Large writedowns at Austrian bank connected to Hungary, Romania and CDS losses

Erste Group Bank of Austria has just announced it needs to take a 2 billion writedown. What has happened is that its activities in Eastern Europe have caught up with it due principally to the Hungarian government’s recent legal action imposing a cap on exchange rate losses for Euro and Swiss France loans to Hungarian mortgagees.

Central European borrowers loaded up on cheap Swiss franc and euro loans (mainly from Austria and Switzerland) in the lead up to the credit crisis because of higher nominal rates in central Europe. When the crisis hit, these loans became expensive overnight. In Hungary, one of the hardest hit due to currency depreciation, the government has legislated a fix that goes into effect.

–Hungary: Controversial Swiss franc loan law goes into effect

Note that Erste Bank, like Dexia was not undercapitalised according to the European Stress tests. One Austrian bank did fail the tests. But this was Volksbank, not Erste.

Austrian daily Der Standard covered the writedowns today. The CEO Andreas Treichl said that he was taking “radical measures because of the impact of sovereign debt crisis” in order to make a clean slate by writing down all toxic assets and impairments immediately. Treichl said this accounts for the two billion euro charge.

In Hungary, Erste’s subsidiary wrote down 762 million euros in losses due to the forced conversion of foreign currency loans to forint and the poor quality of debtors. In addition, Erste Bank Hungary needed to increase its equity by 600 million euros and that means a charge on the parent’s balance sheet. In Romania, the bank’s investment in BCR had to be corrected for 627 million euros based on a review that has been in the works for two years. Lastly, the bank took a charge related to credit default swaps that resulted in a 220 million credit provision, including retroactive balance sheet corrections for 2009 and 2010.

The bottom line: a loss of 700 to 800 million for 2011 and the 2 billion euro charge. The core capital ratio remains at 9.2 percent.

This gives you a sense of the interconnectedness in Europe.

But there’s more. In reading the account in El Pais, the Spanish newspaper noted that Erste also owns 10% of the Spanish ‘”caja” CaixaBank, considered the best capitalised Spanish savings bank. El Pais also writes that Erste revealed exposure to debt In Portugal, Italy, Ireland, Greece and Spain of 600 million euros, down significantly from 1.9 billion euros. Erste will take a charge of 180 million (30%) on this amount. Where did this debt go and in what time frame was the company able to work it down? I am not sure of the answer to these questions.

Whether the writedowns make investors feel relieved because of the alleged balance sheet transparency remains to be seen. However, the balance sheet woes at Erste highlight how active banks within the EU are in cross-border relationships.