* Banks' Tier 1 would be 5.1 pct in 2010 in worst scenario
* Worst case T1 ratio of 6 pct if banking package exhausted
* Bad debt 10 pct in Austria, 20 pct in CEE in stress test
(Adds quote, detail, background)
By Boris Groendahl
VIENNA, July 6 (Reuters) - Top Austrian banks' core capital
ratios would drop to an average 5.1 percent next year if they
raised no fresh funds in a worst-case stress test based on a
sharp rise in emerging European bad debt, the central bank said.
Austria's top lenders would have to tap Austrian state funds
or markets in such a scenario -- which makes more pessimistic
assumptions for economic and bad debt developments than the
baseline scenario -- to reach the capital levels markets demand.
However, Austria's central bank, which supervises some of
emerging Europe's biggest lenders, said the stress test scenario
was not its forecast, and that at the moment it did not foresee
Austria's main banks needing additional capital.
"We conclude that in our view there is no further
recapitalisation need right now," said Andreas Ittner, the
central bank's head of banking supervision.
"However, we will continuously monitor the real development
of capital requirements," he said. He added that even under the
baseline scenario, the central bank expected bad debts to rise.
Western banks own the biggest lenders almost everywhere in
the parts of Europe formerly under communist control. Italy's
UniCredit <CRDI.MI>, via its Bank Austria arm, and Austria's
Raiffeisen International <RIBH.VI> and Erste Group Bank
<ERST.VI> top the list of the biggest banks in the region by
some distance. []
The other main Austrian banks are Oesterreichische
Volksbanken <OTVVp.VI>, BayernLB's [] Hypo Group Alpe
Adria and Cerberus Capital's [] BAWAG P.S.K.
Austria has set up one of the biggest bank stability
packages in Europe relative to the size of its economy, offering
15 billion euros ($21 billion) in capital injections and 75
billion in bond guarantees.
Only part of the 15 billion euros in equity has been tapped
so far, and if it was exhausted under the stress test scenario,
the top six banks' Tier 1 capital ratio would be at 6 percent in
2010, the central bank said.
In any case, none of the banks would drop below the legal
minimum Tier 1 capital ratio of 4 percent, a level that is
significantly less than what markets expect.
PESSIMISTIC STRESS TEST
The central bank said its stress test assumed a 10 percent
contraction in emerging Europe's economies over this year and
next, compared with a 4.3 percent drop forecast by the
International Monetary Fund.
This would translate into non-performing loans rising to 20
percent of total loans in emerging Europe -- more than three
times the current level -- and to 10 percent in Austria, twice
what they are now, it said.
On top of rising bad debts, the stress tests assumed
declining profits because of depreciating currencies, and a rise
in risk-weighted assets because of deteriorating asset quality.
"We incorporated a drastic recession scenario in Eastern
Europe into the outlooks," Ittner said.
"We don't expect that this will materialise, but we think
that 5 percent (Tier 1 capital ratio in case it does) in 2010 is
a decent result compared with other European countries," Ittner
said. "We'll review the situation later this year."
The IMF and the Organisation for Economic Cooperation and
Development (OECD) both said last week that Austrian banks
should raise their capital buffers as bad debt is on the rise in
Austria and emerging Europe. [] []
The IMF in April forecast that companies and governments in
emerging Europe had to refinance $579 billion in debt this year,
or 19 percent of the region's gross domestic product.
Non-performing loans and corporate defaults are rising already.
The IMF also forecast asset writedowns in emerging Europe
would climb to $185 billion and translate into bank
recapitalisation needs of $102 billion, an estimate that roughly
tallies with what analysts predict.
(Editing by John Stonestreet and Will Waterman)
($1=.7154 Euro)
