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Erste Puts Off Repaying $1.6 Billion State Aid Til 2015

Erste Group Bank AG, Austria’s biggest lender, won’t repay 1.2 billion euros ($1.6 billion) of state aid in the next two to three years unless the conditions attached to the 2009 capital injection change.

Erste, which pays an 8 percent annual dividend on the capital, will only start repayments in 2015, Chief Executive Officer Andreas Treichl told analysts on a conference call today. He scrapped a plan to repay the aid last year after writedowns resulted in a loss at the Vienna-based bank.

“If the conditions under which we took it remain the same, which is actually what we anticipate, we probably will keep it for another two to three years and start repaying it 2015,” Treichl said, adding that the bank might opt for immediate repayment should the government change those conditions.

Erste and Austrian peer Raiffeisen Bank International AG received state aid in the form of participation capital, a non-voting capital that absorbs losses on the same terms as equity. Treichl is unhappy that Erste must also pay higher taxes to fund the 1 billion-euro bailout of Oesterreichische Volksbanken AG.

“We are paying tax in order to support the state-owned banks and their competitive endeavors, which makes me really angry,” Treichl said. Erste is paying the “highest bank taxes in the world” in its home country as well as in Hungary and Slovakia, he said.

Austria’s government, which increased its banking levy by 25 percent this year, also bailed out Kommunalkredit Austria AG in 2008 and Hypo Alpe-Adria-Bank International AG in 2009.

Participation Capital

While the participation capital used by Erste has no maturity, its dividend and repayment terms make it gradually more expensive from 2014 to create an incentive for redemption. The first dividend step-up to 8.5 percent in 2014 wouldn’t worry him “substantially,” Treichl said.

The dividend for the participation capital compares with the current cost of equity of “slightly above 10 percent,” said Michael Mauritz, a spokesman for the bank.

Austria booked a 624 million-euro repayment of the capital in its 2013 budget.

Participation capital is being phased out under new rules proposed by the Basel Committee for Banking Supervision starting in 2019.

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