EU Bank-Failure Rules Leave Volksbanken With Liquidity to Burn

(Bloomberg) -- The European Union’s bank-failure rules are forcing Austria’s Volksbanken to open up the lending tap, a strategy reminiscent of the one that nearly brought down the cooperative group a few years ago.

The irony has arisen because the EU requires banks to have sufficient loss-absorbing liabilities on their books to cover the costs of their restructuring and refinancing in a crisis, avoiding the sort of massive public bailout that kept Volksbanken alive in 2012. To comply, the Volksbanken will end up selling nearly 1.5 billion euros ($1.7 billion) of debt they don’t really need, leaving them awash in cash that has to be put to work.

“We don’t need this liquidity, we have plenty of client deposits and we only do those issues to meet” the EU requirements, Gerald Fleischmann, head of Volksbank Wien AG, said in an interview. “We’re filling up the balance sheet with this, and then face the difficulty of what to do with the liquidity.”

The group, led by Fleischmann’s bank in Vienna, sold 400 million euros of Tier 2 bonds last year in its first unsecured issue since it emerged from the crisis, and it will have to top this up with as much as 1 billion euros of non-preferred senior debt, he said.

This time is different

Aggressive lending during an ill-fated expansion into eastern Europe contributed to the near-collapse of Volksbanken. But Fleischmann said this time will be different. He targets annual lending growth of 5 percent to 10 percent, mostly in mortgages, consumer and small-business loans. Still restricted by EU state-aid rules, he can’t buy other banks or venture outside Austria.

“Our strategy is to target Austrian consumers and small and medium-sized enterprises with low risk,” he said. “We want to be seen as a boring bank.”

As part of Volksbanken’s restructuring, it spun off a bad bank for toxic assets and had to adhere to a tight capital plan agreed with the European Central Bank for the surviving business. Mergers reduced the group’s numbers to nine from more than 50 lenders, costing 100 board members their jobs.

Other highlights of the interview with Fleischmann include:

  • Volksbanken have to repay 230 million euros of state aid to the Austrian government by the end of 2023, with the biggest part due end-2021
  • To raise those funds with retained profits, the lender’s cost-to-income ratio must fall to 60 percent from 80 percent
  • The bank may consider an IPO in 2020 to accelerate the repayment, but that’s not currently the base case and no specific preparations have been made
  • Volksbanken haven’t yet received a binding and precise minimum requirement for own funds and eligible liabilities, or MREL, but Fleischmann expects a ratio of 20 percent to 24 percent of risk-weighted assets
  • CET1 ratio stood at 12.4 percent at the end of 2017; total capital rose to 16.6 percent thanks to the Tier 2 issue
  • 2017 net income was 61 million euros, compared with an 80 million-euro loss in 2016

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