• Cooperative group eyes benchmark covered bonds from 2016
  • Better profitability to underpin return to investment-grade

Austrian cooperative banking group Volksbanken-Verbund plans to return to capital markets with benchmark covered-bond issues in 2016 after completing a sweeping revamp that will cause a final bumper loss this year.

Regaining access to debt and equity markets is a key target regulators have set the bank as it recovers from years of losses and capital erosion, said Gerald Fleischmann, chief executive officer of Volksbank Wien-Baden AG, the new central institution of Volksbanken-Verbund. The bank wants to sell senior unsecured bonds in 2017 and be prepared to sell equity in 2020, he said in an Oct. 12 interview in Vienna.

Volksbanken-Verbund, suffering from an ill-fated expansion into eastern Europe, failed the European Central Bank’s stress test last year with a capital hole of 865 million euros ($984 million). To repair its balance sheet, it split off “bad bank” Immigon Portfolioabbau AG, which is winding down 7 billion euros of assets. The surviving business has to adhere to a tight capital plan agreed with the ECB and the European Commission, the European Union’s executive arm.

“We’re under very strict supervision,” Fleischmann said. “We have to be profitable throughout the group so we’re attractive to investors.”

Restructuring Plan

As it completes its revamp, Volksbanken-Verbund may post a loss in the hundreds of millions of euros this year after Immigon bought back debt held by the group at a discounted price, Fleischmann said. The deal, which helps fund Immigon’s asset wind-down, was part of the Volksbanken’s restructuring plan, he said. 

Volksbank Wien-Baden also took over from Immigon the responsibility of repaying 300 million euros of Austrian state aid before 2023, he said. To guarantee repayment, Austria will receive a 25 percent stake in the bank for as long as the debt is outstanding.

Volksbank Wien-Baden sold two 100 million-euro covered bonds this year, according to data compiled by Bloomberg. The last covered bond with a face value exceeding 100 million euros was sold in 2007.

Volksbanken targets an A rating on its covered bonds and plans to sell as many as two benchmark-sized issues each year, Fleischmann said. The securities are now rated BBB at Fitch ratings. The group wants to achieve an investment-grade issuer rating next year, up from the BB+ it now holds at Fitch.

By 2020, the banking group plans to cut its cost-income ratio to 60 percent from 78 percent now, with cost cuts it hopes to achieve by merging its 43 member banks, reducing their number to 10, Fleischmann said. It also targets a core capital ratio of 12 percent, which should be accomplished after the planned sale this year of start:gruppe , Volksbanken’s real estate lending unit, according to the CEO.

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