the shareholder, with Cerberus, about future capital injections in support of our plans,” Haynes said. Cerberus, the private-equity firm led by Stephen Feinberg, said in a separate statement today that it will support “potential capital actions” at Bawag.
Bawag hasn’t produced returns for its shareholders since a Cerberus-led group bought the lender for 3.2 billion euros in 2006. Haynes, who took on the job in 2009, has headed an expansion of the retail lender’s reach by using 500 Austrian post offices as branches in the past two years. He’s accelerating a program started in 2010 to cut costs and jobs, and last week shut down the lender’s proprietary trading desk.
While Haynes said Bawag may cut a “reasonably significant” number off its 4,000 staff, he dismissed a report in Wiener Zeitung newspaper this week saying he would fire as many as 700 and shut down the bank’s corporate client division.
“Our cost-income-ratio is 10 to 15 percentage points higher than the Austrian market, and there’s pressure on revenues, so of course we’re looking at costs,” Haynes said. He said it may be possible to bring down that ratio to below 60 percent next year, from 66.3 percent in the six months to June 30, if interest rates don’t remain at current record-low levels.
Bawag was founded as a workers’ bank in 1922 by Karl Renner, a socialist and Austria’s first chancellor after World War I. The lender will continue to invest mostly in retail banking, Haynes said, citing consumer finance as one of the areas the bank is targeting.
While Bawag won’t abandon its corporate customers, Haynes said that the strong competition in the Austrian market meant that he didn’t see that area as a growth business. He confirmed that Bawag is evaluating options for its leasing business.
The bank, which Cerberus bought from the Austrian trade union federation, lost money each year from 2007 to 2009, causing the New York-based private-equity company to inject 205 million euros into Bawag, with the Austrian state providing an additional 550 million euros.
Cerberus said in a statement today that it may come up with additional capital, if needed, contrary to the Sept. 18 Wiener Zeitung report which said that it wasn’t. It “stands behind and continues to support its investment in Bawag PSK, including potential capital actions which will enable Bawag to execute successfully its strategic business plan,” the firm said in an e-mailed statement today.
The lender, which already had to be rescued by the government in 2006 before the purchase by Cerberus, is now preparing for so-called Basel III rules. More than a quarter of its core reserves consist of capital that will be phased out under theses new rules or have to be replaced for other reasons.
Bawag’s core Tier 1 capital ratio rose to 8.8 percent at the end of June, from 7.8 percent at the end of 2011. That measure includes the non-voting capital the lender received from the government. The state capital costs Bawag 9.3 percent interest annually until next year, and will get increasingly more expensive starting in 2014.
Under the aid deal, Bawag isn’t allowed to pay dividends to the equity holders until this year, and dividends are restricted thereafter until the state is repaid.
The bank’s capital also includes hybrid securities no longer recognized as loss-absorbing under Basel III. Bawag bought back two-thirds of those securities in March and has said it will have to replace them with new capital.
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