VZCZCXRO4136
PP RUEHIK
DE RUEHVI #1479/01 3241304
ZNR UUUUU ZZH
P 201304Z NOV 09
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC PRIORITY 3655
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 VIENNA 001479 
 
SIPDIS, SENSITIVE 
 
TREASURY FOR OCC/SIEGEL AND OASIA/ICB/MAIER 
TREASURY PASS TO FEDERAL RESERVE, FINCEN AND SEC/OIA 
 
E.O. 12958: N/A 
TAGS: EFIN AU
SUBJECT: Austria's Hypo Alpe Adria Bank in Trouble 
 
REF: A) Vienna 1257; B) Vienna 1076; C) Vienna 484 
 
VIENNA 00001479  001.2 OF 002 
 
 
Sensitive but unclassified -- protect accordingly. 
 
SUMMARY 
- - - - 
 
¶1. (SBU) Hypo Alpe Adria (HAA), Austria's sixth largest banking 
group, is in trouble again.  According to media reports and leaked 
documents, HAA is undercapitalized and will need fresh equity of 
1.5-2.0 billion Euros in time for a special general shareholder 
meeting December 10.  A conflict has emerged between the bank's 
German majority owner (BayernLB), the province of Carinthia (a 
minority owner) and the GoA Finance Ministry over recapitalizing the 
bank again after a large injection last December.  Since Carinthia 
has guaranteed a whopping EUR 18 billion of HAA liabilities -- much 
more than it can service without federal help -- the GoA has a large 
stake in keeping the bank going.  END SUMMARY. 
 
Insufficient Capital to Cover Big Losses 
- - - - - - - - - - - - - - - - - - - - - 
 
¶2. (U) According to media revelations this week, Hypo Alpe Adria/HAA 
will fail to meet its regulatory capital minimum (4%) in the coming 
weeks, absent a large recapitalization.  Austrian supervisors have 
reportedly pressured bank leadership to submit a turnaround plan 
(though neither Austria's Financial Market Authority nor central 
bank will comment publicly). 
 
¶3. (U) A large bank with total assets of EUR 41.7 billion (as of 30 
June 2009), HAA has lost ground rapidly.  It reported a loss after 
taxes of EUR 520 million for 2008 and another EUR 162 million for 
the first half of 2009; an "asset screening" this month by 
PriceWaterhouseCoopers (ordered by majority owner BayernLB) 
apparently identified substantial additional problems, which will 
cause HAA to lose at least EUR 1 billion for 2009.  Public 
revelation of PWC findings and disclosures by BayernLB have 
highlighted HAA's equity gap: the bank apparently needs at least EUR 
1.5 billion to keep its Tier 1 capital ratio above the legally 
mandated minimum. 
 
¶4. (U) HAA's recent losses stem from large write-downs of loans and 
leasing deals in Southeastern Europe -- where it was a relatively 
late entrant and loaned aggressively to expand.  The bank loaned 
heavily to high-profile ventures in the tourism sector (large hotels 
along the Adriatic and in Austria) and made other bad bets, such as 
lending to now-bankrupt Croatian retail chain Pevec.  According to 
reports, the PWC review found undisclosed losses in HAA's leasing 
business, losses which were not reflected on the bank's balance 
sheet. 
 
A Troubled Legacy 
- - - - - - - - - 
 
¶5. (SBU) Hypo Alpe Adria's problems stem in part from its history as 
the "house bank" of the Carinthia provincial government, during 
which time it lent heavily in support of flagship projects by 
now-deceased populist right-wing governor Joerg Haider (such as the 
Hypo Arena soccer stadium in Klagenfurt).  The province managed to 
sell the bank to BayernLB at the peak of the financial bubble (May 
2007), using the proceeds to support more political largess. 
 
¶6. (SBU) Allegations of poor corporate governance and political 
influence have marred HAA since at least 2004.  In 2006, Austrian 
regulators forced out the bank's management in connection with 
accounting abuses; in 2007, the bank was cited again for weak 
management.   According to media reports, there were irregularities 
surrounding BayernLB's takeover of HAA.  In October, both BayernLB 
and HAA headquarters were apparently searched (the results of which 
have not been disclosed). 
 
Who Will Pay to Save Hypo? 
- - - - - - - - - - - - - - 
 
¶7. (SBU) In November 2007, BayernLB pumped EUR 440 million into HAA; 
in December 2008, HAA was recapitalized with EUR 900 million from 
the Austrian government and EUR 700 million in fresh equity from 
BayernLB (the latter as part of a EUR 10 billion Bavarian state 
government rescue of BayernLB).  As reported (reftels), HAA 
apparently cannot pay this year's coupon (EUR 72 million) on its 
existing GoA equity capital tranche. 
 
¶8. (SU) BayernLB has indicated it will provide additional capital to 
HAA, but has conditioned that assistance on the Austrian government 
also providing a second capital injection.  Until now, FinMin Proell 
has downplayed the HAA problem and pressured the bank's owners 
(including minority shareholders) to do more.  HAA's largest 
minority shareholders -- the province of Carinthia via a holding 
company (12%) and Grawe insurance company (20%) -- have said they 
 
VIENNA 00001479  002.2 OF 002 
 
 
will not provide additional capital. 
 
¶9. (SBU) As former majority owner and home of HAA's headquarters in 
Klagenfurt, the Carinthian provincial government has issued 
contingent guarantees for EUR 18 billion in HAA liabilities, a huge 
sum relative to the province's annual budget (about EUR 2 billion). 
Since the province would need federal help to service those 
guarantees in the event of HAA folding, the GoA will presumably do 
its best to avoid a collapse if possible. 
 
COMMENT 
- - - - 
 
¶10. (SBU) It is unclear how HAA "passed" the Austrian National 
Bank's stress tests this summer (as of 30 June 2009, HAA reported a 
Tier 1 capital ratio of 8.1%).  Under EU competition policy rulings, 
BayernLB may be forced to sell off Hypo Alpe Adria over the next 
three years, as a condition for the state help that both BayernLB 
and Hypo Alpe Adria received early in the crisis.  With mediocre 
assets and few buyers in the market, Hypo Alpe Adria has bleak 
future prospects and little or no access to private funding except 
via public guarantees (earlier this year, HAA had an "E-Plus" rating 
from Moody's). 
 
¶11. (SBU) There are signs that the GoA will back troubled Hypo Alpe 
Adria in spite of its public pressure on the bank's owners.  This 
past week, the GoA extended Austria's bank rescue package for 
another year (through December 2010) -- an indication that Hypo Alpe 
Adria (and perhaps other banks) could need additional help -- and 
GoA regulators consider Hypo Alpe Adria a "system-relevant" bank 
(basically "too big to fail").  For Austria, the potential cost of 
an HAA failure in terms of contingent guarantees remains greater 
than the cost of keeping it on life support -- it can only hope that 
HAA's German owners stay on board as well. 
 
EACHO