August 18, 2014 / 10:52 AM / 3 years ago

Fitch: Austrian Banks' CEE Risks Will Drag On 2014 Profits

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Peer Review: Major Austrian Banks here LONDON/FRANKFURT, August 18 (Fitch) Austrian banks' risks from central and eastern European exposures will drag on 2014 profits and leaves them more vulnerable ahead of the ECB's stress test later this year, Fitch Ratings says. Some of these operations expose the banks to geopolitical risks, raising uncertainty over earnings. Overall profitability is being negatively affected by currency depreciation, high loan impairment charges and poor loan growth in some CEE markets. Adverse legislative actions, particularly in Hungary, and sizeable bank levies in several key markets also play a role. Recurring low margins and lacklustre growth in Austria will weigh on earnings as well. The three largest Austrian banks - Bank Austria, Erste and Raiffeisen Bank International (RBI) - rely heavily on profit generation from a few CEE markets, mainly Russia, Turkey and the Czech Republic. While the banks' operations in these countries remain sound and asset quality is robust, RBI's and Bank Austria's sizeable Russian units leave them more exposed to geopolitical tensions from the situation in Ukraine. RBI and Bank Austria are the most exposed to Russia relative to equity among western banks, with about EUR20bn assets each (2.2x Fitch Core Capital (FCC) and 1.2x FCC, respectively). The limited geographical profit diversification constrains their standalone strength, reflected in their Viability Ratings. Slower economic growth and pressure on the rouble could weaken earnings. Conservative macroeconomic and asset quality assumptions for several CEE countries in the ECB's bank stress test leave Austrian banks more vulnerable than many western European peers. The review is likely to be least challenging for Bank Austria (which is being assessed within its parent group, Unicredit) since it is less exposed to foreign-currency loans and residential mortgages in countries for which the assumptions are most severe. It could be tougher for Erste due to its strong CEE focus and a large foreign-currency residential mortgage book in Romania. RBI could suffer most from foreign-currency loans in Hungary and residential mortgages in Poland, where the stress scenario is more severe. But its EUR2.8bn capital raising in February 2014 has considerably improved its ability to absorb severe stress scenarios. Volksbanken Verbund, a smaller network of Austrian cooperative banks undergoing restructuring, has a large legacy Romanian portfolio (160% of FCC at end-2013). We believe it is at risk of a technical failure under the ECB stress test - where a capital shortfall would be identified but filled through previously announced measures. Sizeable non-core CEE real estate portfolios were divested in 1H14, which should help address the potential capital gap. For more details on Austrian banks, see "Peer Review: Major Austrian Banks" published today at www.fitchratings.com. Contact: Patrick Rioual Director Financial Institutions +49 69 768076 123 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. 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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