Largest Austrian Bank Crashes After "Revealing" 40% Surge In Bad Debt Provisions, Record Loss

Tyler Durden's picture

Update: just as expected, the confidence-preservation brigade is quick on the scene:


Because clearly marking loans to fair value would crush investor confidence. And clearly investors are dumb enough not to realize that it is precisely by hiding what is beneath the surface, that they have zero confidence in the system.

* * *

Ever since 2012, when we first revealed that the biggest problem plaguing Europe's financial sector is the $2 trillion+ in bad debt on the books of European banks (not our numbers, the IMF's), it became clear that the only way Europe can avoid a complete financial meltdown coupled with currency disintegration, is if it can constantly keep rolling over said bad debt (obviously the only way to do that would be to create an epic debt bubble leading managers of other people's money to do idiotic things like buy Spanish debt at 2.75%). This is why not only the BOJ launched its mega QE in 2013, but why Draghi also kicked in with NIRP a month ago: the logic - do anything and everything to reflate the biggest credit bubble possible as otherwise European banks will have no choice but to face up to their trillions in bad loans.

Unfortunately for some banks, especially those which operate in Europe's supposedly highest-rated country, Austria, sometimes just being able to kick the can is not enough as on occasion a law will change, having the unintended consequence of forcing the bank to admit just how ugly its balance sheet truly is. That's what happened overnight when Erste Group, Austria's largest bank by assets, and the third biggest bank in Eastern Europe after UniCredit and Raiffeisen, announced that, oops, its earlier forecast about the amount of bad loans on its books is wrong, and will have to rise by a massive 40%, leading to what will be a record $2.2 billion loss, and triggering writedowns.

Shareholders, not used to being told the truth and instead preferring sweet, little lies, promptly took the stock to the woodshed.

Analysts, whose job it is to predict these things, were shocked:"This is a clearly bad surprise as it comes in addition to the already ‘badly surprising’ warning issued by the group at the beginning of this year,” Natixis Securities SAS analyst Steven Gould said in a note to clients. “These announcements hurt the management’s credibility going forward."

What was the catalyst for the early recognition of the massive writedown? Bloomberg explains:

The provisions are caused by new rules due to be approved by Parliament in Hungary today, forcing banks to refund “unfair” loan fees, and by the Romanian central bank’s push for faster bad-debt reduction amid the European Central Bank’s bank health check, Erste said. Writedowns on goodwill and deferred tax assets, triggered by the loan-loss provisions, may reach as much as 1 billion euros.


“By taking these measures, we have done everything in our power to avoid one-off effects from 2015 onward,” Chief Executive Officer Andreas Treichl said in the statement. “We are convinced that these measures will also help us pass the asset-quality review and stress test comfortably.”



Hungary contributed to Erste’s loss with a new law forcing it to repay some loan costs to customers. New rules due to be approved by Parliament in Budapest today will require banks to refund certain expenses on as much as 6.5 trillion forint ($28 billion) of loans going back as far as 10 years, according to the draft bill.


Higher bad-debt provisions in Romania, the Black Sea country of 20 million where Erste bought Banca Comerciala Romana SA for 3.75 billion euros in 2005, were caused by the central bank’s pressure on banks to clean up their balance sheets as part of the ECB’s bank health check, Erste said.

Ironically, it is the poor Eastern European sovereigns themselves who are forcing banks to do what is effectively is the job of their regulator, the ECB. Needless to say, the last thing the ECB will do is force banks to clean up their balance sheets: if anything Draghi knows full well that Erste is just the harbinger and Europe is loading to the brim with banks that are in the same situation. Should the ECB actually force banks to either revealt the true state of their bad debt and/or take measures to remedy it, the entire financial system would implode overnight.

Which is why instead we have an annual confidence building farce known as the "stress test", which in the past has seen Bankia and Dexia pass with flying colors, and this year would have also given Erste an AAA+++ grade as well:

The loss won’t hit Erste’s regulatory capital to the full extent, and the bank’s common equity Tier 1 ratio will reach about 10 percent by the end of the year without raising fresh capital, Erste said. That’s because goodwill, brand value and other intangible assets of its Romanian unit that Erste is writing down aren’t part of the regulatory capital.

Which also goes to show just how ridiculous Europe's definitions of capital truly are.

As for Erste, it's ok - the stock has been punished and now it is time for the BTFD algos to lift it right back to where it was, because as has been made very clear in the past 6 years, fundamentals are no longer relevant or matter when making capital allocation decisions. The only thing that does matter is how much more of a moral hazard will the central banks push the system into before one day what happened to Erste today takes place at the global level, and the can containing the entire modern financial system which is broken beyond repair can no longer be kicked down the street.

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Eyeroller's picture

Tick tock, tick tock.

Arius's picture

I thought was just Greece ... kind of blaming on their lazyness and socialism...


it seems it is everybody the same ... why this debt thing???


Armstrong says this debt thing has been used countless times ... it seems every 40-50 years countries do the same thing ... but WHY?


are people by definition insane ... you know doing the same thing repeatdly and expecting different results or smt else is at play? 

Arius's picture

following up on this thought just occured to me ... but in finance humans can never get it together ... always making the same mistake with this debt system ... over and over and over again ...


Why?  it is the same people who have made amazing achievements in everything else discovering electricity, computers ... you name it ... still in finance they suck ... they seem to be insane by definition ....


 wondering....afer reading Armstrong and he really knows history ... especially financial history

IndyPat's picture

...always making the same mistake with this debt system...

Mistake. Keep thinking that.

If they "keep doing it" you better bet your sweet ass it's because it keeps fucking paying, boyo.

You can bank on that and only that.

Arius's picture

...because it keeps paying...


well, i would believe it if it was a few cases, but here is the whole world ... the same system ... over and over and over again .... for hunderds and hunders and hunderds of years. 


it seems very clear humans just suck at finance and then again they seem to be execelling at almost everything else ... going even to the Moon...yeah well,


read Armstrong and you will see what i am talking about ...

centerline's picture

Armstrong dances around the issues.

And, don't get me wrong.  I appreciate his work.

Cycles repeat because human nature never changes.  Concepts like Greshaw's Law always assert themselves (or say the invisible hand - Adam Smith).

What is part of the cycles is how sociopaths rise to power.  How power corrupts.

Of course it is in our very DNA to want more... we are programmed for growth.

Debt based systems simply reflect who we are.  That is why they keep popping up.

 Attempting to change the amplitude of effects is perhaps Martin's angle in saying we need to do something smarter - but really it isn't any different on the surface than all the other centralized attempts to squash the business cycle.  Where I agree with him is perhaps in a different place - that evolution requires pressure and we have the tools (technology) now to do better.  General education - not centralization.   

Arius's picture

"Debt based systems simply reflect who we are"


may be you right ... but, when you know how it will end WHY start at the benning, and it is not one country it is the WHOLE world and it seems doing it for ever with the hope of different result .... in my book this is INSANITY

BaBaBouy's picture

ReJoice And Give Thanks... "THEY" Pushesd GOLD Down Again Yesterday...

Fear NOT, Everything Is Just Fine In Bankster FED Fairyland,

With The Printers (To The .001% Chozen Few) At The READY.

Save_America1st's picture

wow, their stock is cheaper than silver!  We should buy a bunch of it while it's on sale now!  Does it come in tubes of 20? 

svayambhu108's picture

And how bad is this, given that, banks and bankers keep on falling ?

SafelyGraze's picture

2 trillion debt over there

2 trillion in excess reserves over here

net net -- all balanced

knukles's picture

Gas pipeline is gonna run through which country, again?

centerline's picture

Yup.  Is nuts for sure.

Troublehoff's picture

Money supply has to expland exponentially

Productivity does not

The only way to make this equation work is to pile on more debt or more base money.

Either way, it's fucking inflationary 

If there's one thing you can count on, it's that the real value of cash and bonds is getting destroyed, default or not

logicalman's picture

The people (psychopaths) that run the system benefit HUGELY, on the backs of Joe Public every time and run away with their loot when TSHTF

Not insane for them, is it?

The insane part is how humans allow the psychopaths take over every damn time.


Citxmech's picture

"Debt-based systems simply reflect who we are."

Honestly, I think each broad-based monetary system has benefits and pitfalls.

A fixed monetary system (like gold - which worked pretty well for a very long time) invites currency deflation as population and growth increase and scarce resources are used-up.  Also, balance of trade issues can lead to catastrophic imbalances in the currency supply of net importers.

An expansionary monetary system tries, at least, to match growth and create stable pricing.  The problem here is how do you manage it?  Central control has obvious problems, but leaving it up to the market by using a debt-based system REQUIRES exponential growth (ie eventual failure is baked into the cake).  Then, of course, there is the greed of the issuers that must be dealt with.

If you want to facilitate maximum growth and utilization of resources (which can be viewed as both a virtue, or a cancer) the debt-based system makes initial sense - especially when its certain and eventual failure seems so far away.

At humanity's current stage, where population is slamming into resource limits, however, debt-based fiat it is at its failure point.  Under these circumstances, a zero-growth, or better yet, a system that will function in a contracting market will need to be transitioned to, if any semblance of stability is to be maintained.

max2205's picture

-20%, that's a good start

centerline's picture

Solid post C.  There is no utopia and the current system is toast.  Even the mechanics of debt are turning the tide regarding demographics.  Hand in hand with resources, social complexity, you name it.  A pefect storm for a debt based system - globally.  And the powerful are going to drag us to hell trying to keep the party going for themselves.

Troublehoff's picture

Under these circumstances, a zero-growth, or better yet, a system that will function in a contracting market will need to be transitioned to, if any semblance of stability is to be maintained.

Great point!

Only problem with that system is that it makes it hard for people in power to steal from everyone else. Rich people might loose money in that system.

Bananamerican's picture

Oh they're "loosing" money all right but they're fighting a "losing" battle in doing so.

Maxter's picture

Nice post and I agree with you.

I just wanted to point out that the exponetial grow would be slower if we let the TBTF bank actualy fail.

Urban Redneck's picture

We are morally weak and easily corrupted, but going all the way back to the Stoics- even strong leaders have been led into temptation...

in 161 AD Upon becoming Grand Poobah - Marcus Aurelius reduced the silver content of the denarius from 2.68 grams to 2.57 grams to finance his shovel ready spending spree...

in 168 AD Marcus Aurelius increased the silver content of the denarius from 2.57 grams to 2.67 grams. (THINK ABOUT THAT...)

in 170 AD Marcus Aurelius reduced the silver content of the denarius 2.67grams to 2.57 grams (because fighting those damn Germans was draining his treasury and he needed more coins)

in 180 AD Marcus Aurelius croaked and Commodus became Grand Poobah and promptly rinsed his hands of Marcus Aurelius and repeated his predecessor's devaluation for his own shovel ready spending spree, this time to 2.34 grams

The "shovel-ready spending/jobs program" basically Rinses & Repeats with each Roman Emperor. Spending money to reduce the money supply... not so much (read never).

no debt was harmed (or issued) in this demonstration

Urban Redneck's picture

It's not DEBT (that's a different problem)

It is the failure to CLEAR & SETTLE that throws another coin in the great RINSE, REPEAT machine.

Smart people keep reinventing the "flexibility" wheel to address this, but these same smart people consistently neglect to incorporate mean reversion/counter-cyclicality/responsibility into their reinvented wheel, and thus the cycle continues...

"They" are smart people, and they know they can get away with it, and no one stops them, either because they don't understand the inevitable consequence of the engineering, or they are bought off.

CrazyCooter's picture

Are you a bot?

That is the oddest prose I think I have ever seen (three post sample). Each paragraph is this disjointed idea, not really logically strung together, echoing the same sort of stuff (e.g. you cite "Armstrong" in every post.

If you really want to learn shit, go the the front page, scroll to the bottom, find the links to go to the previous page of posts (e.g. 1 2 3 4 5 6 7 8 9 … next › last ») and choose the "last" option.

Start reading in chronological order towards the present.

When you finally catch up with us, you won't ask dumb questions, you will post brillian sarcasm (or that weird off-beat humor like Knuckles or slewie the pi-rat). After all, once you figure out what is really going on you will need a coping mechanism that works for you.

And I suspect you willl have dropped yoru Armstrong fetish by then.

Carry on.



Arius's picture

i think is an important thing to discuss, thats why i tried to improve it each time ... i

t just struck me as odd thats all that people will do the same thing over and over.


you acceot this as normal business?


if that was the case, people would have been stuck in other areas and we would never had these amazing discoveries ...


armstrong it is just someone i respect for his knowledge ... i take it back


IndyPat's picture

The simple conclusion is that it keeps working for "the few".
Every. Single. Time.

It's in really bad taste to name "the few", but if you are honest with yourself after researching it, don't state your conclusions here.

We get away with a lot here. But there were a few that found the boundaries of our little play pen.

His name was.....

Luckhasit's picture

I don't know individual names, but Italy with a certain group of people was the birth of it all. 


logicalman's picture

Coping mechanism - AKA Beer!

IANAE's picture

Many believe they are experts oddsmakers when in fact they do not understand the games or attendant risk.


Should not wager unless they have an edge...most people calculate their edge ("...what's that?") inaccurately, if at all.


The pros, however, know very well what their edge is...

IndyPat's picture

...the magic crystals in their blood from their mothers side of the "family"?
Am I right? Am I right?

Dublinmick's picture

"the magic crystals in their blood from their mothers side of the "family"

Best laugh I have had in awhile Pat, Thanks

IndyPat's picture

From one mick donkey motherfucker to another...
You're most welcome and always glad to help.

Edit: big fan of your blog, btw. Still crawling the old stuff, but I'll get up to speed soon.

TVP's picture

The cycle repeats throughout history because naive, sheep-like humans such as yourself cannot see through the illusions created by the handful of elites who rule over us all.  They use illusions to keep the masses subdued, while they usurp and control all capital created by the producers of society in order to achieve easy power and wealth.  


It's all by DESIGN, they BUILD IT UP, only to later BURN IT BACK DOWN.


Anyone who trades anything knows that a CRASH is always welcomed by the biggest players in the game....because it means they can swoop up ALL assets for PENNIES on the dollar. It's not a goddamned CONSPIRACY, it's just REALITY.

COSMOS's picture

This is why the Austrians need cheap Russian gas via South Stream, any savings they can create will need to go to bail out their banks.

CrazyCooter's picture

While I am sure this is unrelated, it *IS* Hungary and Austria rocking the boat. I wonder just a bit if there isn't some serious shit going on behind the scenes.

After all, any group of banks in any country can theoretically sink the whole system just by pulling down their pants for all to see. Sure, their banks will take a hit, but it could well bring it all down too.

Maybe this is what Hollande should have done, "Oh, you want to fine/blackmail us. Fine. Tomorrow we go public with our balance sheets." The voice on the other end would reply, "Well, that is hasty and illogical. Perhaps if we .... instead?"



COSMOS's picture

Someones pants will fall eventually even if by mistake, rubber bands last only so long...

Tabarnaque's picture

Funny, I was thinking the same. What a strange coincidence that this is happening shortly after Austria approved the construction of Russian’s South Stream Nat Gas pipeline… And this is supposedly coming from tighter regulations out of Hungary and Romania?!! That smells fishy.

shovelhead's picture

"I'm too smart to get stuck.

That's for the dummies."

I used see it all the time when I played poker.

Sometimes I was the dummy.

Gambling is like that.

Manthong's picture

God forbid reality should take hold anywhere.

Citxmech's picture

"Reality" is going to be a gigantic kick in the balls for everybody.  

We are all Wile E. Coyote, Super-Genius.

Antifaschistische's picture

I know I'll gain a nice collection of dis-arrows for this...

But, thanks to the ability to short sell and buy puts...the .0001% who knew this information (in advance) and knew it was going to tank the stock price were still able to make a fortune off the headline.

I'm no expert in market mechanics, but if it's wrong for the FED to invent dollars through just seems that brokers who invent stock through short sales are equally as wrong.   None of which seems so bad, until the .0001%'ers make tens/hundreds of millions of dollars on either side of the news.

IndyPat's picture

Dunno who would junk that?
Looks like ya got the tiger by the balls.

CrazyCooter's picture

I sort of figured that out when I read Jessie Livermore's autobiography. It really demonstrated how the "inside class" uses stocks to screw the "outside class". No other demarcation fits; your an insider or your an outsider. Sophisticated hedgefunds simply work to become insiders (like banging a certain ex-President's daughter). Think that stinky hasn't generated some primo investment ideas?

If outside folks can get trends right, they can ride the ride and make a return. And maybe that works when the economy is generally expanding, growing, industries are innovating, etc. But all the land on the Earth is camped by people now; nothing new to explore. All the giant/supergiant oil fields have been found (oil discoveries peaked in the 60s). Et cetra.

At this juncture, I would rather take my dough and establish a business I think could actually survive over the long haul and gamble on my retirement htat way. Everything I put into a retirement fund will either be stolen outright or inflated to toilet paper. That includes not just stocks, but simple bank accounts with deposits greater than a month of rent/food/gas/etc.

Best of luck trading against the insiders. 



centerline's picture

Worse is that calling it a casino seems so normal. That says enough for me.

Dublinmick's picture

Sounds about right to me, I went through the FSU business school and nobody ever bothered pointing out to me the fed was not federal. What could I possibly know?

IndyPat's picture

Silly rabbit. Of course it's Federal. Says so right in the name. It's would be like...I dunno..against the law for them to claim Federal status and not be.
And really sneaky and underhanded.

logicalman's picture

Paraphrasing a bit here, but Henry Ford said putting money on a horse does not make it faster or stronger and the same applies to companies when people buy stock in it.

Brokers get their name from the likelyhood you'll be broker after you listen to them.


IndyPat's picture

..Ford said putting money on a horse does not make it faster or stronger and the same applies to companies when people buy stock in it...

I think he bet Nazi, as well. Still undecided if it was a winning bet.
I know it was a lucrative one, though.