OREANDA-NEWS. German banks have larger exposures than Austrian banks to Heta Asset Resolution AG, Fitch Ratings says. Losses are likely to be material for German banks but should be manageable.

The moratorium imposed on Heta by the Austrian authorities on 1 March 2015 will put most pressure on German covered bond issuers. These banks are largely exposed through their legacy public-sector portfolios because state-guaranteed bonds are eligible collateral for public-sector covered bond pools. However, most of the affected banks have typically low standalone Viability Ratings, reflecting their vulnerable asset quality and concentration risk, or they are members of larger and stronger banking groups. Therefore, the losses are unlikely to have much effect on German bank ratings.

Assuming a haircut of 50% and that German banks hold around 40% of Heta's liabilities that are affected by the moratorium, we do not expect Heta-related losses to exceed 15bp of the German banking sector's common equity tier 1 (CET1) ratio. However, we estimate this could cost up to 10% of the sector's 2015 net profit, illustrating the potential of a single resolution to dent the performance of even large, diversified banking systems under the EU Bank Recovery and Resolution Directive (BRRD) regime.

Deutsche Pfandbriefbank (bb+) will provision EUR120m or 30% of its EUR395m Heta exposure in its 2014 accounts, cutting its pre-tax profit by almost 70%. Dexia Kommunalbank Deutschland (not rated), another Pfandbrief issuer, will take an unspecified charge in 1Q15 on its EUR395m Heta bonds. This is likely to exceed its recurrently weak profits. Large exposures to Heta, other Landeshypothekenbanken and the Austrian regional states are likely to be held on the balance sheets of other Pfandbriefbanken.

Among the Landesbanken, Bayerische Landesbank (BayernLB, 'bb+') is the most affected, with EUR2.35bn unsecured (unguaranteed) loans at end-2014. However, BayernLB's published 12.8% common equity Tier 1 (CET1) ratio at end-3Q14 provides an adequate buffer.


All Fitch-rated Austrian banks have manageable exposures to Heta. Most stayed clear of Heta's predecessor, Hypo Alpe Adria (HAA) or cut their exposures to low levels after the 2009 Austrian government bailout. We do not rate the Landeshypothekenbanken sector, which has large exposures to Heta, mostly through its covered bond issuing vehicles. Therefore, we do not expect Heta's moratorium to affect Austrian bank VRs. But it illustrates the decreasing propensity for sovereign support in line with the BRRD, which we expect to reflect by lowering the Austrian banks' and many other EU banks' IDRs by end-1H15.

The Austrian regulator's asset review suggests a potential haircut of up to 50% for senior bondholders, which the market has already largely priced in. Although there is no official statement yet, we expect the Austrian central government to repeal (if needed, using ad-hoc legislation) the regional state of Carinthia's deficiency guarantee ('Gewaehrtraegerhaftung') covering the majority of Heta's senior debt. Other Austrian regional states have provided deficiency guarantees to their respective Landeshypothekenbanken.

A bail-in of senior creditors would be the first under BRRD in Europe, only two months after Austria implemented the new regime. The central government repealed Carinthia's deficiency guarantee last year (see 'Fitch: Hypo Alpe Losses Are Another Sign of Waning State Support', 13 June 2014), but only for subordinated debt, possibly because BRRD had not yet been implemented.

We do not rate Heta or any other debt instruments issued by Heta or HAA, except for EUR1bn Tier 2 subordinated notes guaranteed by the Austrian sovereign (ISIN: XS0863484035). The affirmation of these notes at 'AA+' following the announcement of the moratorium ('Fitch Affirms Heta's Government-Guaranteed Tier 2 Notes at 'AA+'', 4 March 2015) in line with the sovereign rating reflects our expectation that the central government will honour its guarantee, based on several public statements, even though these notes are explicitly affected by the moratorium.