UPDATE 2-Austria's Volksbanken revamps to bolster capital

Thu Oct 13, 2011 3:58pm EDT

* Expects 2011 group loss of 500 mln-750 mln euros

* Plans mutual liability pact with main shareholders

* Plan would boost capital, avert more state aid

By Michael Shields and Angelika Gruber

VIENNA, Oct 13 (Reuters) - Oesterreichische Volksbanken AG , the Austrian bank that failed this year's European stress test, will post a 2011 loss and reorganise to shore up its balance sheet, the country's fourth-biggest lender said on Thursday.

Vienna-based Volksbanken announced after a supervisory board meeting that it aims to form a mutual liability association with its main regional bank shareholders, as financial sources had earlier told Reuters.

The plan -- modeled on Dutch lending cooperative Rabobank -- would let Volksbanken consolidate the regional banks' capital while keeping them separate entities, allowing it to avoid more state aid.

Volksbanken received 1 billion euros ($1.37 billion) in nonvoting state capital during the financial crisis. It now will not repay a 300 million-euro tranche due this year, it said.

After writing down the book value of its Investkredit Bank and Romanian units by around 700 million euros and absorbing other one-off costs, Volksbanken AG alone expects to lose around 900 million euros this year, it said.

On a consolidated basis, it is set for a loss of 500 million to 750 million euros according to IFRS accounting standards, it added.

"The current conditions on financial markets force us to revalue our participations and to bring them in line with the current developments on the markets," it said, adding it expected the financial crisis to last for some time.

"In our view, these steps were necessary in order to prepare ourselves for the tough economic conditions," Chief Executive Gerald Wenzel said.

Its regulatory capital base will fall by around 200 million euros as a result of the move.

WEAK FINANCES

Volksbanken is the second big Austrian bank to clean up its balance sheet this week. Erste Group Bank said it would lose up to 800 million euros this year and omit a dividend after writedowns in eastern Europe.

Volksbanken has been trying to use asset sales to shore up its balance sheet and comply with Basel III capital rules.

But it received less than it wanted for selling its VBI Eastern European arm to Russia's Sberbank and has been unable so far to sell its minority stake in peer Raiffeisen Zentralbank as planned.

In April it had said its main shareholders would chip in money to help repay the 300 million euro aid tranche due this year, but that plan did not pan out.

Volksbanken had already issued a profit warning and said it was unlikely to make 2011 payments on shares and hybrid or supplementary capital.

Failure to make repayments gives Austria the right to convert aid into equity and nationalise a third bank, a step Finance Minister Maria Fekter says she would prefer not to take.

Regional banks own 60.8 percent of Volksbanken. Germany's DZ Bank Group owns 23.4 percent, Victoria Group 9.4 percent, Raiffeisen Zentralbank 5.7 percent, and others 0.6 percent.

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