UPDATE 2-Austria's Volksbanken to hold talks on plugging capital shortfall
* H1 group net loss 203 mln euros vs 68 mln year ago
* Common Equity Tier 1 ratio 11.2 pct of risk-weighted assets
* Can't predict outcome of AQR/stress tests this year (Recasts, adds details, background)
By Michael Shields and Angelika Gruber
ALPBACH, Austria, Aug 28 (Reuters) - Part-nationalised Austrian lender Volksbanken is to hold talks with its shareholders on measures to boost capital as it faces up to a shortfall likely to emerge by 2017, it said on Thursday.
Volksbanken, one of the Austrian banks to come under direct supervision of the European Central Bank (ECB) in November, expects its equity ratio to fall in the coming years as it repays 300 million euros ($396 million) in state aid and applies Basel III regulatory standards.
It also faces costs from charges related to the shrinking of its operations under a drastic EU-mandated regime designed to reduce risk in bank portfolios, but is aiming to take steps to avoid the need for further state support.
The Vienna-based lender, which is majority owned by regional savings banks, said it expects to meet minimum capital ratios at the end of 2014.
Reducing its risk-weighted assets and issuing bonds that comply with Basel III capital rules are still options, "even though the ability to issue bonds seems limited at present", it said amid investor jitters about the crisis in Ukraine.
"Discussions will be held with shareholders and owners of participation capital regarding measures to optimise further the existing capital structure," it added.
Austrian watchdogs have demanded an overall equity ratio of 13.6 percent, and while Volksbanken said its ratio stood at 15.3 percent at mid-year, it acknowledged that it could be damaged if there is a negative surprise in the ECB-led checks of big banks' balance sheets and an ensuing stress test.
Fulfilment of these requirments could be jeopardised if potential charges arising from the Asset Quality Review (AQR) and stress test or winding down of the non-core portfiolio prove higher than expected, it said, adding that "such a scenario is not expected at present".
Volksbanken's Common Equity Tier 1 ratio - the key yardstick for the ECB-led AQR and stress tests - was 11.2 percent of risk-weighted assets at the end of June and the bank has said previously that it had sufficient capital to pass the health checks without further state aid.
The bank has dismissed as "speculative and premature" a newspaper report that it may need an extra 500 million euros to 1 billion euros in capital to meet minimum levels under an adverse stress test scenario.
It could maintain an 8 percent capital ratio under the current AQR but miss the 5.5 percent minimum in the tough scenario, Austrian daily Der Standard reported, citing central bank estimates.
The group has more than halved its total assets from 41.1 billion euros in 2011 to 18.78 billion at the end of June.
However, its first-half loss widened to 203 million euros from 68 million euros a year earlier, it reported on Thursday, after pumping money into the Romanian business it has to sell by the end of next year. It also reiterated its forecast for a significant full-year loss.
Austria became Volksbanken's second-biggest shareholder in 2012 by taking a stake of 43 percent. It has ploughed 1.35 billion euros of aid into the bank so far to keep it afloat.
Ratings agency Fitch said this month that the bank may need to rely on capital injections from the government, something Finance Minister Michael Spindelegger had ruled out before he quit this week. His replacement is has yet to be appointed.
Moody's, meanwhile, downgraded its rating to reflect what it called reduced assumptions of more state support because of the prospect that shareholders, bondholders and even large depositors would have to lose money before government or euro zone money could be used to rescue a bank.
The ratings agency acknowledged the "substantial progress" Volksbanken has made in implementing its restructuring programme but said that operating performance remained weak. (1 US dollar = 0.7569 euro) (Editing by Georgina Prodhan and David Goodman)