VZCZCXRO7073
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHVI #0484/01 1131023
ZNR UUUUU ZZH
P 231023Z APR 09
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC PRIORITY 2421
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 03 VIENNA 000484 
 
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:  Austrian Banks Take GoA Equity, But More 
Funds Available; Mixed Outlook 
 
REF:  (A) VIENNA 0365; (B) VIENNA 0060; 
      (C) 08 VIENNA 1665; (D) 08 VIENNA 1619 
 
¶1.  SUMMARY.  Four of the six largest Austrian banks 
(Erste Bank, Raiffeisen Zentralbank, Volksbanken AG 
and Hypo Alpe Adria/HAA bank) have now taken equity 
injections.  So far the Austrian government has 
committed only about one third of the EUR 15 billion 
reserved for equity participation.  Italian-owned Bank 
Austria plans to start negotiations soon to receive 
GoA equity; BAWAG, which will disclose a major loss 
for 2008, is already in negotiations; and nationalized 
Kommunalkredit (a smaller, specialty lender) will also 
apply for a GoA injection soon.  Finance Minister 
Josef Proell is convinced that current bank rescue 
efforts will suffice: if no large Austrian bank fails 
-- implying that GoA equity injections and state 
guarantees for interbank lending remain intact -- the 
GoA would make a tidy profit on its bank rescue, with 
earnings approaching EUR 300 million per year. 
However, ratings agencies foresee a deeper collapse in 
Central/Eastern Europe, which might necessitate more 
state aid to Austrian banks.  END SUMMARY. 
 
The GoA's Equity Facility 
- - - - - - - - - - - - - 
 
¶2.  Austria's October 2008 bank rescue package set 
aside EUR 15 billion for equity injections to assure 
solvency of banks and insurance companies.  These 
funds are administered by a new GoA bank rescue 
holding company Finanzmarktbeteiligung AG (FIMBAG / 
Financial Market Participation Company -- ref C).  All 
five top Austrian banks initially signaled interest in 
taking state equity injections, but progress was slow 
due to late approval by the European Commission, the 
high cost of taking state equity prior to December 13 
(a full six-months interest), and bank resistance to 
Finance Ministry terms and conditions.  Only troubled 
Hypo Alpe Adria bank (HAA) had accepted state money 
before December 31; since then, other large Austrian 
banks (Erste Bank, Raiffeisen Zentralbank and 
Volksbanken AG) have taken state equity, in each case 
along with new capital from private shareholders.  To 
date, the GoA has signed equity agreements totaling 
EUR 5.6 billion, of which EUR 4.6 billion has been 
disbursed, leaving EUR 9.4 billion is still available. 
 
GoA Conditions for Equity Participation 
- - - - - - - - - - - - - - - - - - - - 
 
¶3.  The maximum amount a bank can get from the GoA 
equity pot is EUR 3 billion, and conditions vary among 
"sound" and "distressed" banks.  From sound banks the 
GoA stipulates: 
-- a market- based interest rate of at least 9.3% (can 
be reduced to 8% conditional on repayment of 110% of 
the nominal capital, and if private investors 
subscribe at least 30% of the total equity injection) 
-- dividends to ordinary shareholders are capped at 
17.5% of profit before taxes and reserve allocation 
(not applicable if private investors subscribe at 
least 30% of the total equity increase). 
 
From distressed banks the GoA stipulates: 
-- a market-based interest rate of no less than 10% 
-- no dividends can be paid to ordinary shareholders. 
 
The GoA also requires banks receiving state help (via 
capital participation or a bond guarantee) to lend out 
twice the amount received to SMEs over the next 
several years (terms vary). 
 
Hypo Alpe Adria/HAA 
- - - - - - - - - - 
 
¶4. In late December 2008, HAA got EUR 900 million in 
GoA capital and received EUR 700 million in fresh 
equity from its 67% owner, German Bayerische 
Landesbank/BayernLB (as part of a larger EUR 10 
billion Bavarian government package for BayernLB). 
This equity increase together with the GoA's injection 
reportedly raised HAA's Tier 1 capital ratio to 8.4%. 
HAA, which had a troubled record even before 2008, was 
the Austrian bank is direst need; it has not yet 
presented its 2008 balance sheet, which is expected to 
show a substantial loss.  Since one of the Bavarian 
 
VIENNA 00000484  002 OF 003 
 
 
government's conditions for supporting BayernLB was a 
massive cut-back of its international business, 
BayernLB started implementing a restructuring plan at 
HAA, which may also involve HAA's withdrawal from some 
SEE countries. 
 
Erste Bank 
- - - - - - 
 
¶5.  In late February, Erste Bank signed an agreement 
with the GoA for an equity injection of EUR 1.9 
billion.  Erste also plans to raise EUR 800 million 
via non-voting participation certificates from private 
and institutional investors.  Erste will soon offer 
these participation certificates (interest rate of 8% 
until 2014 and then rising to a maximum of the 12- 
month EURIBOR plus 10%; interest will not be paid in 
years of a loss or with no dividend payments), but 
already has reservations for more than half of the 
volume.  The EUR 2.7 billon will push Erste's Tier-1 
ratio to about 9.8% from 7.2% at the end of 2008. 
Erste's 2008 annual report shows a net profit of EUR 
860 million (vs. EUR 1.2 billion in 2007). 
 
Raiffeisen Zentralbank (RZB) 
- - - - - - - - - - - - - 
 
¶6.  In early April, Raiffeisen Zentralbank (RZB) 
signed an agreement with the GoA for EUR 1.75 billion, 
which will bring RZB's Tier-1 ratio to 10.4% (from 
8.4% on December 31).  In late 2008, RZB's owners 
subscribed to an EUR 165 million equity increase and 
an additional EUR 750 million in equity participation 
shares.  RZB will use some of the equity for its 
consolidated subsidiary Raiffeisen International/RI 
which handles the group's CESEE/FSU business.  RI is 
organized as a holding company with no separate 
banking license and is therefore not directly eligible 
for state equity.  RZB's 2008 balance sheet shows a 
strong operating profit of EUR 2.8 billion but net 
profit of only EUR 482 million (down 94% from 2007) 
due to CEE currency weakness, exposure to Lehman and 
Iceland, and an EUR 1.2 billion set-aside in 
additional loan loss reserves.  Subsidiary RI had 2008 
net profit of EUR 982 million (2007: EUR 841 million). 
 
Volksbanken, BAWAG, Bank Austria 
- - - - - - - - - - - - - - - - 
 
¶7.  In early April, the GoA signed an agreement with 
Volksbanken AG for EUR 1 billion in state equity. 
Volksbanken reported a net loss of EUR 152 million for 
2008, due to massive write-downs from Lehman, Iceland 
and Kommunalkredit business (see reftel D). Its Tier-1 
ratio at the end of 2008 was 7.6%.  Kommunalkredit, 
which the GoA nationalized in November 2008 (ref C), 
is expected to apply for a GoA injection once its new 
business concept and resulting capital requirements 
are available sometime in May. 
 
¶8.  BAWAG has started informal talks with the GoA and 
will reportedly soon disclose a substantial loss for 
¶2008.  BAWAG -- owned by U.S. private equity firm 
Cerberus Capital Management -- is reportedly sitting 
on toxic assets in the range of EUR 1 billion, whose 
status is complicating the state aid process. 
 
¶9. The Italian UniCredit group, with its Austrian 
subsidiary Bank Austria (BA), reportedly plans to tap 
government rescue packages in both Italy and Austria 
for a total of EUR 4 billion.  BA would be eligible 
for a maximum amount of EUR 2.7 billion from the GoA, 
UniCredit in Italy for 3.8 billion.  BA CEO Erich 
Hampel recently said that BA will start talks on GoA 
capital, but FinMin Proell said negotiations will 
first require a commitment from UniCredit to BA's 
future viability.  For 2008, BA reported a net profit 
of EUR 1.1 billion (2007:  EUR 2.3 billion), despite a 
doubling of provision charges to EUR 1 billion and 
impairment losses of EUR 1 billion (on goodwill 
related to CESEE subsidiaries). 
 
Equity Injections - Profit Center for the GoA? 
- - - - - - - - - - - - - - - - - - - - - - - 
 
¶10.  If none of the banks receiving GoA equity fail, 
the GoA could make good business out of its rescue 
 
VIENNA 00000484  003 OF 003 
 
 
efforts.  Since equity disbursed so far (EUR 4.6 
billion) bears an interest rate of 8-9.3% and the 
GoA's refinancing costs are about 4%, net book 
earnings for the GoA will be about EUR 200 million 
annually.  In addition, fees for GoA guarantees under 
the interbank lending facility total about EUR 80 
million annually based on the current status of 
guarantees issued. 
 
GoA Interbank Lending Guarantees also for Industry? 
- - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶11. FinMin Proell recently said that the GoA is 
considering using EUR 10 billion of the GoA's EUR 75 
billion interbank lending guarantee facility (ref A) 
to guarantee bank loans to industrial enterprises (but 
not industrial bond issues).  The program would 
address growing complaints from industry about overly 
stringent bank lending conditions.  Proell said the 
program would offer market-based conditions and would 
still expose banks to some default risk. 
 
Financial Sector Comments 
- - - - - - - - - - - - - 
 
¶12. FinMin Proell argues that Austria's current 
banking rescue package will be sufficient, since 
almost two thirds of state equity pot is still 
available.  In contrast, FIMBAG co-head/ex-Finance 
Minister Hannes Androsch is convinced that the EUR 15 
billion will soon need to be increased and that the 
rescue package, devised in October 2008, was based on 
false optimism regarding the CEE region (Proell 
rejects Androsch's views). 
 
¶12. Banks publicly express guarded optimism.  RZB CEO 
Walter Rothensteiner sees no problem in repaying the 
GoA money in five years, since "no crisis lasts five 
years" (predicting a turnaround within 2-3 years). 
Erste CEO Andreas Treichl said publicly that the EUR 
2.7 billion from the GoA and private investors will 
suffice and that Erste would only need more equity if 
the entire CESEE region falls into much deeper crisis. 
 
¶13. Rating agencies continue to cast doubt on the 
health of major Austrian banks.  On April 16, Fitch 
announced its own stress tests of the largest Austrian 
banks, concluding that further losses in CEE (and 
weakness in the Austrian domestic market) will cost 
the banks most of their existing capital -- and that 
an "extreme" CEE crisis will essentially wipe out 
their capital base.  Fitch added, though, that 
Austrian banks are stable based on the continuing 
ability of the GoA to support them with further 
measures. 
 
KILNER