Fitch: OeVAG Asset Transfer Would Raise Sub Debt Bail-in Risks

Fri Sep 5, 2014 7:07am EDT

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(The following statement was released by the rating agency) LONDON, September 05 (Fitch) A potential asset transfer from Austria's Oesterreichische Volksbanken (OeVAG) to a state-owned bad bank could prompt the European Commission to revisit its existing state aid process for OeVAG. This would increase the risk of bail-in for OeVAG's subordinated debt, Fitch Ratings says. But OeVAG's credit profile could benefit from a transfer of non-performing loans as this could strengthen its capitalisation. We believe OeVAG may have to rely on state support to complete its restructuring and to remedy any capital shortfalls arising from the ECB's exercise, as we stated in August. This is because Volksbanken-Verbund - Austria's second largest cooperative banking group for which OeVAG is the central institution - has limited flexibility to raise capital. OeVAG is majority owned by VB-Verbund's primary banks with the Austrian state holding 43%. OeVAG is restructuring to focus on necessary central functions to service the primary banks in this cooperative group, so opening up ownership to private shareholders would be neither a favoured strategic option, nor likely an attractive one for potential investors. On 3 September the Austrian finance minister said that an announcement regarding OeVAG would be made in the coming weeks. We believe an adverse stress test failure for OeVAG is likely, but it would be technical, with any capital shortfall identified likely to be filled through measures previously announced or implemented since end-2013. However, we are not aware of any concrete plans to transfer non-core assets to a state-controlled vehicle or to modify OeVAG's existing restructuring plan ahead of the ECB's comprehensive assessment results in October. Recapitalisation by the state would be subject to state aid scrutiny, even if addressing a shortfall from the ECB's adverse stress scenario. Similarly, if an asset transfer was considered, it would probably be subject to state aid review by the European Commission, and junior debt holders would therefore be at risk of bail-in. The size of the potential capital shortfall net of mitigating measures, the valuation of assets and volumes transferred would be among the factors considered to determine the required bail-in volume. At end-1H14, OeVAG's subordinated liabilities (not rated) held by unrelated third-party investors amounted to about EUR550m. We believe any incremental bail-in risk from developments at OeVAG is limited to subordinated debt, until the bail-in tool for senior debt under the EU Bank Recovery and Resolution Directive is implemented in Austria, which is likely to be in 2016. We believe that the government would try to exclude sub debt issued by VB-Verbund's retail-focused primary banks from a potential bail-in to protect financial stability as allowed in principle by the state-aid rules. Any additional restructuring at OeVAG will not affect other rated Austrian banks. A transfer of problem assets (with correspondingly high risk-weightings) could - depending on the valuation and on the technical aspects of the transfer- improve OeVAG's capitalisation without requiring a direct capital injection by the Austrian state. It would also significantly accelerate OeVAG's restructuring plan, which is already well-progressed, notably thanks to the sale of material non-core assets since the end-2013 cut-off date. This could eventually be positive for VB-Verbund's credit profile, which is heavily constrained by weak capitalisation. However, we are likely to remove sovereign support from VB-Verbund's and OeVAG's IDRs before mid-2015. This would imply a seven notch downgrade of OeVAG's and VB-Verbund's 'A' IDRs and senior debt ratings to 'BB-', in line with VB-Verbund's 'bb-' Viability Rating. We may retain some state support in VB-Verbund's ratings, depending on events and indications between now and the timing of support-driven rating actions, (see 'Fitch Affirms Large Austrian Banks at 'A'; Outlook Negative', August 2014). Contact: Patrick Rioual Director Financial Institutions +49 69 76 80 76 123 Krista Davies Associate Director Financial Institutions +44 20 3530 1579 Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: Peer Review: Major Austrian Banks here Volksbanken-Verbund - Ratings Navigator here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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