UPDATE 1-Austria's Volksbanken faces stress test capital hole-sources

Fri Aug 29, 2014 9:13am EDT

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(Adds detail, background on other failures)

By Michael Shields and Angelika Gruber

ALPBACH, Austria Aug 29 (Reuters) - Part-nationalised Austrian lender Volksbanken AG believes it does not have enough capital to meet the demands of the European Central Bank's landmark review of euro zone lenders, two sources close to the situation said.

The comments come a day after the bank said it was looking to boost its capital, though it said then a shortfall was not likely to emerge until 2017 and did not expect any negative impact from the ECB's scrutiny.

Any more urgent need for fresh funds would therefore point to a more acute requirement than the bank indicated on Thursday and would put it in the company of a handful of others known to be facing capital shortfalls because they won't meet the ECB's standards.

The ECB is examining whether about 130 of the euro zone's top banks have properly valued their assets and have enough capital to withstand future crises, in a bid to banish doubts about their health six years on from the global credit crunch.

Results of the exercise will not be finalised until October, but preliminary estimates Volksbanken has prepared internally show the group needs more capital, one source with direct knowledge of the matter said on Friday.

Banks can try to estimate their results because the ECB has published hundreds of pages detailing the methodology it is using for the tests, as well as the hurdles banks must meet.

A few others are known to have a capital shortfall. Germany's cooperative mortgage lender Muenchener Hypothekenbank admitted on July 17 that it came up short but said it had already raised capital to cover the hole.

The path ahead for Volksbanken, which is majority owned by regional savings banks and in which the state took a 43 percent stake in 2012, is less clear. Austrian daily Der Standard reported the capital gap at Volksbanken was between 600 million euros ($790.4 million) and 800 million.

A source, speaking on the condition of anonymity because the stress test process is confidential, said that figure was in the right range but stressed it could still change.

ADVERSE SCENARIOS

Part of the capital shortfall arises from the asset quality review itself, which exposed insufficient reserves in central and eastern Europe. The rest comes from the adverse scenarios part of the test, the source said.

Austrian government officials have said the bank cannot expect any more state aid after taxpayers provided 1.35 billion euros in support so far, and Volksbanken has said it intends to solve its problems without more public help.

The source said the regional bank shareholders are reviewing if and how they can resolve the issue themselves, but added: "It is not completely ruled out that the government will somehow have to cover its proportionate share."

The bank declined comment ahead of the official results, as did the Austrian central bank, which said testing was still under way and results could change. The ECB also declined to comment.

Volksbanken is one of six Austrian banks coming under scrutiny before the ECB takes on direct supervision of major lenders in November. Two Russian banks with regional headquarters in Austria will also get ECB oversight.

Banks being scrutinised by the ECB have six months to close any capital gap from the assest quality review, and nine months to address shortfalls from the adverse scenario test which checks if they can maintain a 5.5 percent capital ratio. They need an 8 percent ratio under baseline scenarios.

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, but it acknowledged its ratios could be damaged if there was a negative surprise in the ECB checks. (1 US dollar = 0.7597 euro) (Additional reporting by Laura Noonan in London and Eva Taylor in Frankfurt; Editing by David Holmes)

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