Fitch Ratings-London-21 December 2011: Fitch Ratings cites in a newly published special report that major Austrian banks' Issuer Default Ratings (IDR) will, in the short- to medium-term, continue to be based on support from the Republic of Austria ('AAA') given the banks' domestic and regional systemic importance. However, the banks' Viability Ratings (VR), which reflects the banks' stand-alone financial strength, could come under pressure in 2012. Pressure could arise notably if plans to improve capitalisation in the run-up to the end-H112 European Banking Authority (EBA) deadline were to be delayed or if knock-on effects from the banks' deleveraging or the eurozone financial crisis on the banks' main markets, Austria and Central and Eastern Europe (CEE), were to be more severe than currently anticipated by Fitch.
The Long- and Short-term IDRs of all major Austrian banks, Erste Group Bank AG (Erste; 'A'), Raiffeisen Bank International AG (RBI; 'A'), UniCredit Bank Austria AG (Bank Austria; 'A') and Volksbanken Verbund (VB-Verbund; including its central institution Oesterreichische Volksbanken-Aktiengesellschaft, OeVAG, both rated 'A') are on their Support Rating Floor and are based on Fitch's assessment of the availability of sovereign support. Progress towards a bank resolution regime for Austrian banks, either at national or European Union level, leading to a reassessment of sovereign support would put the banks' Support Ratings and IDRs under pressure. However, mirroring the Stable Outlook on the banks' IDRs, Fitch expects the implementation of any new legislation to be a lengthy process and the withdrawal of sovereign support therefore to be gradual.
Downside risks for the banks' VRs are however increasing in light of sizeable EBA capital shortfalls and the worsening operating environment in Austria and many CEE markets. While both Erste and RBI have presented plans to remedy their capital shortfalls until end-H112 (EUR743m and EUR2,127m respectively), RBI will in Fitch's view be challenged to close the capital gap with internal measures (i.e. optimising capital and reducing risk-weighted assets). OeVAG (EUR1,053m shortfall) had already started a restructuring process earlier in 2011 but it is, in Fitch's view, exceedingly likely that in order to meet the EBA target (9% core Tier 1 capital ratio), OeVAG will require additional capital, either from within the Volksbanken sector or the Austrian government.
While capitalisation is only one of many metrics considered in Fitch's analysis and the banks' current capitalisation is already reflected in their VRs, Fitch believes that accelerated deleveraging in an attempt to meet the EBA targets could firstly potentially damage the banks' earnings base, notably in CEE and secondly further worsen the already fragile banking environment in many CEE countries, ultimately leading to worsening asset quality. Still, while Austrian banks will grow only selectively and cautiously in CEE in 2012 they will in Fitch's view remain committed to the region as a whole, given the importance of CEE for the banks' franchises but also for large Austrian corporates (except VB-Verbund which sold much of its CEE operations in late 2011 to Sberbank).
