Volksbanken Plans Revamp as Writedowns Cause $1 Billion Loss

Oesterreichische Volksbanken AG, the Austrian lender that failed a European stress test in July, is seeking a restructuring as writedowns will result in an annual loss of as much as 750 million euros ($1 billion).

Volksbanken, majority-owned by a group of 62 regional cooperative banks, is planning a cross-guarantee accord with those lenders to strengthen its capital buffers, it said in a statement yesterday. It scrapped a plan to repay 300 million euros in government capital due to losses and writedowns caused by its corporate-client unit Investkredit and its Romanian bank.

The liability guarantee, modeled on that of Dutch cooperative group Rabobank Groep NV, “will simplify the process of complying with regulatory requirements,” supervisory board Chairman Hans Hofinger said in the statement. “This model is based on a clear commitment to Volksbanken” by its shareholders, he said.

Volksbanken follows Austria’s biggest lender, Erste Group Bank AG, in writing down assets and postponing state capital refunds as European policy makers push banks to bolster their capital and clean up balance sheets. On Oct. 10, Erste scrapped its plan to refund 1.2 billion euros of state aid this year and announced that writedowns and provisions would result in a loss.


The regional cooperative banks own 61 percent of Volksbanken. Germany’s DZ Bank owns 23 percent, a unit of Munich Re owns 9 percent and Raiffeisen Zentralbank Oesterreich AG owns 6 percent.

Austria’s finance ministry said yesterday that while it still has about 6 billion euros available for capital injections into banks and could support Volksbanken further, the company’s management and owners must present a “credible plan” to strengthen the firm. It welcomed Volksbanken’s liability guarantee with its owners.

There is “no immediate reason” to discuss further state aid now, Chief Executive Officer Gerald Wenzel told Austrian state radio ORF today. Asked if Volksbanken was turning into a “bottomless pit” for the government, Wenzel said: “I don’t have this concern at the moment.”

After failing the European Union’s bank exam in July, 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. It also said it can’t sell a stake in RZB this year.

It also agreed to sell its eastern European business, Volksbanken International, to Russia’s OAO Sberbank at a loss on Sept. 8. Sberbank excluded the money-losing Romanian unit from that deal.

Nationalization Right

Volksbanken’s failures to pay dividends on the 1 billion euros in state capital it received and refund a first tranche of capital this year mean that Austria has the right to nationalize the bank.

Finance Minister Maria Fekter has said in the past that her desire to exercise this right is “very limited.”

Volksbanken said its Tier 1 capital ratio, a measure of financial strength, will be 10.4 percent at the end of 2011, up from 9.4 percent at the end of 2010. That’s because the VBI sale to Sberbank reduces its risk-weighted assets, and because the loss on Investkredit and Romania affects goodwill, which is not counted as regulatory capital for banks.

Volksbanken’s municipal-lending unit, Kommunalkredit, at the time co-owned with Dexia SA, was the first Austrian bank to be nationalized shortly after the collapse of Lehman Brothers Holdings Inc. in September 2008. Dexia is now being broken up by the French and Belgian governments after losing access to funding amid losses linked to the sovereign-debt crisis.

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