* Austrian banks' E.Europe exposure back in focus
* Investors still not convinced about E.Europe recovery
* Volksbanken report spooks markets after Hypo bailout
* Euro, bank shares, E.Europe currencies drop
(Recasts with more background, wraps c.bank reaction)
By Alexandra Schwarz and Sylvia Westall
VIENNA, Dec 15 (Reuters) - Risk-wary investors had Austrian
banks and the country's exposure to crisis-hit emerging Europe
in their sights on Tuesday, as concerns emerged about a second
local lender a day after the state bailed out Hypo Group Alpe
Adria.
The euro dropped against the dollar, European bank shares
declined and Austrian credit default swaps widened as an
Austrian newspaper report triggered concerns another Austrian
bank was under threat. []
Austria took over Hypo on Monday in a rescue the European
Central Bank (ECB) helped broker to avoid a collapse that could
have undermined trust in eastern European banks and government
support of state-owned lenders. []
Austrian newspaper Die Presse said on Tuesday that
loss-making Oesterreichische Volksbanken <OTVVp.VI>, the
country's fourth biggest bank, was on a regulators' "watchlist".
Authorities tried to shoot down the story, with the central
bank taking the unusual decision to comment on an individual
bank on the record.
"There is no 'watchlist'," said Austrian central bank
spokesman Oliver Huber. Volksbanken's "Tier 1 capital is strong.
In our stress test, they did not drop below legal capital
requirements even under severe stress."
Volksbanken itself said it saw no threat of it being
nationalised like Hypo. []
The fact that Volksbanken is loss-making, seeking to raise
fresh capital and selling assets, and overhauling its business
model has been known for months.
The cooperative bank last month reported a third-quarter
pretax loss of almost half a billion euros, said the fourth
quarter would be bad as well and asked shareholders to inject
capital next year. [] [] []
At 1400 GMT, Raiffeisen <RIBH.VI> shares were down 4.8
percent -- making it the steepest faller on the Eurofirst 300
Index -- and Erste Bank <ERST.VI> down 4 percent.
E.EUROPE EXPOSURE
ECB President Jean-Claude Trichet's personal intervention
over the Hypo bailout at the weekend highlights concerns that
the failure of any eastern European bank, however small, may
lead to wider fallout.
Hypo, with total assets of 42 billion euros a rather small
player on a European level, is a major lender in the former
Yugoslavia, where it has large branch network.
Austria's banks have lent a total of 186 billion euros ($272
billion) to borrowers in emerging Europe -- 297 billion euros if
UniCredit's <CRDI.MI> Bank Austria is included -- a level of
exposure that has tended to spook markets in times of risk
aversion.
The Austrian central bank estimates the country's banks face
another 10 billion euros in writedowns over the next two years,
much of it in eastern Europe, in its baseline scenario, and a
further 10 billion if economies contract again in 2010.
Investors are concerned this exposure might force Austria to
bail out banks on a scale it cannot manage, or that their
collapse could push emerging Europe into a deep depression.
Massive intervention by the International Monetary Fund and
the European Union this spring eased such worries, but Greece's
ongoing deficit struggle, the Hypo bailout and the recent Dubai
turmoil put them back on investors' radar screen.
"Problems in Greece and now with Hypo Group Alpe Adria in
Austria affirm that tail-risks for Emerging Europe remain and
suggest that the region will continue to underperform during the
recovery," RBS said in a note to clients.
(Additional reporting by Boris Groendahl in Vienna and Jan
Dahinten in Singapore; Writing by Boris Groendahl; editing by
John Stonestreet)
