September 5, 2014 / 2:40 PM / 3 years ago

Fitch sees Austria's Volksbanken failing ECB stress test

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VIENNA, Sept 5 (Reuters) - Credit ratings agency Fitch expects part-nationalised Austrian lender Volksbanken AG (OeVAG) to fail a health check of major euro zone banks this year and reiterated the lender may need more state aid.

"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," Fitch Ratings said.

Sources close to the matter told Reuters last month that Volksbanken did not have enough capital to meet the European Central Bank-led (ECB) landmark review of euro zone lenders.

Fitch said it was unaware of any concrete plans to transfer non-core OeVAG assets to a state vehicle - an option media have reported the government is considering - or to modify OeVAG's EU-approved restructuring plan ahead of the ECB-led health checks whose results are due in October.

"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," it said.

OeVAG has declined to comment on the stress test process.

Ratings agencies and supervisors look at Volksbanken as one entity - the association or VB-Verbund - comprising the flagship bank and the dozens of regional savings banks that are its majority owners.

The association - Austria's second-largest cooperative banking group - had "limited flexibility" to raise capital, Fitch said. The Austrian state, which has provided 1.35 billion euros ($1.75 billion) in public support so far - has 43 percent after a 2012 rescue.

Fitch said it thought any incremental risk to investors of being dragged into a rescue or so-called "bail in" at OeVAG was limited to subordinated debt until Austria adopts - probably in 2016 - the new EU bail-in tool for senior debt under the Bank Recovery and Resolution Directive.

OeVAG had 550 million euros in subordinated liabilities held by unrelated third-party investors at the end of June, it said.

Fitch said it was likely to remove assumptions for sovereign support from the Volksbanken association and OeVAG before the middle of next year, implying a potential seven-notch downgrade.

"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," it added.

1 US dollar = 0.7714 euro Reporting by Michael Shields; Editing by Mark Potter

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