UPDATE 2-Austria's BAWAG says in good shape for ECB health check

Wed Aug 20, 2014 7:26am EDT

* Q2 net profit nearly doubles to 95 mln euros

* Maintains 2014 targets, H2 profit growth set to slow slightly

* Common equity tier 1 capital ratio at 11.2 pct (Combines stories, adds comments from CEO, CFO)

By Michael Shields and Angelika Gruber

VIENNA, Aug 20 (Reuters) - Austrian lender BAWAG PSK nearly doubled net profit in the second quarter and boosted its core capital adequacy ratio to over 11 percent, it reported, putting it in good shape for the European regulatory health checks now underway.

Majority owned by U.S. investor Cerberus Capital Management , BAWAG is one of six Austrian lenders lining up for the checks being led by the European Central Bank before it takes over as the euro zone's main banking regulator in November.

BAWAG PSK was now looking forward to the results, Chief Executive Byron Haynes told Reuters on Wednesday after the bank reported its common equity tier 1 capital ratio hit 11.2 percent of risk-weighted assets in the first half.

"We believe that we are well prepared for the announcements towards the end of October and we are well prepared because of the actions we have taken," he said.

Haynes declined to say whether Cerberus might now look to sell out, having acquired BAWAG PSK with other investors for 3.2 billion euros ($4.25 billion) in 2007, adding that no sale process was under way and a potential sale was beyond management's control.

U.S. firm GoldenTree Asset Management also now has a stake of nearly 40 percent in the bank, whose book value is around 2.3 billion euros.

Chief Financial Officer Anas Abuzaakouk added: "Cerberus is a financial investor. At some point there will be a monetisation. Whether it is an IPO, a trade sale, that is something we don't control. What we communicate to the employees here is BAWAG's best years are still ahead of it."

He said the bank was around one third of the way towards achieving its full potential.

Its second-quarter net profit of 95.1 million euros ($127 million) brought the first-half total to 175 million euros, up 87 percent despite tough market conditions.

"We expect the second half of the year to be in line with the first half, maybe a slightly slower run rate compared to the second quarter annualised," Haynes said, noting its core capital ratio should rise more by year's end.

LOOKING WEST

First-half core revenue increased 21 percent as reduced funding costs helped net interest income rise by a quarter. In a cut-throat Austrian market, BAWAG boosted its net interest margin by 0.53 percentage points to 1.84 percent.

It repaid the last 350 million euros of Austrian state aid in March, redeemed "non-sustainable" minorities of 400 million in the first half and paid off the remaining 60 million euros of non-sustainable Tier 1 instruments on July 31, it said.

Unlike Austrian rivals Erste Group, Raiffeisen Bank International and UniCredit Bank Austria , BAWAG is withdrawing from central and eastern Europe (CEE) to focus on stabler economies in Austria, Germany, Britain and western Europe.

BAWAG's CEE exposure has been reduced to 560 million euros, less than 2 percent of total assets, and is set to disappear entirely without losses within 18 months, officials said.

It was on track to hit its targeted return on equity of above 10 percent this year, boost its Austrian retail lending market share above 8.5 percent from 8 in 2013, and cut core operating expenses to below 500 million euros from 574 million in 2013.

BAWAG's partnership with Austrian Post gives it a nationwide network of branches to complement its online products.

It has slashed its balance sheet in a drive to cut risk and non-core assets while boosting capital efficiency, and has also cut staff by 15 percent in the past year to under 3,000.

However, the bank is still embroiled in a legal fight with the Austrian city of Linz over a swap transaction from 2007. Hayes said he was open to a settlement but would fight the case if needed.

(1 US dollar = 0.7517 euros) (Editing by Georgina Prodhan and Greg Mahlich)