UPDATE 1-Austrian banks advised to keep aid for now-sources

Wed Oct 5, 2011 10:56am EDT

Related Topics

* Central bank not keen on aid repayments - sources

* Finance ministry says decision up to banks if supervisors agree

* Erste Group Bank to comment with Q3 results (Adds quotes and background)

By Michael Shields

VIENNA, Oct 5 (Reuters) - Austrian banks are set to keep state capital they secured during the financial crisis longer than first planned to ensure they have the strength to withstand shocks spawned by Europe's debt crisis, financial and supervisory sources said.

No new crisis cases along the lines of Belgian-French lender Dexia have emerged in Austria, where officials are keeping a close eye on nationalised bank Hypo Alpe Adria and EU stress test flunker Oesterreichische Volksbanken AG (OTVVp.VI).

But the safety-first mentality may hold up Erste Group Bank's attempt to repay 1.2 billion euros ($1.59 billion) in non-voting state participation capital this year.

"It is still being discussed but unofficially the line is that the Austrian National Bank is not very happy about that," one supervisory official said on Wednesday, when asked about possible repayments of state aid by banks.

In Erste's case, "the final conclusion would be that it would be no problem to pay it back in normal times but we are not in normal times. That is the problem at the moment," the official added.

Two more sources confirmed this. All spoke on condition of anonymity because the discussions were confidential.

The central bank declined comment.

"We will comment on this when we present our Q3 figures" on Oct. 28, an Erste spokesman said.

A finance ministry spokesman said banks had to decide for themselves when to repay state aid that the government had made available to help them shore up their balance sheets.

"We are not pushing anyone to repay or pushing anyone to keep it longer...however the supervisory authorities have to check off that repayment does not cause any problems," he said.

Officials say privately the broader issue was whether it was a good idea to have banks repay expensive but useful state capital at a time when it has hard for them to raise fresh equity on markets at reasonable terms.

Shares in Austria's two largest banks extended gains, with Raiffeisen Bank International up 8.4 percent and Erste Bank up 4.9 percent by 1445 GMT.

AVOIDING WORST CASES

The worst case would be for banks to repay aid only to require assistance again in a few months should the debt crisis blow up and plunge the financial system into turmoil.

"This is what we want to avoid," the first source said.

That is also why Volksbanken, Austria's fourth-biggest bank, probably will not repay a 300 million euro tranche of state aid this year for fear it will weaken the lender, financial and supervisory sources had said last week.

Regulators have often noted that Austrian banks are undercapitalised versus peers operating in central and eastern Europe and repeatedly stressed the need for them to build up their balance sheets.

But Austrian banks' exposure to Greece, Ireland and Portugal is manageable and Austria's state debt is rated AAA, giving domestic banks a handy refinancing tool.

The Austrian banking sector had a combined 6 billion euros in overall exposure to Greece, Ireland and Portugal at the end of 2010. The top six banks accounted for around 4.5 billion euros of that, much of it held on their bank books.

Central bankers said in June the potential fallout of a Greek state debt default would have only a limited impact on Austrian banks, at least directly, and was unlikely to make any Austrian lender need recapitalisation.

Raiffeisen Bank International AG has made clear it is in no rush to repay 1.75 billion euros in non-voting capital it secured during the financial crisis.

RBI said in August it may sell fresh shares within the next year but sees scant prospects for this now with stock prices at such depressed levels.

Hypo Alpe Adria has been asking for more time to raise about 1.5 billion euros in extra capital recommended by the central bank and FMA market watchdog.

Hypo, nationalised in 2009 to avoid a collapse that could have shaken central and eastern Europe, faces a March 2012 deadline to raise the extra capital. ($1 = 0.753 Euros) (Editing by David Cowell)

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