Banks
Austria
Peer Review: Major Austrian Banks
CEE Challenges Shift Eastward Amid Waning Sovereign Support at Home
Special Report
This report focuses on the major Austrian
banks’ rating drivers and trends. It does
not elaborate on their rated Central and
Eastern European (CEE) subsidiaries.
A list of the rated CEE subsidiaries with
links to the most recent Ratings
Navigators is in Appendix 2 and
individual research is available on
www.fitchratings.com.
Stand-Alone Strength Drives IDRs: The Long-Term Issuer Default Ratings (IDR) of Austria’s
three largest rated banks, Erste Group Bank AG ('BBB+'), UniCredit Bank Austria AG ('BBB+')
and Raiffeisen Bank International AG (RBI, 'BBB'), are based on their stand-alone strength.
Fitch Ratings downgraded their ratings after its review of sovereign support in 2Q15.
Stable VRs: The three banks’ Viability Ratings (VR) primarily reflect their homogeneous
business models and risk profiles resulting from their broadly comparable positioning in Austria
and across diverse CEE markets. The VRs also reflect Fitch’s view that the banks’ flexibility to
deal with recurring but evolving challenges in CEE is adequate but not strong. CEE accounts
for about half of their exposure but is the dominant rating sensitivity.
Russia Main Immediate Risk: RBI's and, to a lesser extent, Bank Austria’s, VRs are
constrained by large exposure to the deteriorating Russian economy, which is increasingly
denting profits. This mainly drives the Negative Outlook on RBI's Long-Term IDR. RBI benefits
less than its peers from Austria’s stable and low-risk operating environment and relies heavily
on profits from its still-robust Russian operations. Its Negative Outlook also reflects the
execution risk of the deleveraging plan it expects to complete by 2017.
Related Research
Fitch Downgrades Large Austrian Banks on
Support Revision (May 2015)
Erste Group Bank AG - Ratings Navigator
(October 2015)
UniCredit Bank Austria AG - Ratings
Navigator (June 2015)
Raiffeisen Bank International AG - Ratings
Navigator (June 2015)
VB-Verbund - Ratings Navigator (June 2015)
Fitch Upgrades VB-Verbund, Downgrades
and Withdraws Immigon’s Ratings following
Spin-Off (August 2015)
Fitch Affirms Austria at 'AA+'; Outlook Stable
(August 2015)
Sovereign Support for European Banks
(May 2015)
Fitch Affirms 6 Foreign-Owned Russian Banks
(February 2015)
Austria (February 2015)
Austrian Banks’ Exposure to Swiss Franc
Assets (January 2015)
Analysts
Patrick Rioual
+49 69 76 80 76 123
[email protected]
Maria Shishkina (Erste, Bank Austria, RBI)
+44 20 3530 1379
[email protected]
Christian Schindler (Volksbanken-Verbund)
+44 20 3530 1323
[email protected]
www.fitchratings.com
Stable Outlooks: Bank Austria's Stable Outlook reflects more robust, regionally diversified profits
and lower vulnerability than RBI to asset quality pressure in Russia. A successful sale of its
Ukrainian unit would relieve Bank Austria from a deepening of the country’s recession. Its large and
solid Turkish presence is a strength but may create risks if its strong, organic loan growth persists.
Restructuring measures expected to be unveiled shortly by Bank Austria’s parent might change
Bank Austria's setup and role within the group. This could trigger a reassessment of its ratings.
Erste's Stable Outlook reflects our expectation that the Hungarian and Romanian markets will
break even by 2016 after years of losses and intensive impaired loan clean-up; indeed, Erste’s
profit and asset quality showed significant recovery in 1H15. We also expect the critically
important profit contributions from its strong Czech and Slovakian units to remain resilient.
VB-Verbund’s Restructuring Progress: The smaller cooperative Volksbanken-Verbund (VBVerbund, 'BB+’/Positive) will remain an outlier in light of its domestic retail focus but it is closing
the gap to its larger peers’ ratings. The upgrade of its Long-Term IDR in 3Q15 mainly reflects
the spin-off of its riskiest legacy assets. The Positive Outlook signals that the 'BBB' range is
achievable in the medium term on successful restructuring and materially improved earnings.
Low Domestic Margins: The banks are unlikely to earn their costs of capital in their home
market in the foreseeable future without sweeping measures to tackle the sector’s overcapacity
and high fixed costs. Depressed earnings and low growth in CEE in the last few years have
made the issue more pressing, accelerating initiatives such as investments in mobile banking.
However, except for VB-Verbund and possibly Bank Austria, we expect the banks to muddle
through until CEE recovers, helped by the low risk-costs prevailing in Austria.
Regulatory Costs and Complexity: The banks’ necessary capital build-up is constrained by
particularly high bank levies and contributions to the new EU resolution and deposit insurance
funds. The three large banks are also being repeatedly hit across CEE by politically motivated
legislation that is shifting wealth to households from the banking sector. Their presence in a
number of jurisdictions (including non-eurozone) with uncoordinated regulatory requirements
complicates capital management as regulatory convergence remains a distant prospect.
4 November 2015
Banks
Figure 1
Figure 3
Rating Overview
Erste
Bank Austria
RBI
VB-Verbund
IDRs
BBB+/Stable/F2
BBB+/Stable/F2
BBB/Negative/F3
BB+/Positive/B
VR
bbb+
bbb+
bbb
bb+
Source: Fitch
Figure 2
No Longer Support-Driven
Long-term IDRs
Until May 2015 (State support-driven)
Current (VR-driven)
A 2
A- 2
BBB+
2
BBB
1
BBB1
1
BB+
BB 1
Erste
Bank
Austria
RBI
VBVerbund
Source: Fitch
Source: Fitch
VR Dynamics Since the 2014 Peer Review
Erste and Bank Austria’s individual VR scores have remained unchanged since our previous
peer review, reflecting Bank Austria’s broadly stable development and Erste’s major asset
quality and performance improvement in 1H15, which were largely anticipated last year. The
risks arising from Russia and Ukraine and the uncertain outcome of RBI's deleveraging plan
are mainly responsible for the downward shift of several of its VR scores. The trend remains
negative overall as indicated by the Negative Outlook on RBI's Long-Term IDR.
Figure 4
CEE Loans
In % of total loans at end-1H15
(%)
80
60
40
20
0
Bank
VBRBIᵇ
Austriaª
Verbund
a Includes Turkey pro-rata (41% stake)
b Credit exposure
Erste
VB-Verbund’s restructuring progress has driven the improvement of a majority of its VR scores.
Beside the considerable asset quality relief from the spin-off of OeVAG, its former central
institution, in 3Q15, the main drivers are VB-Verbund’s improved structure and governance and
the efficiency gains expected from the ongoing mergers of its local (primary) banks. As a result,
the peer group’s rating drivers are becoming significantly more homogeneous.
Source: Bank reports, Fitch adjustments
More Selective Approach to CEE
Figure 5
Erste
RBI
Bank Austria
VB-Verbund
Likely
negative
Possible
constraint
Rating
Implications
End-2014c
(%)
Neutral
Loansa by Country Groupb
Group Group Group
A
C
D
63
33
44
~100
30
43
23
n.m.
7
24
33
n.m.
n.m.: Not Meaningful
a
Gross loans, except for Bank Austria (net)
b
Fitch’s Country-Specific Treatment of
Recovery Ratings
c
Except for VB-Verbund (Fitch estimates at
end-3Q15)
Source: Fitch
Related Criteria
Global Bank Rating Criteria
(March 2015)
Peer Review: Major Austrian Banks
November 2015
Erste, RBI and Bank Austria’s parent, UniCredit S.p.A. (UC, BBB+/Stable/bbb+), remain
committed to diversified CEE franchises. But the challenges of the last seven years made them
reconsider their strategic positioning in several countries. Their franchises are more focused
but remain broad enough to allow necessary adjustments without compromising the geographic
risk diversification that underpins their CEE strategies. However, VRs will be constrained as
long as the banks are unable to improve materially the geographic balance of profit generation.
Pre-Crisis: Less Differentiated Focus on Market Shares
The large banks have been generally prompt to seize growth opportunities in CEE, where their
track record is overwhelmingly positive. Yet, some late market entries (eg Erste in Romania;
OeVAG in general) led to subpar asset selection or inflated prices paid for existing franchises.
Later attempts to build up market shares included aggressive FX retail lending, whose asset
quality deteriorated as local currencies devaluated. Hypo Alpe-Adria International AG (HAA, not
rated) has combined these strategic flaws to the extreme, amplified by poor risk management.
Crisis-Driven Adjustments
Past excesses have been largely addressed. Most notably, new FX retail lending all but ceased
in 2009, contributing (alongside loss-inducing conversions forced by local legislators and nonperforming loan (NPL) sales) to a reduction of legacy stocks, especially at Erste. Improving
2
Banks
Figure 6
Domestic Market Shares
Deposits
18
14
n.m.
30
7
Erstea
Bank Austria
RBIb
RBG
VB-Verbund
Loans
19
15
n.m.
27
7
a
Retail segment only
RBI operates predominantly in CEE
Source: OeNB, banks’ presentations
b
Figure 7
Sharper Regional Focus
RUS
POL
CZE
UKR
SVK
AUT
HUN
ROM
SVN
Unquestioned strategic importance;
particularly key for Erste
Deleveraging to mitigate risk in RUS
(RBI); uncertain but improving
prospects in HUN (all)
Exit; in UKR completed (Erste) or
intended (RBI, UBA); in POL and
SVN initiated (RBI)
Lower risk/return implications (limited
market size, small or no franchises)
Source: Fitch
Figure 8
Geographic Loan Split in CEE
Gross loans; main markets at end-1H15
(EURbn)
40
Erste
Bank Austria¹
RBI
30
20
10
UKR
POL
HUN
TUR
CRO
RUS
ROM
CZE
0
¹ Net loans incl. Turkey pro-rata (41% stake)
Source: Banks, Fitch
Figure 9
Geographic Loan Split in CEE
Gross loans; main markets at end-1H15
(EURbn)
70
CZE
TUR
RUS
HUN
ROM
POL
CRO
UKR
60
50
40
30
20
10
0
Erste
Bank
RBI
Austria¹
¹ Net loans incl. Turkey pro-rata (41% stake)
Source: Banks, Fitch
Peer Review: Major Austrian Banks
November 2015
local regulatory frameworks in several markets have also contributed to stronger risk cultures.
Overpaying for existing bank assets has also become less likely, due to uncertain short-term
economic outlooks deflating asset prices in some CEE countries, Basel III requirements
constraining the excess capital available for acquisitions, and higher shareholder scrutiny.
Narrowed Comfort Zone and Necessary Compromises
The banks have increasingly concentrated new business generation within the EU as a result
of their more cautious approach to CEE. This has been mostly driven by risk aversion. Bank
Austria sold its Kazakh unit and Erste left Ukraine in 2013 while the Russian/Ukrainian conflict
caught RBI and Bank Austria in 2014 as they tried to follow suit. Erste already had a strong
strategic focus on EU members within CEE (it never had a large Russian exposure). Within the
EU, too, the need for a more selective geographic approach has become evident. Years of
adverse legislative measures in Hungary have acted as a reminder that EU membership does
not ensure a stable, business-friendly environment free of political interference. The protracted
convergence across CEE also supports more differentiated approaches.
A sharper regional focus and differing assessments of individual countries’ potential could
trigger modest M&A activity. The Hungarian government has agreed to acquire a 15% stake in
Erste’s local unit by injecting fresh capital that the bank intends to use to resume growth in the
country. Erste is welcoming as a minority shareholder the government that was largely
responsible for years of heavy losses, which required EUR1bn recapitalisation by Erste and
triggered the unit’s 40% shrinkage. However, we believe that Erste’s renewed commitment to
Hungary and its pragmatic approach to it also reflect the lack of sizeable alternative growth
markets in the eastern EU and prohibitively expensive assets in more promising markets
(especially Poland). At the same time, RBI's strategic review in 1Q15 identified Hungary as one
of the markets to be reassessed and rescaled, with more uncertain strategic implications.
Constrained Capital Generation Drives Priorities
RBI's decision in 1Q15 to cut its risk-weighted assets (RWAs) by 20% by 2017 illustrates the
sense of urgency driven by the current pressure (regulatory and from weakening asset quality)
on capital. This pressure has facilitated the bank’s decision to exit the small and poorly
performing Slovenian market. But its difficult decision to leave the large and promising Polish
market (for which Erste has repeatedly signalled strong long-term interest) shows that the rising
regulatory pressure from Basel III requires more selective growth in CEE at times of insufficient
capital generation. The need to become more selective can also imply shifting priorities within
large countries. RBI, for instance, is leaving the Russian Far East to focus on large cities.
As the planned disposal of RBI's Polish unit shows, political interference can also complicate market
exit plans. The unit’s Swiss franc-denominated loan book (EUR3.2bn) could, despite its good
quality, burden the sale process in light of the Polish government’s planned legislation (inspired by
the Hungarian precedent) to compensate franc-denominated retail mortgage borrowers for the
currency's revaluation in 1Q15. Nevertheless, we expect the bank to proceed with the sale as it is a
central element of its deleveraging plan even if it needs to carve out the franc loans.
Some Bold Restructuring Steps
The depth of the restructuring processes correlates with the scale of the banks’ challenges in
CEE, which are the dominant VR sensitivities: large at VB-Verbund until OeVAG’s spin-off,
significant at RBI, increasingly manageable at Erste and so far more moderate at Bank Austria.
Volksbank Romania’s sale in 2Q15 was VB-Verbund’s last major step toward leaving CEE, a
process started in 2012 when it sold several CEE units (Volksbank International) to Sberbank.
OeVAG’s spin-off in 3Q15 finally shaped a group that is now almost fully focused on Austria.
The three large banks have so far shown sufficient ability to address challenges in CEE, at
times belatedly in the past but more pro-actively recently. For instance, RBI's deleveraging plan
anticipates a sharp deterioration of its Russian operations although their weakening remains
3
Banks
manageable to date. We view the restructuring plan announced by the bank as adequate and
the three-year horizon as realistic given the (mostly FX-driven) progress achieved in 4Q14.
Figure 10
Modest Growth Reappearing
Loan growth yoy in euro terms
Erste
Bank Austriaª
RBI
VB-Verbund
(%)
10
5
4
2
0
-2
-5
-10
-11
-15
-20
-25
2010 2011 2012 2013 2014 1H15
a Including Ukraine (held-for-sale since 2012)
and Turkey (at-equity since 2013)
Source: Bank reports, Fitch
Figure 11
LIC/Gross Loans
(%)
2.5
Erste
Bank Austria
RBI
VB Verbund
2.0
1.5
1.5
1.0
0.5
0.7
0.6
0.2
0.0
2010 2011 2012 2013 2014 1H15
Source: Bank reports, Fitch adjustments
Figure 12
Pre-Impair. Profit/Total Assets
(%)
3
Erste
Bank Austria
RBI
VB Verbund
2
1.7
1.4
1.3
1
0.5
0
-1
2007
2009
2011
2013
Bank Austria, whose capital and earnings create less urgency, has not applied similar risk
reduction measures in Russia yet and its exposure is broadly stable in euro terms. UC is
expected to announce restructuring measures in 4Q15. We believe that these could
significantly affect Bank Austria’s structure, growth and capital allocation in Austria and CEE.
Capital Management and Weak Domestic Demand Limit Loan Growth
Loan books at Erste and Bank Austria are likely to resume modest growth in 2015 after a
relative stabilisation in 2014. Absent consolidation measures in the Austrian banking sector,
sluggish growth in Austria, especially from corporates, will barely compensate for the low
demand, restructuring, asset sales and restrictive underwriting prevailing in much of CEE.
Following the purchase of Citigroup’s Hungarian retail assets in 3Q15, Erste is likely to resume organic
growth in the country as market conditions improve gradually. But net growth is likely to remain
constrained by muted demand in Hungary as well as NPL sales and workouts (mostly in Romania).
RBI will shrink in the next two years as it implements its 20% RWA reduction plan. This will be
only partly offset by increased new business in core markets and potential bolt-on acquisitions
such as the purchase of Citigroup’s Czech retail assets announced in 3Q15. Bank Austria and
RBI's total assets are also sensitive to further devaluation of the rouble and the hryvnia, similar
to 2014. Following the shrinkage of VB-Verbund’s assets by about 15% in 2015 dominated by
OeVAG’s spin-off, a stabilisation around EUR30bn is likely from 2016 as the primary banks’
mergers will be driven by efficiency gains and economies of scale, not by curtailing lending.
Asset Quality Pressure Actively Mitigated
Exposure Shift Within CEE Towards Less Vulnerable Markets
The loan books of eight of the 25 largest CEE units have shrunk by between 10% and 30%
since 2013, mostly in weak markets, but only Hungary and Ukraine have shrunk overall. This
reflects risk mitigation (Erste’s NPL sales in Romania, restrictive lending), capital management
(RBI in Russia) and low demand (Hungary). Local currency devaluation (Ukraine, Russia) have
amplified the shrinkage. Conversely, growth is solid in stronger countries (Czech Republic).
On balance, the banks’ combined CEE loan exposure has risen by 8% since 2013, resulting in
a shift to more robust markets, which should have positive risk implications in the medium term,
with one exception: RBI's partial capital reallocation from Russia and Poland to southeast
Europe. While risk limitation seems necessary in Russia in the short term, partly substituting
Polish assets with rising new business in less resilient southeast Europe may weaken RBI’s
risk/return profile in the longer term. This should be mitigated by the bank’s growth plans in
Czech Republic and Slovakia. Bank Austria’s aggressive growth in Turkey, its largest foreign
market, bears longer-term risk potential in light of the quite high-risk operating environment.
1H15
Source: Bank reports, Fitch adjustments
Asset Quality Divide: CEE Versus Austria
Figure 13
Peer Review: Major Austrian Banks
November 2015
15
+23%
10
+6%
-12%
-16%
+4%
+2%
+14%
End-2013
Total end-1H15: EUR172bn
Total end-2013: EUR164bn
+6%
+20%
+15%
-29%
-18%
+13%
-33%
+0%
-17%-3%
+14%
-3%
+12%
+24%
+3%
-10%
5
RBI
BA
Erste
RBI
BA
RBI
BA
RBI
RBI
BA
Erste
RBI
Erste
BA
BA
RBI
RBI
Erste
BA
RBI
Erste
BA
0
RBI
UBA’s loan book sin these 11
markets have grown by 25% to
almost EUR80bn, with very high
growth rates of 25% to 45% in CZE,
ROM, TUR, BUL and SER.
1H15
+42%
(EURbn)
+5%
20
BA
Erste and RBI’s total loan exposures
in the top 11 markets have remained
stable at about EUR50bn each.
CEE Loan Exposures
Erste
RBI has shrunk in five CEE markets
since end-2013, compared with two
for Erste and one for Bank Austria.
CZE
RUS
CRO
ROM
TUR SVK
HUN
POL BUL
UKR
SER
Erste and RBI: Gross exposures; Bank Austria: Net exposures, except for Ukraine; Percentages show growth since FYE13
Source: Bank reports
4
Banks
Figure 14
Gross NPL Ratios
Erste
Bank Austria
RBI
VB Verbundª
(%)
14
13
12
11
10
9
8
7
6
2011
The peers’ NPL ratios correlate with their shares of non-domestic assets relative to total assets
and are likely to further diverge along these lines in the short term: some deterioration at RBI
(Russia, Ukraine); stabilisation at Bank Austria and improvement at Erste (clean-up in
Romania). For Bank Austria, strong growth in Turkey dilutes the deterioration in Russia for
now, but the seasoning of Turkish loans could add pressure on asset quality in the longer term.
11.9
9.0
7.8
7.0
2012
2013
2014
1H15
a
2014 excl. Romania (sold in April 2015)
Source: Bank reports, Fitch adjustments
Figure 15
NPL Coverage Ratios
Erste
Bank Austria
(%)
RBI
VB Verbundª
80
70
68
62
60
50
48
40
30
2010 2011 2012 2013 2014 1H15
The gap between the solid asset quality in Austria on the one hand and Ukraine and Russia on
the other has widened since 2013. RBI's NPL ratio in Russia increased by about 70% from
end-2013 to end-1H15 (Bank Austria’s by 25%). The active shrinkage of RBI’s loan book has
accelerated the deterioration of its NPL ratio to 8.1% at end-1H15. Both banks’ focus in Russia
on affluent households and export-driven firms with dollar revenues, and modest exposure to
clients affected by international sanctions, has delayed the pressure on asset quality so far. But
RBI’s NPL ratio is no longer materially better than the Russian banking sector’s average.
Loan impairment charges (LICs) are currently very low in Austria. Erste’s consolidated LIC/loan
ratio was 58bp in 1H15 but the contrast between CEE (90bp) and Austria (27bp) remains high.
RBI and Bank Austria’s situations are broadly comparable. RBI is the most affected due to its
dominant CEE focus and EUR334m LICs in its discontinued Asian business since end-2013
while Erste and particularly VB-Verbund benefit most from the solid Austrian environment.
VB-Verbund’s NPL ratio improved dramatically to 7.0% in 2014 from 12.7% (the 2014 data is
pro-forma excluding the Romanian unit sold in 2Q15, which concentrated the largest stock of
NPLs by far). As VB-Verbund is now fully focusing on Austrian retail clients following OeVAG’s
spin-off, we expect its NPL ratio to be close to 5% at end-2015, in line with the group’s primary
banks at end-2014, and improve gradually thereafter as risk monitoring continues to improve.
a
2014 excl. Romania (sold in April 2015)
Source: Bank reports, Fitch adjustments
Significant NPL Sales and Workouts
Figure 16
Unreserved NPLs/FCC
Erste
Bank Austria
RBI
VB Verbundª
(%)
100
80
60
40
44
37
28
26
20
2010 2011 2012 2013 2014 1H15
a
2014 excl. Romania (sold in April 2015)
Source: Bank reports, Fitch adjustments
VB-Verbund and Erste have been the most active NPL sellers since 2013, mostly in Romania
to accelerate OeVAG’s wind-down and the protracted turnaround of Erste’s local unit. We
believe that RBI may increase NPL sales in the next two years to support its deleveraging plan.
Erste has used fairly intensively the relatively liquid secondary market currently available for
NPLs in Romania and increasingly, albeit to a lesser extent, in other CEE countries. The bank
cut its large stock of NPLs in Romania by EUR1bn from mid-2014 to mid-2015, mostly via two
large portfolio sales in 2H14 but also from write-offs and recoveries. This reduced the NPL ratio
to 23% from 31% at its local unit, bringing its loan quality in line with the rest of the Romanian
banking sector. The unit’s asset quality remains weak, with a high share of euro-denominated
loans, but its NPL coverage increased to 77% and NPL inflows are currently low. Selected NPL
sales should continue in the medium term and the improving Romanian economy and an
enhanced collection process should support NPL recoveries as intensive workout continues.
Stalling Convergence of NPL Coverage
Figure 17
Figure 18
NPL Ratios in CEE
NPL Coverage Ratios in CEE
Lower-risk countries
(%)
10
Lower-risk countries
End-1H15
End-2013
(%)
120
End-1H15
End-2013
100
8
80
6
60
4
POL
CZE
SVK
BA: CZE at end-2014
Source: Bank reports, Fitch adjustments
Peer Review: Major Austrian Banks
November 2015
RUS
TUR
POL
CZE
SVK
BA: CZE, RUS at end-2014
Source: Bank reports, Fitch adjustments
RUS
BA
RBI
BA
RBI
Erste
RBI
BA
RBI
BA
RBI
BA
RBI
Erste
RBI
BA
Erste
0
RBI
20
0
Erste
40
2
TUR
5
Banks
Bank Austria‘s NPL provisioning consistently lagged Erste and RBI's during the crisis years. It
caught up in 4Q13 on the back of UC's aggressive group-wide clean-up in anticipation of the
European Central Bank’s (ECB) balance sheet review (AQR). However, despite the flexibility
offered by its solid profits, Bank Austria did not keep pace with its peers’ progress in 2014. This
is mostly visible in Ukraine, where NPL coverage (local GAAP) still lagged behind that of RBI at
end-1H15. Bank Austria’s EUR141m loss in Ukraine in 1H15 (EUR57m at RBI) reflects some
provisioning catch-up, but uncovered NPLs remain high. This makes Bank Austria vulnerable to
Ukraine’s deep recession and is likely to affect the terms of the pending sale of its local unit.
Figure 19
CHF/EUR Floor Removal
(EUR/CHF)
1.3
1.2
1.1
1.0
Figure 20
Figure 21
NPL Ratios in CEE
0.8
2012
NPL Coverage Ratios in CEE
Higher-risk countries
2013
2014
(%)
60
2015
Source: Bloomberg
End-1H15
Higher-risk countries
End-2013
50
30
Erste's CHF Loan Exposure
20
HUN
CRO
- CHF/EUR floor removal
- Forced conversion in HUN
12
10
40
10
20
0
0
UKR
HUN
ROM
BUL
CRO
SER
BA: HUN unavailable; UKR local GAAP; BUL, CRO, SER
at end-2014
Source: Bank reports, Fitch adjustments
8
6
End-2013
60
BA
RBI
Erste
BA
RBI
Erste
BA
RBI
BA
RBI
Erste
BA
RBI
Erste
BA
RBI
AUT
(EURbn)
14
End-1H15
80
40
Figure 22
(%)
100
BA
RBI
Erste
BA
RBI
Erste
BA
RBI
BA
RBI
Erste
BA
RBI
Erste
BA
RBI
0.9
UKR
HUN
ROM
BUL
CRO
SER
BA: HUN unavailable; UKR local GAAP; BUL, CRO, SER
at end-2014
Source: Bank reports, Fitch adjustments
4
2
Jun 15
Mar 15
Dec 14
Jun 14
Sep 14
Mar 14
Dec 13
Jun 13
Sep 13
Mar 13
Dec 12
0
Source: Bank reports, Fitch
In 2014, the NPL ratios improved by 60bp in lower-risk countries and by 70bp in higher-risk
countries (excluding Ukraine) on average. Thus, NPL coverage converged, down to 65% from
68% on average in lower-risk countries and up to 64% from 60% in higher-risk countries.
Ukraine’s NPL ratios are extreme outliers in terms of level and trend (+60% yoy in euro terms).
Currency Volatility Dominates Market Risk
Figure 23
Ruble Devalution vs. Oil Price
EUR/RUB (LHS)
USD/RUB (LHS)
Brent (RHS)
(RUB)
80
(USD)
120
The three large banks are exposed to local currency depreciation, which deflates their CEE
subsidiaries’ unhedged capital base relative to their FX-denominated assets, most of which are
euro- or dollar-denominated. Bank Austria and RBI are the most exposed, especially in Russia
and Ukraine, while Erste is less vulnerable due to its smaller presence in non-eurozone
countries. The dollar’s appreciation since mid-2014 has affected the large three banks by
inflating their FX-denominated RWAs (typically loans to export-driven corporates) in euro terms
without compensatory effects on the capital side.
70
100
60
80
50
60
Resurgence of Swiss Franc Risk in Loan Portfolios
40
40
FX loans comprised between 40% and 50% of the large three banks’ entire CEE exposure at
end-2014. With the exception of the franc-denominated retail book of RBI’s Polish unit, the
asset quality of CEE subsidiaries with high shares of FX retail loans is generally weak and the
sensitivity of these loans’ quality to the countries’ economic developments is above-average.
FX retail loans notably contributed to the poor performance in Hungary in the last few years.
30
20
Mar 14
Sep 14
Mar 15
Source: Bloomberg, Fitch
Sep 15
Figure 24
FX Pressure in Ukraine
100 UAH/EUR
100 UAH/USD
14
12
10
8
The banks have all but terminated new FX lending to retail clients without revenues in matching
currencies (the regulator prohibited new loans after 2008 in Austria). New FX retail lending is
generally limited to corporates with matching revenues. But the four banks have large stocks of
legacy loans (particularly very long-term franc-denominated mortgages), which remain exposed
to market volatility, of which the Swiss central bank’s removal of the CHF/EUR floor in 1Q15
was a stark reminder. However, mitigating factors make this manageable for all four.
6
4
2
0
Jul 13 Jan 14 Jul 14 Jan 15 Jul 15
We estimate that 80% of the banks’ combined franc loan exposure at end-3Q15 are Austrian
mortgages. The current modest deterioration (albeit from strong levels) of Austrian economic
indicators (unemployment, households’ savings rate) could affect the borrowers’ debt capacity.
Source: Bloomberg, Fitch
Peer Review: Major Austrian Banks
November 2015
6
Banks
Figure 25
However, the risk from the removal of the CHF/EUR floor is unlikely to crystallise in the
Austrian franc mortgage portfolios any time soon, given the loans’ bullet repayments with very
long tenors. The average residual maturity is well beyond five years for 80% of them. Most are
endowment loans collateralised with life insurance contracts or investment funds on top of
generally low-risk and prudently valued Austrian residential properties. In addition, borrowers
are generally affluent households in urban areas, with adequate financial flexibility.
In Hungary
1,000 HUF/EUR
1,000 HUF/CHF
6
5
4
3
Jul 09
Jul 11
Jul 13
Jul 15
In Hungary, years of legislative dispute between the banks and the government were resolved
in 2H14. As a result, the HUF/CHF and HUF/EUR rates of retail loans were frozen at the
market rates prevailing in 4Q14 and the loans were converted into forint at these rates in 1H15.
This has insulated the franc-denominated loans from the removal of the CHF/EUR floor.
Consequently, the banks’ exposures to FX retail loans in Hungary are now immaterial.
Source: Bloomberg, Fitch
Figure 26
In Romania
100 RON/EUR
100 RON/CHF
Erste, Bank Austria and VB-Verbund’s franc retail loan exposures are unlikely to trigger
significant asset quality deterioration in the medium term given their strong Austrian focus.
However, VB-Verbund’s narrowed capital base since its 2014 loss and OeVAG’s spin-off
results in a much higher exposure relative to FCC based on our estimates (Figure 27).
40
Figure 27
36
Swiss Franc Denominated Loan Exposures at End-1H15
32
(EURbn)
Austria
CEE total
Poland
Hungary
Romania
Croatia
Other
Total
In % of gross loans
In % of FCC
CHF loans in % of FCC at end-3Q14
28
24
20
Jul 09
Jul 11
Jul 13
Jul 15
Source: Bloomberg, Fitch
Figure 28
In Poland
Erste
6.8
0.9
Bank Austriaa
11.7
1.3
RBI
0
3.9
3.2
VB-Verbunda
3.0
0
0.3
0.6
7.8
6
62
83
0.8
0.5
13.0
11
89
79
0.4
0.3
3.9
5
49
59
3.0
11
136
99
Total
21.5
6.1
3.2
0.3
0.4
1.7
0.5
27.6
a
100 PLN/EUR
100 PLN/CHF
Exposures at end-3Q14 (VB-Verbund) and end-2014 (Bank Austria) as disclosed by the banks x1.15 to reflect the
CHF/EUR revaluation in 1H15
Source: banks, Fitch estimates
35
30
25
20
Jan 11
Aug 12
Mar 14
Oct 15
While RBI is the least exposed relative to FCC, its large Polish exposure is complicating the
sale process of its local subsidiary planned for 2016. This is due to the Polish government’s
plans to emulate the Hungarian approach of partly shifting the burden of the Swiss franc
revaluation from households to the banking sector. RBI might eventually resort to carving out
and retaining its franc portfolio to facilitate the sale and achieve acceptable sale proceeds.
Similarly, in 3Q15 Croatia passed a law (widely contested by the banking community and
international institutions) to force the conversion of franc retail loans into euro. The resulting
provisioning will significantly burden Erste, Bank Austria and RBI's group profits in 2H15.
Source: Bloomberg, Fitch
2015 Performance Set to Improve After Two Weak Years
Figure 29
Endowment Loan Shortfalls
Shortfall of collateral contractsa
(EURbn)
8
6
4
2
0
End-2014
End-2Q15
End-3Q15ᵇ
a
b
Total Austrian banking sector
Fitch estimate
Source: Austrian Central Bank
Peer Review: Major Austrian Banks
November 2015
The Austrian operations are resilient but suffer structurally from low margins and high fixed
costs. Consequently, they only partly mitigate the earnings pressure and volatility driven by
challenging operating conditions in several CEE markets. As a result, the Austrian banking
sector recorded its first net losses ever in 2013 and 2014 (the latter includes a EUR7.4bn loss
at HAA’s successor, which returned its banking license at end-2014). The four peers also made
their first combined net losses of about EUR0.8bn in 2013 and EUR0.7bn in 2014.
The four peers’ combined operating RoA (before non-recurring items) was a stable 0.5% in
2013 and 2014 but remains modest in light of their relatively high-risk profiles and conceals
opposite trends (Figure 31). The operating income data exclude vast cash- and FCC-neutral
goodwill and other intangible asset impairments of EUR2bn at Bank Austria in 2013 as well as
EUR1.4bn at Erste and EUR750m at RBI in 2014. The 2014 combined loss also includes a
EUR275m charge related to Volksbank Romania’s accounting as discontinued operations.
7
Banks
Restructuring Costs Weigh on Short-Term Performance
Figure 30
LICs/Pre-Impairment Profits
Erste
Bank Austria
(%)
120
RBI
VB Verbund
104
100
80
60
57
40
34
28
31
20
0
2007
2009
2011
2013
1H15
VB-Verbund: Missing years not meaningful
Source: Fitch
Figure 31
Operating RoAA
Erste
Bank Austria
RBI
VB-Verbund
(%)
1.5
0.97
0.83
0.74
1.0
0.5
0.37
0.0
For the first time since 2008, LICs consumed less than half of the banks’ average preimpairment profits in 1H15, but remain well above the average pre-crisis consumption rate of
25%. The peer group’s combined operating performance should improve moderately in 2015,
mainly driven by Erste’s recovery in Hungary and Romania and historically low LICs in Austria.
The other banks’ profitability is affected by restructuring costs to various degrees. We expect
the peer group’s internal capital generation to recover gradually until 2017 as 2016 is likely to
be another transition year for VB-Verbund and RBI and to a lesser extent for Erste.
RBI's 2H15 performance is the most uncertain and will determine, in our view, whether a
double-digit growth of the peer group’s combined operating income is achievable in 2015. RBI's
ability to generate capital in 2015 will depend mostly on how the costs from its deleveraging
plan and the sale of its Polish unit are spread between this year and next and how rapidly the
situation will deteriorate in Russia. Subject to the scope and timing of UC's restructuring plan
and a conclusion of the sale of its Ukrainian unit, Bank Austria’s P&L should remain the most
stable this year. The bank is already streamlining its Austrian branch network, but other large
players seem more reluctant to address the cost pressure in the overbanked domestic market.
We expect restructuring costs to trigger a significant but manageable loss at VB-Verbund in
2015, compounded by its contribution to a recapitalisation of OeVAG’s successor, immigon
Portfolioabbau AG, via the redemption at large discounts in 3Q15 of immigon’s notes held by
VB-Verbund’s members. The Positive Outlook on VB-Verbund’s IDR reflects our expectation
that the group will break even sustainably in 2016.
Reliance on Russia and Czech Republic High but Decreasing
-0.5
2010 2011 2012 2013 2014 1H15
Source: Bank reports, Fitch adjustments
Figure 32
High but Decreasing Reliance
Share of CEE pretax profit
RUS
CZE
TUR
The Czech market alone accounted for 62% of the large three peers’ combined pre-tax profits
in 2014 (26% in 2013) and is most critical for Erste. Russia (RBI, Bank Austria) came close,
with 58% (37%). While the Czech and Slovak units are highly resilient, profits from Russia were
down by one third yoy. Russia’s high share of Bank Austria and RBI's CEE profits results from
poor earnings in weak markets, primarily Romania and Hungary. Similarly, Erste’s ability to cut
its reliance on its Czech unit will hinge on the turnaround initiated in those two markets in 1H15.
SVK
(%)
200
Figure 34
CEE Profits Remain Concentrated on a Few Dominant Subsidiaries
Profit before tax
(EURm)
800
600
400
200
0
-200
-400
-600
-800
RUS
% of group pre-tax income
Bank Austria
100
RBI
80
40
42
33
18
20
34
16
21
0
2010 2011 2012 2013 2014 1H15
17
Excl. corporate centre, consolidation items
Source: Bank reports; Fitch adjustments
Peer Review: Major Austrian Banks
November 2015
TUR
SVK
ROM
SER
RBI
BA
RBI
POL UKR
Erste
BA
RBI
RBI
BA
RBI
BUL
Erste
BA
RBI
BA
RBI
Erste
RBI
BA
CRO
HUN
a Annualised
Source: Bank reports, Fitch
RBI's P&L has become overly reliant on Russia, which makes it highly vulnerable to further
asset quality deterioration expected in this market. Bank Austria’s pre-tax profit in Russia also
fell strongly in 2014 (-37% yoy vs. -29% at RBI) and in 1H15 (-37% yoy vs. -17% at RBI).
85
60
CZE
Erste
BA
Figure 33
Russian Profit Contribution
(%)
Total profit 1H15a: EUR2.6bn
Total profit 2014: EUR2.6bn
BA
2013
BA
2014
Erste
1H15
Erste, BA and RBI cumulated
Source: Fitch
BA
0
RBI
50
Worst likely to be over
Total loss 1H15a: EUR0.4bn
Total loss 2014: EUR1.2bn
Erste
100
1H15ª
2014
Turnaround
Cash cows
RBI
150
However, Russia’s more moderate contribution to Bank Austria’s profits reflects better
geographic diversification, solid profits in Turkey (these halved in 2014 but stabilised in 1H15)
and the remarkable fact that Bank Austria, as sole member of the peer group, remained
consistently profitable in Hungary in the last years, notably helped by a smaller FX mortgage
book. If the current trends persist, Bank Austria will generate higher profits in three CEE
countries (including the small Bulgarian market) than in Russia in 2016.
8
Banks
Figure 35
Regulatory Costs Slow Down Necessary Capital Build-Up
Operating RoAE
Erste
Bank Austria
RBI
VB-Verbund
20
14.0
10.5
10.3
10
5.9
Bank Levies Erode CET1 Ratio by 20bp Annually
The Austrian domestic bank levy has cost the entire sector a very high EUR640m annually
since 2013. Erste, Bank Austria and RBI have contributed half of the total. Including the
Hungarian and Slovakian levies, the three banks paid roughly EUR650m in 2014, which is
equivalent to their combined consolidated pretax profits in that year.
0
Moreover, the Austrian levy is used to fix state budget deficits while only a small share is
earmarked for bank support. This use of the proceeds has negative financial stability
implications as it drains from the banking system significant resources that – since Austria’s
implementation of the Bank Recovery and Resolution Directive (BRRD) with its bail-in tool in
early 2015 – are unlikely to be available for sovereign support to banks when the need arises.
-10
-20
2010 2011 2012 2013 2014 1H15
Source: Bank reports, Fitch adjustments
The Austrian and Hungarian levies are based on the banks’ balance sheet size, offering no
flexibility to accommodate their modest profitability in previous years. The Hungarian levy
(EUR230m combined for Erste, Bank Austria and RBI in 2014 or 1% of their local units’ total
assets) is particularly onerous as it still reflects their asset bases at end-2009, ignoring the last
years’ balance sheet shrinkage, which was most pronounced at Erste (-40% since end-2012).
Figure 36
Bank Levies
In % of 2014 operating income
Austria
Slovakia
(%)
Hungaryª
Other
40
Erste suffers more than its peers due to its relatively high focus on countries with onerous
levies. RBI’s shrinkage in Russia and planned exit from Poland (both countries without material
levies) will somewhat dilute the benefits arising from the expected positive trends in Austria and
Hungary. Bank Austria benefits from its more diverse country portfolio outside these countries.
30
20
10
0
Erste
RBI
Relief Eventually Likely
Bank
Austria
The Austrian government has not proposed yet to offset the Austrian levy with the contributions
to the new European deposit and resolution funds which, at EUR360m annually in total, will
increase the total annual burden for the sector to EUR1bn initially, excluding the foreign levies.
However, the banking community’s demand for a (partial) offset seems to be gaining political
traction and we consider likely that some form of compensation will be eventually introduced.
a
Incl. financial transaction tax;
other levies in Slovenia and Romania
Source: 2014 reports, Fitch
Figure 37
Internal Capital Generation
Erste
RBI
Bank Austria
(%)
15
9.9
7.5
5.9
10
5
0
-5
This is because the high levies burden the banks’ competitiveness relative to less affected
foreign peers in the race to fulfil rising regulatory capital requirements. The Austrian levy is
comparable to Germany’s in absolute terms despite a banking sector that is only 15% of
Germany’s size. The Austrian central bank recently warned of the risk that further neighbouring
(CEE) countries may emulate excessive levies. Pressure may also come from the ECB (the
four banks’ direct supervisor since 4Q14) to ensure a level playing field across the Eurozone.
-10
-15
2011
2012
2013
2014
1H15
VB-Verbund not meaningful
Source: Fitch
Figure 38
Flat Fitch Core Capital
Erste
Bank Austria
RBI
VB-Verbundª
(EURbn)
20
15.5
12.4
10
IPOs
8.0
State recap
1.8
0
2011
Leverage and Capitalisation
Weak Capital Generation Pressures Regulatory Ratios
15
5
The Hungarian government has decided a significant reduction of the local levy, switching from
a static to a dynamic calculation and cutting the tax rate in two steps in 2016 and 2017. While
this will support the turnaround of Erste and RBI's local subsidiaries, the authorities still seem
to be tempted to condition the cut to commitments from the banks to increase lending. This
could prove difficult to fulfil as long as demand is muted. And while Erste is now envisaging
significant lending growth, RBI's long-term strategic commitment to Hungary is still uncertain.
2012
2013
2014
a
1H15
1H15: Fitch pro-forma excluding OeVAG
Source: Fitch
Peer Review: Major Austrian Banks
November 2015
The four banks’ levels of FCC and common equity Tier 1 (CET1) capital are acceptable. Their
leverage ratios, driven by the high RWA density of their CEE assets, comfortably exceed the
average of large western European banks and future requirements under Basel III. But their
internal capital generation needs to improve to allow them to catch up with the strengthening
CET1 of their western European counterparts, driven by rising regulatory and market demands.
Erste, Bank Austria and RBI's combined internal capital generation was slightly negative in the
four years to end-2014 and materially positive in 2012 only, and the recovery in 1H15 to a more
9
Banks
Figure 39
Goodwill, Intangibles, DTAs¹
reasonable level last seen in 2009 will be challenging to confirm. VB-Verbund’s succession of
large losses and recapitalisations during this period prevents meaningful comparisons.
In percent of total equity
Erste
Bank Austria
Consequently, the peers’ FCC has broadly stagnated until end-2014 and only the absence of
asset growth in Austria and CEE (driven by weak demand and, in some cases, the banks’
efforts to protect their regulatory capital ratios) has so far preserved reasonable FCC ratios.
RBI
VB-Verbund
(EURbn)
29%
4
18%
3
Low Profit Distribution Follows Capital Injections
2 17%
11%
1
9%
2%
7%
0
2011
2012
2013
2014
1H15
¹ Tax losses carried forward
Source: Fitch
Except for 2012, the Austrian banking sector’s latest profitable full year, only a mix of
recapitalisation by the state (EUR250m at VB-Verbund in 2012), the equity markets (Erste’s
EUR660m IPO in 2013), the parent (UC’s EUR2bn injection into Bank Austria in 2010) or a
combination of markets and parent (RBI’s EUR2.8bn IPO in 2014, partly subscribed by its
parent, Raiffeisen Zentralbank Oesterreich) and low profit distribution has stabilised the banks’
FCC by countering the negative effects of the losses and Basel III’s implementation.
Figure 40
Low profit distribution has absorbed much of the pressure so far, and regulatory costs will
continue to constrain dividends in the short term. Erste’s loss in 2014 prompted the cancellation
of coupon payments on some legacy hybrid capital instruments for the first time. Bank Austria
has upstreamed no dividends to UC since 2010 (but the issuance of substantial subordinated
debt to UC since 2014 has since led to material coupon payments). RBI has skipped dividends
for 2014 and a repeat seems likely for 2015 and 2016, subject to its deleveraging progress.
OeVAG’s recurring losses have prevented dividend payments in its final years and the
cooperative form of VB-Verbund’s primary banks drives structurally very low profit distribution.
High RWA Density in CEE
RWA/total assets at end-1H15
(%)
80
60
40
20
0
Erste
Bank
Austria
RBI
VBVerbund
Source: Fitch
Figure 41
Bail-Inable Debt Buffers
End-1H15a
(%)
100
Total buffer/RWA (RHS)
Total buffer/FCC (LHS)
Min. buffer/FCC for IDR uplift (RHS)
(%)
10
80
8
60
6
40
4
20
2
0
0
Erste
Bank
RBI
Austria
a VB-Verbund: End-2014
Source: Fitch
VBVerbund
Figure 42
Capital Ratios
End-1H15a
(%)
13
12
11
10
9
8
7
6
5
Fitch core capital ratio
CET1 ratio (transitional)
CET1 ratio (fully-loaded)
Tang. common equity/assets
Erste
RBI
VBBank
Verbund
Austriaᵇ
a VB-Verbund at end-2014
b Fully-loaded CET1: Fitch assessment
Source: Bank reports, Fitch adjustments
Peer Review: Major Austrian Banks
November 2015
Less optimistic earning prospects in CEE have driven large impairments of intangible assets
since 2012. Bank Austria wrote off most of its (predominantly CEE-driven) goodwill, intangibles
and deferred tax assets (DTAs) in 2013, largely guided by UC’s clean-up and NPL provisioning
exercise ahead of the AQR. Erste and RBI followed suit in 2014, albeit to a lesser extent. Both
banks’ intangible assets remain material but are largely driven by Erste’s strong Czech and
Slovak units and, to some extent, by RBI’s Polish unit.
Capital Structures Do Not Trigger IDR Uplift
The BRRD’s bail-in tool enables junior debt bail-in without triggering a default on senior debt.
However, the peers’ existing qualifying loss-absorbing junior debt buffers (lower Tier 2, upper
Tier 2, legacy Tier 1 and Basel III-compliant additional Tier 1 capital (AT1)) are short of 8% of
RWAs and, therefore, insufficient for an uplift of their IDRs from their VRs under Fitch’s criteria.
The banks have not issued any AT1 yet. Only Erste has a EUR2bn AT1 issuance programme
in place so far. While it remains unused, it offers some flexibility to seize windows of
opportunity in the market as these arise, notably to compensate the regulatory phasing-out of
Erste’s legacy hybrids. Erste and RBI have the largest buffers relative to their RWAs (Figure
42) but would need to issue about EUR2bn and EUR1.2bn respectively to achieve the 8%
threshold. RBI targets fully-loaded CET1 and total capital ratios of 12% and 16% respectively
by end-2017, suggesting that an 8% buffer is unlikely in the medium term. Its uncertain profit
situation until 2016 should make the issuance of hybrid capital challenging in the short term.
We expect Bank Austria to continue to benefit from UC’s capital support, whose form (capital
injections or a continuation of the non-payment of dividends) is likely to depend on the new
Pillar 2 target capital ratio to be set by the ECB. VB-Verbund’s junior debt buffer, which was
already the lowest of the peer group at end-2014, further decreased moderately at mid-2015
with the spin-off of OeVAG, where the majority of the group’s subordinated debt was located.
The high RWA-density resulting from the three large banks’ focus on CEE creates high CET1
requirements in absolute terms, leading to above-average CET1/total asset ratios ranging from
5.5% at Erste (fully-loaded) to 7.1% at Bank Austria at end-2014. Pre-crisis, above-average
profits easily absorbed the high cost of capital resulting from these capital structures. However,
10
Banks
the cost of adding junior debt layers may somewhat limit the banks’ appetite for junior debt
issuance until profits recover sustainably in CEE. The finalisation of the ECB’s Supervisory
Review and Evaluation Process (individual capital ratios targets under Pillar 2) in 4Q15 could
add pressure on top of the 2% capital surcharge recently announced by the Austrian
authorities, to be achieved by end-2018, although we expect this pressure to be moderate.
As regulatory convergence remains a distant prospect, the three large banks’ presence in a
number of jurisdictions (including non-eurozone) with uncoordinated regulatory requirements
complicates resolution planning and capital management such as the evaluation of issuance
needs to comply with MREL (Minimum Requirement for Own Funds and Eligible Liabilities).
Funding and Liquidity
Figure 43
Funding Mixes
End-2014
Retailª
Banks
Other
Corporates
Public sector
All four Austrian banks show sufficient resilience to severe liquidity and funding stress
scenarios. In our view, Erste’s higher share of Austrian retail deposits and its leading Czech and
Slovakian retail deposit franchises result in a stronger funding profile than its peers.
The banks’ loan/deposit (LTD) ratios have converged toward broadly similar levels since the
start of the financial crisis by developing their CEE units’ local deposit franchises to reduce their
reliance on downstream intragroup funds. This trend has been supported by the long-term
target set for each CEE unit by the Austrian regulator of 110% for loan/local stable funding
ratios (LLSFR). LLSFR is defined as the ratio of loans to deposits, capital, funding from
supranational institutions and debt from third parties with original maturities above one year.
100%
80%
60%
40%
20%
0%
RBI
Bank
VBAustria
Verbund
a Includes small businesses
Source: Banks, Fitch calc. and assessments
Figure 44
CEE Local Loan/Deposit Ratios
Major subsidiaries - end of period
(%)
200
1H15
2013
LLSFR target
150
100
UKR
POLTUR
CRO
BUL
HUN
ROM
RBI
Erste
BA
CZE
RBI
Erste
BA
SER
RBI
RBI
RUS
Erste
BA
RBI
BA
RBI
Erste
BA
Erste
RBI
BA
RBI
BA
Erste
BA
RBI
RBI
0
BA
50
SVK
BA: BUL, HUN, SER deposits include debt securities in issue; UKR 1H15 local GAAP data
Source: Bank reports, Fitch adjustments
Figure 45
Improving Loan/Deposits
Erste
Bank Austria
RBI
VB Verbund
(%)
160
150
140
130
120
110
110
115
114
105
100
2010 2011 2012 2013 2014 1H15
Source: Bank reports, Fitch adjustments
Peer Review: Major Austrian Banks
November 2015
This progress (Figure 45) compares favourably with the largest 40 European banks, whose
loan-to-deposit ratios have improved to 135% from 155% since 2010. Half of Erste, Bank
Austria and RBI’s largest 25 CEE subsidiaries improved their LTD ratios in 2014, mostly driven
by a stronger focus on local funding. Improved asset/liability profiles in CEE have also helped in
more challenging situations, such as VB-Verbund’s sale in 2Q15 of its Romanian unit, the peer
group’s most negative outlier in CEE (in line with Ukraine) with an LTD ratio of 184% at end2014. VB-Verbund has not retained any exposure to its former subsidiary following the sale.
However, progress has been unequally spread across CEE. Markets with weak asset quality
records or uncertain trends are stagnating at best, as in Ukraine. This is often driven by the
devaluation of local-currency deposits facing the sudden revaluation of large franc-, dollar- or (to
a lesser extent) euro-denominated loan books, which is also the case in Russia. Despite rapid
deposit collection, the stagnating LTD ratio of Bank Austria’s Turkish unit is driven by the
challenge for its deposit base to keep pace with its very high loan growth (+32% in 2014).
Despite generally improving LTD profiles in CEE, only Erste’s Czech and Slovak subsidiaries
(relatively large savings banks with leading retail deposit franchises in some of the most
advanced and resilient CEE economies) are material net deposit contributors to the group.
Erste is also the peer with the smallest number of negative LTD outliers (only Croatia).
11
Banks
Appendix 1 – Sovereign Support No Longer Drives IDRs
Fitch downgraded the major Austrian
banks’ IDRs on 19 May as part of a
review of sovereign support across
Europe and North America to reflect
regulatory changes that notably
affect all EU countries.
Support from the Austrian sovereign (AA+/Stable/F1+) to the country’s banking sector generally
had been forthcoming until recently. The combination of a highly-rated sovereign with an
extensive track record of support during the financial crisis and major banks with relatively highrisk, CEE-focused business models (and thus relatively low VRs) was unusual. This translated
until May 2015 into some of the highest support uplifts among developed market banks’ IDRs.
As a result, the major Austrian banks’
IDRs are now based on their
respective VRs, in line with other EU
countries.
BRRD Precedents Underpin Paradigm Shift
Therefore, the downgrades were not
driven by the latest developments in
Austria.
However, the Austrian authorities
have demonstrated their willingness
to bail in senior debt, which is
consistent with the downgrades.
Austria’s plummeting propensity to support failed banks became clear as early as mid-2014,
even before the BRRD’s implementation, when the government attempted to bail in HAA’s
subordinated creditors through ad-hoc legislation (later declared unconstitutional) abrogating a
deficiency guarantee from the region of Carinthia.
In 3Q14, the government publicly ruled out further support to VB-Verbund’s then troubled
central institution, OeVAG, when it became clear that VB-Verbund would fail the AQR. VBVerbund’s restructuring was accelerated as a result, culminating in OeVAG’s spin-off in 3Q15.
The authorities’ boldest step to date was to impose in March 2015 a moratorium on all debt
holders (including senior creditors and those guaranteed by Carinthia) of Heta Asset Resolution
AG, HAA’s successor. The government is devising plans and proposed in October 2015 an adhoc law to bail in Heta’s creditors while enabling Carinthia to honour its oversized guarantee
ahead of the moratorium’s expiration in May 2016. Complex legal challenges make the
resolution’s outcome uncertain and are likely to result in protracted litigation. Heta’s creditors
face losses of several billion euros and many have already written down half of their exposures.
The substance of these measures is consistent with the implementation of the EU’s bank
resolution regime (OeVAG’s wind-down and Heta’s moratorium are both subject to the Austrian
BRRD law), which prompted Fitch to withdraw state support considerations from EU banks’
issuer ratings in 2Q15, triggering downgrades of Austrian banks’ IDRs by two to seven notches.
Bail-In Risk Increases for All Unprotected Creditors
The unprecedented burden on Austria’s public finances exacerbated by the scope of Heta’s
problems and lingering political pressure to shift the burden from taxpayers to owners and
creditors has motivated the adoption by the Austrian authorities of an early-adopter approach to
the BRRD. Heta’s moratorium has been one of the first and, to date, largest and most
aggressive instances thereof in Europe. Austria was one of the first countries to implement the
BRRD’s bail-in tool in early 2015. It also broadened the scope of its BRRD law just before its
implementation to accommodate non-banks, paving the way for its application to Heta in 1Q15.
We do not expect Heta to become a blueprint in case of failures of large systemically important
banks though, given the potential to unsettle market confidence and threaten financial stability.
The Austrian authorities, ECB and EU Commission’s concerted approach to rapidly address
the shortfall identified by the AQR has greatly facilitated OeVAG’s accelerated wind-down since
4Q14. It also suggests a possible application of the BRRD which protects the viable parts of
banks. This may explain that the ECB’s continues to closely scrutinise VB-Verbund’s ongoing
restructuring. But a resolution of one of the three large Austrian banks would be considerably
more complex due to their much broader business scope and presence in many jurisdictions.
The Heta and OeVAG cases show that bail-in risk has significantly and durably increased for
investors in Austrian banks, including senior creditors. However, this risk remains low for the
three large banks given their safe distance to the point of non-viability as expressed by their
VRs. The banks in this peer review have modest direct exposures to Heta as they either stayed
clear of HAA or cut their exposures after HAA’s first bailout by Austria’s government in 2009.
Peer Review: Major Austrian Banks
November 2015
12
Banks
Appendix 2
Figure 46
Rated CEE Subsidiaries
Country
In % of group total
Assets at 1H15 pretax
end-1H15
profit
Subsidiary
Erste (BBB+/Stable/bbb+)
Ceska Sporitelna
Slovenska Sporitelna
Banca Comerciala Romana S.A.
Erste Bank Hungary Zrt
CZE
SVK
ROM
HUN
17
7
7
3
RBI (BBB/Negative/bbb)
AO Raiffeisenbank
Raiffeisenbank (Bulgaria) EAD
RUS
BUG
Bank Austria (BBB+/Stable/bbb+)
AO UniCredit Bank
Ukrsotsbank
Zagrebacka Banka d.d.
UniCredit Bank S.A.
Yapi ve Kredi Bankasi A.S.
RUS
UKR
CRO
ROM
TUR
Support Country
Rating ceiling
IDR constrained by
country ceiling?
IDR
VR
32
12
16
-3
A-/Stable/F2
BBB+/Stable/F2
BBB/Stable/F2
BBB-/Positive/F3
abbb+
bbb
11
3
48
4
BBB-/Negative/F3 bbbBBB-/Negative/F3 bb-
2 BBB2 BBB+
Yes
No
10
2
8
4
15a
20
-11
11
8
20a
BBB-/Negative/F3
CCC/RWN/C
BBB-/Negative/F3
BBB/Stable/F2
BBB/Stable/F2
2
5
2
2
2
Yes
Yes
Yes
No
Yes
bbbcc
bb
bbbbb-
2
2
2
2
AA+
AAA
BBB+
BBB
BBBCCC
BBBBBB+
BBB
No
No
No
No
The links lead to the latest Rating Navigators on the respective subsidiaries
Latest rating action: affirmed; upgrade or Outlook/Rating Watch changed to Positive; downgrade or Outlook/Rating Watch changed to Negative
a
Figures reflect the 41% stake booked at-equity by Bank Austria, not the subsidiary’s total assets and pre-tax profits
Source: Fitch
The rating trend at the large three banks’ eleven rated CEE subsidiaries has turned slightly
positive in the last twelve months after years of material negative developments. The latest IDR
downgrades were driven by the parents’ IDR downgrades in May 2015, except for
Ukrsotsbank’s downgrade, which was VR-driven.
Erste’s Czech unit Ceska Sporitelna is the sole rated unit whose VR is higher than its parent’s.
This highlights the high importance of this strong subsidiary for Erste’s profits, capital and
funding. Reflecting its focus on higher-rated EU countries, Erste is also the sole of the three
large peers without any rated CEE subsidiaries whose IDRs are constrained by country
ceilings.
The VRs of Bank Austria and RBI’s Russian units were affirmed in 1Q15 and are one and two
notches below their respective parents’ VRs. Particularly in RBI’s case, we believe that the VR
differential between the Russian unit and the group will need to remain limited in light of
Russia’s high contribution to group profits and the risk arising from the deteriorating Russian
economy. Russia’s sovereign rating was affirmed at ‘BBB-’/Negative on 16 October 2015.
Bank Austria relies less than RBI on Russia in relative terms. But the VR downgrade of its
Turkish unit (its largest foreign profit contributor on par with Russia in 1H15) to the level of the
Turkish sovereign’s IDR in 2014, reflects moderately deteriorating credit metrics.
Peer Review: Major Austrian Banks
November 2015
13
Banks
Appendix 3
Figure 47
Peer Data
Viability Rating
Income statement (EURm)
Net interest income
Net fee income
Non-interest operating income
Non-interest operating expenses
Pre-impairment operating profit
LICs
Operating profit
Pre-tax profit
Net income
1H15
Erste
bbb+
2014
2,244
917
1,182
2,107
1,329
371
955
964
691
4,569
1,870
1,827
3,787
2,625
2,159
466
-1,000
-1,313
4,775
1,807
1,712
3,896
2,612
1,774
838
506
200
1,691
714
1,059
1,792
1,185
408
787
803
491
Balance sheet (EURbn)
Gross loans
NPL reserves
NPL
Loans to banks
Securities portfolio
Total assets
Customer deposits
Long term funding
Total funding
Equity
Fitch Core Capital (FCC)
130.4
6.9
10.1
8.8
51.4
197.5
124.0
28.4
178.0
14.0
12.5
128.3
7.5
10.9
7.4
53.2
196.3
122.0
30.8
177.9
13.4
11.9
127.7
7.8
12.3
8.4
53.4
200.1
121.5
32.8
180.3
14.8
12.1
2
7.8
68
26
0.6
1
1
8.5
69
29
1.7
-2
Earnings & profitability (%)
Net interest income/earning assets
Pre-impairment RoE
Pre-impairment RoA
LICs/pre-impairment profit
Operating RoE
Operating RoA
Operating profit/ RWA
RoE
RoA
Net income/RWA
2.5
19.4
1.4
28.1
14.0
1.0
1.9
10.1
0.7
1.4
Capitalisation & leverage (%)
FCC/RWA
Tang. common equity/total assets
Tier 1 ratio
Total capital ratio
Core equity tier 1 ratio
Internal capital generation
Funding & liquidity (%)
Loans/deposits
Deposits/total funding
Asset quality (%)
Loan growth
NPL/gross loans
NPL reserves/NPL
Unreserved NPL/FCC
LICs/gross loans
Growth of total assets
2013
Bank Austria
bbb+
1H15
2014
2013
1H15
RBI
bbb
2014
3,440
1,367
1,847
3,400
2,341
675
1,636
1,778
1,360
3,424
1,374
2,008
3,545
2,109
1,271
763
-826
-1,631
1,682
745
745
1,388
1,039
592
447
467
326
3,789
1,586
1,540
3,024
2,305
1,716
589
-174
-463
3,729
1,626
1,620
3,340
2,009
1,149
860
835
603
746
258
403
941
209
66
144
35
-300
733
254
408
918
224
90
133
115
6
123.9
6.9
11.2
27.3
37.1
191.4
107.9
28.6
165.2
15.7
15.5
120.1
6.8
11.1
26.6
39.2
189.1
101.9
30.0
163.5
14.9
14.7
120.0
6.5
10.8
20.5
33.5
177.5
95.8
27.3
152.9
15.1
14.8
76.3
6.2
9.1
13.0
23.1
119.5
67.0
12.6
108.3
8.8
8.0
77.9
6.0
8.8
15.5
24.0
121.6
66.1
10.9
110.5
8.3
7.5
80.6
5.5
8.7
22.1
22.1
130.6
66.4
11.1
117.3
7.9
6.4
26.5
0.9
1.9
1.4
6.4
36.7
24.1
4.0
32.5
2.3
2.2
29.9
1.9
3.8
1.9
6.8
40.6
24.9
5.5
36.3
2.7
2.6
-3
9.6
63
37
1.4
-6
3
9.0
62
28
0.7
1
0
9.2
62
29
0.6
7
-14
9.0
60
29
0.9
-15
-2
11.9
68
37
1.5
-2
-3
11.3
67
38
2.2
-7
-3
10.7
63
50
1.4
-4
-11
7.0
48
44
0.2
-10
-8
12.7
51
72
0.3
-12
2.5
18.5
1.3
82.3
3.3
0.2
0.5
-9.2
0.7
-1.3
2.5
17.7
1.3
67.9
5.7
0.4
0.9
1.4
0.1
0.2
1.9
15.5
1.3
33.6
10.3
0.8
1.2
6.4
0.5
0.7
2.0
15.2
1.3
30.1
10.6
0.9
1.3
8.8
0.7
1.0
1.8
12.0
1.1
63.8
4.3
0.4
0.6
-9.3
-0.8
-1.4
3.1
24.4
1.7
57.0
10.5
0.7
1.3
7.7
0.5
0.9
3.2
24.8
1.8
74.4
6.4
0.5
0.9
-5.0
0.4
-0.7
3.1
24.8
1.5
57.2
10.6
0.7
1.1
7.4
0.5
0.8
2.1
8.5
0.5
31.3
5.9
0.4
0.6
-12.2
-0.8
-1.3
1.8
8.5
0.5
40.4
5.1
0.3
0.5
0.2
0.0
0.0
12.4
6.4
11.6
16.8
11.6
9.9
11.8
6.1
10.6
15.7
10.6
-11.9
12.4
6.2
11.8
16.3
11.4
-1.0
11.5
7.9
10.8
14.4
10.8
5.9
11.3
7.6
10.3
13.4
12.5
8.2
11.6
13.5
9.0
-11.0
11.5
6.6
11.4
16.6
11.4
7.5
10.9
6.1
10.9
16.0
10.9
-5.6
8.0
5.0
11.2
15.9
10.7
0.8
9.5
6.0
10.3
14.7
10.3
-13.3
9.4
6.4
11.2
15.3
11.1
0.2
105
73
105
72
105
70
11.5
68
118
65
125
64
114
65
118
64
121
59
110
79
120
72
2013
VB-Verbund
bb+
2014
2013
Source: Fitch
Peer Review: Major Austrian Banks
November 2015
14
Banks
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Peer Review: Major Austrian Banks
November 2015
15
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