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Guest Post: Mind the Capital Gap - No Relief for Austria's Banks
Submitted by The Prudent Investor
While clueless politicians and bankers have still not come up with
decisions that could turn around the economy, Mr. Market may soon force
them into action. Greece may dominate headlines these days, but this
buys other equally distressed Eurozone economies time to fly under the
radar. Market talks center around the PIIGS (Portugal, Ireland, Italy,
Greece, Spain) these days. While they fill headlines there is one
Eurozone country that may be a stealth ticking bomb: Austria.
Weeks of relative silence after some first hiccups last year that culminated into Europe's first bank nationalization in this millennium, Hypo Alpe Adria, last December, have given way to a hectic succession of gloomy events this year
First ripples in 2009, when banking giant #2 Raiffeisen withdrew a capital note exchange offer for lack of investor interest, now turn out to have been a sensitive telltale of the grave problems engulfing the country.
GRAPH: After a steep decline in 2009 due to signs of liquidity problems and the following upward correction RI now trades again below its IPO price.
After initial market rumours ignited a slide in Raiffeisen
International (RI), 70% owned by the Raiffeisen group, last week,
panicking Raiffeisen executives worsened the situation, sending shares
into a 30% tailspin within a week, erasing all 2010 gains. RI now
trades below the original issue price around €40 five years ago. Chart courtesy of Vienna Stock Exchange.
Ignoring market rumours Raiffeisen's top brass began to panick when RI had lost €1 billion market capitalization last week. A brief press release on February 24 stated:
The managing boards of Raiffeisen Zentralbank Österreich AG
(RZB) and Raiffeisen International Bank-Holding AG are currently taking
a closer look at a possible merger of the two companies as one of
several possible strategic options. However, no official decisions have
been made to implement any of these strategic options. External
consultants are also being involved in the analysis.
A possible concept for the transaction would be that the business of
RBG associated with the function of RZB as the controlling institution
would be hived off from RZB into a new bank holding. As a result, this
business area and the related equity holdings would not be the object
of a possible merger according to this concept.
Regardless of which type of transaction is chosen a stock listing would remain in place.
A
press conference on last Friday did not provide much more information
but rather exposed that despite positive preliminary 2009 figures
loan-loss provisions went stratopheric. Follow this link for a webcast of Raiffeisen's presentation, the Q&A session with 250 participants and a slideshow containing all relevant figures.
Having seen more than €1 billion market capitalization evaporate
within days Raiffeisen will go through a boardroom fight. RI CEO
Herbert Stepic is also deputy CEO of RZB and it is both funding
questions for Raiffeisen group and lingering massive writedowns in
Eastern Europe that may become an important decision factor in the new
executive board set-ups. RZB CEO Walter Rothensteiner is on the record
with precluding a share issue in Austrian daily Der Standard in January.
Austria's most powerful Raiffeisen actor, supervisory board leader
Christian Konrad, usually not averse to media appearances - the
Raiffeisen group owns or influences Austria's conservative media - has
gone into hiding since shares started to slide. He now has to fight it
out with regional Raiffeisen shareholders as his big dream of
reconquering Central Eastern Europe (CEE) may turn into a nightmare
shortly before his pension. Konrad has reached Austria's legal pension
age of 65.
To keep the unfolding story short it appears that Raiffeisen does not
have any plans how to cope with its risky loan portfolio. RI was listed
in 2005 for "strategic advantages." Current funding problems,
Raiffeisen group also limps along with a crutch of €2.5 billion in
public hybrid loans, obliging its management to hoist the storm jib as
2010 does not look any easier than 2009. The group has not yet decided
on bonuses for 2009 after cancelling them a year earlier.
Erste Group Surprises With Record Operating Profit
Raiffeisen's sudden publication of 2009 figures preceded Erste Group's
2010 by a few hours. CEO Andreas Treichl reported a record operating
profit of €3.77 billion Euros for 2009, an increase of 25% YOY. Erste
is highly exposed to foreign markets in CEE. Less than 9% stem from its
domestic business. Find Erste's recent data here (pdf).
GRAPH: A 90% decline in Erste Group shares in 2007/8
based on fears about its exorbitat foreign exposure was immediately
followed by a 500% jump last year, making it one of the best bank
shares worldwide. Erste upped its loan-loss provisions by 92% to
slightly more than €2 billion.
An unchanged cash dividend
of €0.65 per share demonstrates Erste's optimism to keep its head above
water and outpaced Citigroups estimate from last November at €0.20.
Check the press conference webcast plus slides on Erste's activities here.
Its Czech subsidiary represents a very sizeable part of the Erste Group
and its single most profitable asset has been doing quite well, but
will cease to do so as soon as it is forced to realise losses on its
real-estate related portfolio. Czech market observers point out though,
that Erste entered the market much earlier than Raiffeisen, leaving the
latter only the riskier parts of the business and see pain, but no
fatality.
Although hanging on a €1.224 billion public lifeline Erste considers
reinstating bonuses after cancelling them for 2008 it was said at the
press conference.
As Austrian banks' activities in CEE literally fill volumes I refer you to this latest Erste Group research file on Austria and CEE (pdf).
Nationalized Hypo Alpe Adria,
where regulators try to find out where more than €3.5 billion went
without much recording, made headlines again too. CEO for a mere 9
months, Franz Pinkl was allowed to go home with a €4.5 million public
money handshake in a country where more than 15% of the population are
in immediate danger of falling below the poverty line.
Oesterreichische Volksbanken, in arrears with interest payments for public funds does
not progress in its search for fresh and badly needed equity. German
25% owner DG Bank indicated this week it would not provide fresh
capital and one does not need to jump to conclusions that 6%
shareholder Raiffeisen is not interested either in throwing good money
after the bad.
The Danske Bank warned
about increasing risks to the Romanian banking sector. This
follows reports last week from both the Romanian central bank and
commercial banks that bad loans are rising fairly sharply in Romania.
The largest banks in Romania are Austrian and Greek-owned banks. The
news flow concerning Romanian banking is clearly concerning and
indicates that the bad loans have not peaked in South East Europe.
EU Commissioner Accuses Bankers of Risking Rising Social Tensions
Squashed by the explosive situation in CEE banks come under fire from
many more sides. EU Commissioner Laszlo Andor attacked Austrian banks
on Monday in Brussels, writes "Der Standard."
"It is impossible that Austrian banks know nothing about
the investment risk in the Balkan (countries...) If we now support the
banks they have to give it back in better years."
Andor
supports ongoing fiscal stimuli through 2011, fearing a premature
tightening of budgets may worsen the current fragile situation.
Andor echoes ideas from Austrian social democrats who want to introduce
a so far vague bank transaction tax that must not be passed on to
customers. I may scratch my head whether this results in anything else
than more additional administration when publicly supported banks pay
an extra tax.
Free markets - and with it free interest rates - would right excess
leverage by itself. But as long as investors hang on to the ineffective
market contortion by central banks and are willing to accept real
negative interest it must be doubted that sanity is to be seen anytime
soon.
Government Paralysed by Debt Tsunami
Banks have a big advantage in Austria. The current coalition is so busy
with itself and coming regional elections that no action can be
expected from the government. The recent Greek bond issue at 310 basis
points over swap should be a loud wake-up call that investors have
become risk aware and ailing Austria is on the fast-track to catch up
on the economic downside.
A coveted AAA rating and economic interconnectedness with Germany have
made Austria's Federal Financing Agency's life fairly easy. A total
debt of €169 billion cost an average yield of 4.20% in 2009 (2008:
4.3%) and Austria managed to issue a 16-year bond at yield of 4.85% in January.
TABLE: Austria's economic think tanks forecast
moderate growth in the year ahead, but as industrial production
declined 10% in 2009 this country starts from a very low level. As
always my main criticism focuses on artificially low-held consumer
prices. Up goes, whatever is not in the basket. Unemployment figures
have rushed from one high to the next in the running year.
Politicians
have so far done nothing else than to make more debts. Debt-to-GDP has
rocketed above the 60% Maastricht threshold to 67% and new debts are
budgeted to rise by 4.6% after 4.8% in 2009. In a selfish macro
economic view Austria might be best off to come forward before being
strangled by bond investors, traders and hedge funds. This is a small
capital market that has become heavily overbanked and will not be able
to evade what needs yet to be done in most parts of Europe. Banking has
mushroomed on paper and after 2 decades of bubbles the downtime of the
seemingly inevitable business cycle is nowhere from over. Off balance
sheet risks are bigger than ever and could easily be the blow for
mega-giga bankruptcy.
As long as there is state capital involved - Austria's umbrella
guaranty of €100 billion is close to 40% of GDP - transparency and
prudence fittingly describe the style of banking a paying public wants
to see.
Tighter capital rules envisioned in the Basel III regulations are a
looming next roadblock some players might crash into. The Austrian
banking industry heftily opposes stricter rules as it would require
another fresh €12 billion in equity to shore up institutions that face
strong headwinds. Mind the capital gap.
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history rhymes
"History rymes"; sure does. Even the devil's angels play music. The Rothschildes would "bail" themselves out back in the day. Ironically, one of their biggest "problems" was once the Ausrtian bank. The brothers had a pact to "always rely on each other"-Mayer Amschel had a pact, "All things family" (the family intermarried with relatives well into the 20th century), and so the Brit 'ish and French branches helped the Austrian and Itialian ones. This was during one of the many crashes when the brothers Rothschildes were in absolute conrtol of all things Europe (wars, gold, etc).
1931 again?!?
anyone catch this little smoot-hawley redux????
"U.S. lawmakers launch push to repeal NAFTA"
http://www.reuters.com/article/idUSTRE6233MS20100304
Oso, Do you have an opinion on this? Will this affect Europe trade as well?
Ha! Well if the democrats want $7.00 gasoline this would definately help get you there.
More deregulation anyone?
Carefull there tyler.
If someone pushes us too far we might feel like starting a wordlwar again.
Just a quick note of 'Thanks' to the ZH team for their relentless pursuit of truth in a timely manner.
Bad news => Markets will go up.
I am starting to think the stock market is to collapse only when ZH declares it believes everything is fine and the market should melt up to new record highs.
Perhaps we need to see a real skeleton come outta the closet!
I have recently been watching CNBC, after a long hiatus. It is beyond bad, from an always visible clock in the lower right of the screen that counts down (in the hundredths of seconds) to whatever announcement or program is up next, to non stop promos of Cramer, Suzie Orman and horror of horrors the Fast Money Crew.
What garbage, I hope ZH joins other bloggers in not posting links or commenting on anything that emanates from CNBComcast.
PS I just deprogrammed it from my new TV - it's back to Bloomberg.
"While clueless politicians and bankers have still not come up with decisions that could turn around the economy, Mr. Market may soon force them into action."
The only way politicians and bankers will take action is, when Mr. Market forces them to do so. Otherwise, do not expect much from them.
It is amusing to me that the Austrian gov has a AAA credit rating.
First paragraph included three "mays".
May and hope and unexpected and surprise.
Who has the hard numbers?
They are not sharing.
Power to some people....the rest of you can.....?
40muleteam borax
America would be ecstatic to have the 5.4% unemployment rate enjoyed by Austria!
Now that the bubble has burst, one see's that eastern Europe is afflicted with the same death spiral demographics that Mark Steyn so well describes about the PIGS (previously known as Club Med in the boom years).
With sufficient growth Europe and America could hope to grow their way out of this in the long term. Demographics and a poiled, socialist citizenry preclude the "grow out of it" option, this is why the entire west (and formerly communist eastern Europe) is so screwed.
I wonder how Austria's neighbor, Switzerland, is really faring. Switzerland has the advantage of not being in the Euro zone and not having invested so deeply in the former Eastern bloc, but one wonders what other stinky sh*t they managed to be lured into buying.
Where do you get that info about Swiss banks being immune to Central/Eastern Europe exposure? From 2005-2008 all the small countries had interest rates north of 5%. Euro was at 3.5%, swiss at 2.5%, guess who they picked for the mortgage? Why do you think SNB keeps intervening to eur/chf every couple weeks lately? All these loans are paid in chf and the local currency is more or less pegged to euro. CHF going stronger increases chances of payment problems/defaults to swiss banks and they do all they can to keep eur/chf around 1.50.
IMO swiss is going to bleed more in coming months/years when the real estate depreciates more there, keep in mind they are about 2 years behind US as far real estate pricing/crash goes.
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