Hypo Alpe Loss Balloons as Skeletons Turn Up in Closet

Hypo Alpe-Adria-Bank International AG, Austria’s most costly bank failure, pushed up bad debt charges and writedowns as it found “skeletons in the closet” while speeding up its dismantling under European Union orders.

Loan-loss provisions and asset writedowns rose to 1.7 billion euros ($2.4 billion), more than four times what it booked in 2012, widening the bank’s net loss to 1.86 billion euros from a restated 23 million euros, the Klagenfurt, Austria-based nationalized bank said in a statement today. The charges were necessary to bring forward the sale of assets as requested by the European Commission and because asset quality worsened more than expected last year, Hypo Alpe said.

“The key issue was the European Commission decision to order the bank to curb our new business and sell assets quicker,” new Chief Executive Officer Alexander Picker told reporters in Vienna. “We also had to revise some of our own estimates and book bigger losses than expected because there were indeed more skeletons in the closet than we thought.”

Hypo Alpe has already cost Austrian taxpayers 5.5 billion euros since its nationalization in 2009, when the bank’s ill-fated transformation from a provincial lender into a financier for former Yugoslavia unraveled. The prospect of additional billions of euros in aid has prompted Austrians to sign petitions requesting a parliamentary investigation and take to the streets demanding the bank go bankrupt as the government’s approval ratings plummeted this year.

Burden Sharing

Finance Minister Michael Spindelegger said last month he’s seeking contributions from former shareholders including Germany’s Bayerische Landesbank and the Austrian province of Carinthia to lower the burden on taxpayers. The ministry is looking at options to bail in some subordinated debt holders.

The main EU condition for the state aid needed to fund Hypo Alpe’s shut-down is that it sells its banking units in ex-Yugoslavia by mid-2015. That accelerated process prevented the company from sitting out a downturn in Croatia and Slovenia, leading to the extra writedowns on the units last year, Hypo Alpe said. It now expects to complete the sales as soon as this year after several bidders looked at the units’ books and a first round of binding bids are due this month. The sale is managed by Deutsche Bank AG.

The business, which also consists of banks in Bosnia, Serbia and Montenegro, turned in an after-tax loss of 286 million euros last year as provisions for bad loans soared. Picker said the business has a book value of about 500 million euros after the writedowns last year.

‘Bad Bank’

Hypo Alpe cut assets by 7.6 billion euros to 26.2 billion euros in the period, mostly by selling its domestic banking business. The southeast European banking network makes up 8.5 billion euros of that total.

The remainder comprises about 17.8 billion euros in assets, of which about 8.2 billion euros are non-performing loans, also mainly in ex-Yugoslavia. Those assets will be turned into a special vehicle, or “bad bank,” this year to limit capital requirements while they are run down.

Picker reiterated the process may cost as much as 4 billion euros on top of the aid already received, of which 750 million euros was injected this month. He said this was an “educated guess” as there are many uncertainties influencing the wind-down process. An insolvency of the bank, which the government ruled out last month, would have been more expensive than a gradual dismantling, he said.

The additional support and the bad bank will bring Austria’s budget deficit close to the EU’s 3 percent limit this year and boost its debt level to more than 80 percent of gross domestic product.

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