VZCZCXRO9275
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHVI #1601/01 3041615
ZNR UUUUU ZZH
P 301615Z OCT 08
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC PRIORITY 1252
RUEATRS/DEPT OF TREASURY WASH DC PRIORITY
INFO RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 VIENNA 001601 
 
SIPDIS 
 
TREASURY FOR FTAT, OCC/SIEGEL, AND OASIA/ICB/ATUKORALA 
TREASURY PLEASE PASS TO FEDERAL RESERVE AND FINCEN 
TREASURY ALSO PASS TO SEC/E.JACOBS 
 
E.O. 12958: N/A 
TAGS: EFIN AU
SUBJECT: Two Austrian Banks Tap Rescue Funds 
 
REF:  (A) VIENNA 1571; (B) VIENNA 1534 and previous 
 
¶1.  SUMMARY:  Erste Bank, Austria's second largest 
banking group, will receive an EUR 2.7 billion GoA 
capital injection under Austria's EUR 100 billion bank 
rescue package.  Erste Bank, which just reported its 
best ever nine-month result, says it will use GoA 
funds to push its Tier 1 capital ratio to more than 
10%.  Another Austrian bank (Kommunalkredit, which 
provides state/municipal financing) will also resort 
to the GoA umbrella and appears to be in bona fide 
need.  Rumors are that Austria's sixth largest bank, 
Hypo Alpe Adria, will also soon apply for a GoA 
capital injection.  END SUMMARY. 
 
Erste Bank Goes for State Capital Injection 
------------------------------------------- 
 
¶2.  On October 29, the GoA finalized regulatory 
details of its financial rescue package (reftels). 
Immediately thereafter, Erste Bank (Austria's second 
largest banking group) confirmed early indications 
that it will make use of an EUR 2.7 billion GoA 
capital injection via non-listed, non-voting and non- 
transferable shares to be fully repaid after five 
years (at the earliest).  The participatory capital 
securities, which are recognized as core capital 
pursuant to the Austrian Banking Act, will not dilute 
existing shares.  GoA capital will earn fixed annual 
interest of 8%. 
 
¶3.  Erste Bank CEO Andreas Treichl stated that the 
bank is fundamentally sound, but will use the GoA 
money to prepare for a tougher economic outlook, to 
support economic growth in Austria and to maintain its 
international competitiveness.  The transaction is 
expected to be completed before the end of the year. 
With the GoA capital injection, Erste group's Tier 1 
capital ratio -- originally projected to increase from 
7% at (end-2007) to at least 7.5% (end-2008) -- will 
now surpass the 10% benchmark by the end of 2008. 
 
¶4.  Erste Bank recently reported its best ever nine- 
months result: operating revenue of EUR 2.2 billion 
(up more than 23%), return on equity of 22.2% (13.6% 
when adjusted for the sale of its insurance business), 
continued strong deposit and loan growth in Central 
and Eastern Europe, and a strong liquidity position. 
For the full year 2008, Erste projects its operating 
revenues to grow by 15%;  it expects a positive net 
result for the fourth quarter, despite poor market 
conditions and its write-downs related to itsIceland 
exposure. 
 
Kommunalkreditbank in Trouble 
----------------------------- 
 
¶5.  On October 26, the Austrian banking group 
Kommunalkredit, Austria's eighth largest group and a 
specialist in finance for public infrastructure 
projects (especially for local authorities and states) 
opened talks with the GoA MinFin on receiving support 
under the bank rescue package.  The owners of 
Kommunalkredit are the Austrian Volksbanken AG 
(50.78%), the Austrian Association of Municipalities 
(0.22%) and the Belgian-French Dexia Credit Local 
(49.0%).  Kommunalkredit is active in Austria, 
Bulgaria, Croatia, Czech Republic, Cyprus, Hungary, 
Poland, Romania, and Slovakia.  The bank has no 
branches and no individual deposits; instead it 
provides long-term loans to communities and funds 
itself through bonds, short-term financing, and money 
market-related instruments Q all markets are severely 
affected by the crisis.  Kommunalkredit has liquidity 
problems and will likely show a net loss of Euro 150- 
200 million for 2008 rather than a EUR 70 million 
profit projected until recently.  It also reportedly 
faces a potential EUR 200 million loss from business 
in Iceland and an unknown but major loss in Cyprus, 
through which the bank had channeled all its 
international capital market transactions not 
involving Austria, Switzerland and CEE. 
 
Hypo Alpe Adria Bank Likely to Resort to GoA Capital 
--------------------------------------------- ------- 
 
¶6.  Hypo Alpe Adria bank, Austria's sixth largest bank 
is rumored to be the next Austrian bank that will 
 
VIENNA 00001601  002 OF 002 
 
 
apply for a GoA capital injection, in order to raise 
the bank's tier 1 capital ratio from 5.5% now to 9-10% 
by year-end 2008.  Hypo Alpe Adria's shareholders are 
the Carinthia provincial government (16.0%), the 
Grazer Wechselseitige insurance company (26.5%) and 
the German Bayerische Landesbank (57.5%).  NOTE: Hypo 
Alpe Adria has been named in several banking scandals 
since 2004 and was cited by regulators for accounting 
improprieties in 2006. 
 
GoA Finalizes Details of Its Bank Rescue Package 
--------------------------------------------- -- 
 
¶7.  After Parliament's October 21 approval of the bank 
rescue package (EUR 85 billion to guarantee interbank 
lending and EUR 15 billion for equity injections into 
banks and insurance companies), the GoA on October 29 
finalized procedural details.  The bank rescue package 
will be administered by a new subsidiary of OIAG (the 
state holding and privatization company).  The GoA 
appointed Veit Sorger (President of the Association of 
Austrian Industrialists) as CEO of the new OIAG 
subsidiary and as deputy CEO Hannes Androsch, a 
prominent industrialist and former Minister of Finance 
(1970-1981).  COMMENT:  Sorger is a leading 
conservative and Androsch a Social Democrat, 
reflecting Austria's consensus-based approach to this 
and other major economic challenges in recent decades. 
END COMMENT. 
 
GIRARD-DICARLO