Austrian banks will struggle to strengthen their “moderate” capital buffers because profits are weighed down by bad debt and slow growth, and they may have to sell shares or shed assets, Standard & Poor’s said.
Capital levels at Austria’s three biggest lenders, Vienna- based Erste Group Bank AG (EBS), Raiffeisen Bank International AG (RBI) and UniCredit SpA (UCG)’s Bank Austria, compare “poorly” with peers in Germany or the Nordic countries, S&P said in a report released today. They are more aligned with lenders in Ireland, Italy and France, according to S&P’s own capital measure, RAC, which applies stricter standards than regulators. The company kept an A rating and negative outlook on all three lenders.
“Austrian banks’ moderate capitalization is an increasing concern,” S&P analysts led by Frankfurt-based Anna Lozmann said in the report. “The recovery path for the Austrian banking sector remains shaky,” and “Austrian banks could face rising risks in the coming quarters if economic conditions deteriorate, and may find it increasingly difficult to build up capital internally.”
The capital weakness adds to risks from the banks’ position as the biggest lenders in eastern Europe. Austrian banks together lent 326 billion euros ($426 billion) to governments, companies and households in the former communist nations of Europe, according to the central bank. Their biggest exposures are in countries like Romania, Croatia and Hungary, where bad loans are rising while credit demand remains weak.
Subdued demand for new business and continuously high bad debt levels will depress banks’ earnings and limit the ability to raise capital levels by retaining profit, Lozmann said.
“They are generating good earnings, but not enough to fill this gap,” she said in a presentation to reporters in Vienna. “Large Austrian banks will not be able to achieve a material improvement in the medium term without accessing the capital market.”
Raiffeisen yesterday canceled the planned sale of a subordinated bond, saying it couldn’t get enough orders. Its shares, which dropped 6 percent yesterday, rose 0.9 percent to 24.64 euros at the 5:30 p.m. close in Vienna. Erste dropped 2.1 percent, giving the bank a market value of 9.1 billion euros.
Erste, Raiffeisen and Bank Austria all reported a core Tier 1 capital ratio, regulators’ strictest benchmark, of more than 10 percent of risk-weighted assets by the end of 2012. For Erste and Raiffeisen, that figure is boosted by state capital, which S&P strips off to calculate its Risk-Adjusted Capital ratio. The ratings company also applies higher risk weightings to eastern Europe.
The average RAC for the three banks was 5.5 percent at the end of 2011, and that level hasn’t improved significantly in 2012, Lozmann said. S&P generally considers 7 percent to 10 percent as an adequate RAC figure, she said.
The assessment echoes analysts including Berenberg’s Eleni Papoula, who recommends selling Raiffeisen and Erste and today cut her target price for Raiffeisen to 22 euros from 27 euros, saying she’s worried about the bank’s rising risk appetite.
“The findings of S&P put Raiffeisen on the spot as it has the weakest capital,” Papoula said in an e-mailed comment. “We believe Raiffeisen cannot avoid a highly-dilutive capital raising of as much as 2 billion euros, as retained earnings alone cannot strengthen its capital.”
Raiffeisen CEO Herbert Stepic said last week he considered his bank’s capital situation to be “very relaxed.” Chairman Walter Rothensteiner said April 16 that now “isn’t the best time” to sell new shares.
A spokesman for Raiffeisen and a spokeswoman for Erste said their banks exceed regulatory capital requirements and declined to comment on S&P’s report. Bank Austria said last month it may raise equity from its parent UniCredit or sell Tier 2 debt on the market.
The banks’ weak capital also translates into higher risk for the Austrian government, according to Markus Schmaus, the head of S&P’s bank analysts for the German-speaking and Nordic countries. The government propped up Erste and Raiffeisen with 3 billion euros, and has at least partly nationalized troubled lenders Hypo Alpe-Adria-Bank International AG, Kommunalkredit Austria AG and Oesterreichische Volksbanken AG. (VBPS)
“The contingent liability is relatively high for the sovereign because of the banks’ weak capitalization,” Schmaus said in Vienna. He said it was doubtful whether Austria would support the banks’ foreign operations in case of a crisis.
Austria’s banking system remains rated 2 on S&P’s 1-to-10 Bicra scale, a ranking indicating the second-lowest possible risk level. That put it on the same level as Germany, Japan, Sweden, Norway and Finland.
The Bicra mainly reflects the domestic risks, Lozmann said. It takes into account economic policy, imbalances indicating bubbles and overall credit risk, as well as industry-specific factors like the quality of regulation, competition and bank funding.
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