In 2009 the liquidity and capital position of ÖVAG was strengthened under the Austrian bank support scheme by means of a EUR 1 billion recapitalisation and State guarantees covering EUR 3 billion of debt instruments. Thanks to the implementation of the recapitalisation the tier-1 ratio of ÖVAG was increased to 9,2 % and the equity ratio to 12,5 % as of the end of 2009.

The magnitude of the losses reported by ÖVAG for 2011 will lead to further State aid measures, which consist of a EUR 250 million capital injection by the State in form of ordinary shares ("2012 recapitalisation") and an asset guarantee with the effect of increasing the capital by EUR 100 million ("asset guarantee").

According to the new restructuring plan ÖVAG will integrate closely with the Volksbanken. A system of joint liability ("Verbundmodell") will be established between ÖVAG and the Volksbanken. ÖVAG is reduced to the functions of a central institute of the Volksbanken sector. It will concentrate on providing services to the Volksbanken by pooling liquidity, assisting in the provision of larger-scale loans and offering treasury products for the Volksbanken and their clients. Thereby, its balance sheet total as well as the complexity of its business model will be reduced significantly. The activities which created the bank's problems or do not fall within the scope of activities of a Volksbanken central institute are in run-down or will be divested. The bank bundles those activities in an internal non-core segment.

The "Verbundmodell" is a system of joint liability with a well-regulated transfer of liquidity between its members ("Liquiditätsverbund"), combined with a joint financial protection of the creditors of all members ("Haftungsverbund"). At the same time the Verbundmodell provides for the maintenance of the legal independence of the associated banks while allowing its members to make use of the shared organisational infrastructure of the "network".

In that context, ÖVAG as the central institute is to ensure and to control the solvability and the liquidity of the co-operative banks which are part of the "Verbund" on the basis of consolidated accounts. Furthermore, ÖVAG is, amongst others, responsible for the representation of the interest of the group as a whole, for public relations on a group level and for support in certain back-office functions as for instance transactions in securities, logistics, setting of group standards for compliance and anti-money laundering. In addition, the bank will be assigned further functions ("Verbundfunktionen") that seem necessary from a regulatory point of view for the group as a whole or for efficiency reasons. They include in particular responsibility for compliance with those regulatory requirements which have to be respected collectively (for instance solvability, liquidity, internal capital adequacy process for the "Verbund", internal audit). They also include provision of support for the sales and marketing of (individualised) products.

Another important feature of the Verbundmodell is that of liquidity cooperation. That liquidity cooperation under the terms of the Austrian law means among others that the co-operative banks are obliged to keep 14 % of their deposits with ÖVAG as a minimum reserve. In addition, ÖVAG can pool collateral coming from the Volksbanken (mortgage loans) which then can be used for covered bond funding. Currently, the co-operative banks hold EUR [2,5-5] billion of assets which can potentially be used as such collateral. A further significant element to ensure a stable liquidity position of ÖVAG was the transfer of the online banking platform Livebank from one of the local Volksbanken to ÖVAG in 2011. This will on the one hand provide ÖVAG with direct access to retail deposits and thus reduce its reliance on wholesale funding, which was one of the sources of ÖVAG's problems. On the other hand it will allow for a centralised online banking appearance of the Volksbanken sector, in line with the Verbundmodell.

The core segment consists of three divisions: Credit/Underwriting business, Financial Markets and Banking book/Other items. ÖVAG expects the total assets of the core segment to total EUR [12-15] billion in 2017 (EUR 16,8 billion at the end of 2012) and RWA of [4-6] billion by the end of 2017.

The segment Credit/Underwriting Business comprises three units Credit Verbundbank, VB Factoring and Product Leasing ("Mobilienleasing") Austria ("VBLF"). ÖVAG considers that business part of its core business with the co-operative banks. The business activities are focused on Austria.

The division Financial Markets comprises in particular the units Group treasury, Volksbank investments, Immo KAG and Online Banking (Livebank). Financial Markets is responsible for the management of short- and long-term liquidity, trading of securities and foreign exchange trading as well as for controlling of liquidity and market price risks. In addition, it is a provider of products for the co-operative banks and for domestic and foreign institutional clients.

The division Banking book/Other items consists of the units Capital Markets and Asset Liability Management. In addition, the activities of the company VB Services für Banken GesmbH (an outsourced service provider) and of various holding companies have been assigned to that segment.

The non-core segment comprises the entirety of participations and former business areas which are no longer part of ÖVAG's core business. The total assets of that segment are budgeted with EUR 11,7 billion (RWA: EUR 11,0 billion) in 2012 and with EUR [3-5] billion (RWA: EUR [3-5] billion) in 2017. ÖVAG expects to reduce the RWA of that segment to less than EUR 1 billion by 2026. The portfolios assigned to that segment are in run-down or will be divested.

The run-down part of the non-core segment includes in particular the corporate finance portfolio comprising considerable parts of the current Corporate Lending business CEE, the entirety of the Leveraged Finance divisions in Austria and CEE and the business lines International Project Financing and Corporate Banking as far as the latter is not related to the underwriting business with the co-operative banks. The Frankfurt branch will no longer be part of ÖVAG's core portfolio. Moreover, the real estate portfolio as a whole has been put into run-down and will cease to be part of the bank's business model. The real estate portfolio of Europolis, an asset management company active in the field of real estate, was already sold in 2010.

ÖVAG provided information regarding its liquidity position as of May 2012 and presented measures which address current and future funding needs.

As regards its previous reliance on unsecured wholesale funding, ÖVAG claims that it was mainly due to the subsidiaries which relied heavily on the funding provided by ÖVAG. That problem has already been addressed to some extent by the sale of VBI in 2011 (reduction of the financing needs by EUR 1,1 billion). Further, the restructuring of VBRO and its subsequent sale, together with the divestment of VBLI, are to free up a further EUR 2,4 billion of liquidity.

The new restructuring plan is based on assumptions in respect of the evolution of the Euro area, its GDP growth, short-term and mid-term interest rates changes, which are largely in line with the expectations of important market players and international institutions like e.g. the IMF. Euro area inflation, oil prices and the EUR/USD and EUR/CHF exchange rates are part of the assumptions as well. The planning assumes a moderate recovery of GDP growth in 2013 and thereafter.

The return on equity (RoE) of the bank increases over the restructuring period to a level of 8,0 % after-tax. The bank claims that the level of 8 % RoE after-tax represents a sufficient and market-oriented capital remuneration, given the business model of the core-bank with a low risk profile. In particular the bank is not involved in such volatile activities as investment banking or proprietary trading but concentrates on its role as central institute for the local co-operative banks.

Furthermore, the bank provided sensitivity scenarios set up by an external consultant, in which the following additional adverse developments were assumed: delayed sale of VBRO at a […] price of EUR […] million, increase of its refinancing costs; inability to divest VBLI; lower quality of assets in the non-core segment (increase in RWA by 20 %, increase in risk-provisioning by 50 % and impairments on investments of EUR 100 million); increase in RWA by 10 % in the core segment; no increase in profits in 2016 and 2017.

According to the financial projections of ÖVAG, its administrative costs will be reduced from EUR 166 million in 2012 to EUR 105,5 million in 2017, which represents a reduction by 36 %. However, in addition to the cost-optimisation measures (such as closing the Frankfurt branch and IK's representative offices in CEE; synergies resulting from the merger of ÖVAG and IK; reduction of personnel, building occupancy and consultancy expenses; outsourcing of IT infrastructure), that impact includes the effects of divestments and scaling-down of operations in the non-core segment. Therefore, the bank provided also information on the expected results of the cost-cutting measures in the core segment. There the cost optimisation measures should result in a reduction of the annual costs by EUR 15 million by the end of the restructuring period, which represents about 12 % of the total costs in 2012.

As part of the capital cut in 2012, the PS granted by Austria in 2009 was reduced to EUR 300 million. The bank intends to redeem 50 % of that amount in 2017 and the remaining 50 % at the beginning of 2018. If it proves necessary to do so to allow for that redemption, the Volksbanken will provide ÖVAG with the relevant means.

A restructuring plan must ensure that the financial institution is able to restore, when properly implementing it, its long-term viability (section 2 of the Restructuring Communication).

According to the Restructuring Communication, long-term viability is achieved when a bank is able to compete in the marketplace for capital on its own merits in compliance with the relevant regulatory requirements. It must be able to cover all its costs and provide an appropriate return on equity taking into account its risk profile. The restructuring plan must identify the causes of the bank's difficulties and its weaknesses and explain how the restructuring is addressing them. In particular, successful restructuring entails withdrawal from all activities which would remain structurally loss-making in the medium-term.

In line with points 9 to 11 of the Restructuring Communication, Austria submitted a comprehensive and detailed restructuring plan which provides complete information on the business model. The plan also identifies the causes of the difficulties faced by the bank.

As regards its business model, ÖVAG will limit its scope of activity to its role as central institute of the local and regional Volksbanken. It will provide liquidity management services and intermediation in the access to capital markets to the associated Volksbanken, products which exceed the Volksbanken's capacity or expertise, and shared back-office facilities such as compliance, marketing or IT. As a consequence, ÖVAG will concentrate on its statutory activities and capitalise on its core competences, while withdrawing from those areas which have been at the origin of its financial difficulties or do not fall within the scope of the newly defined business model. In particular, ÖVAG ceases its real estate activities and the parts of its corporate financing and investment portfolios which are not necessary for its role as central institute, and divests all non-core subsidiaries. The Commission considers that the new business model of the bank is appropriate to ensure its long-term viability and sustainability.

ÖVAG's difficulties were mainly attributable to the following factors: its exposure to CEE countries through its retail banking subsidiaries grouped in VBI; its engagement in public finance and infrastructure financing; its real estate activities and parts of its corporate portfolio; its investment portfolio; its reliance on wholesale funding.

As regards ÖVAG’s activities in the fields of real estate and of public finance and infrastructure financing, the Commission notes that the relevant subsidiaries (KA, Europolis) have been sold and losses on those stakes were recognised by ÖVAG in its accounts. The real estate activities remaining in ÖVAG have been allocated to the non-core portfolio and are being run down.

The full cessation of the activities referred to in recitals 99 and 100 constitutes a necessary and appropriate measure to remove the Commission’s concerns, because the divestments set an end to any future losses or risk exposure resulting from those subsidiaries. In addition, the measures free up management capacities, which can be reemployed in the core business of the bank.

As regards the past reliance on unsecured wholesale funding, the Commission notes that ÖVAG and its majority owners are implementing measures which will ensure a comfortable liquidity position of the bank. In particular, the establishment of the liquidity pool with the regional Volksbanken and the divestments of subsidiaries which depended heavily on the refinancing of ÖVAG should ease the funding needs of the bank by EUR 6,2 billion. Furthermore, with the acquisition of Livebank ÖVAG gained access to retail funding of currently EUR 470 million, significantly reducing its past reliance on wholesale funding. On the basis of the information provided in the context of the new restructuring plan, the Commission considers that ÖVAG is able to ensure a comfortable funding position, even with the approaching maturity of the remaining EUR 1 billion of State-guaranteed debt.

According to point 13 of the Restructuring Communication, the bank must be able to generate an appropriate return on equity, while covering all costs of its normal operations and complying with the relevant regulatory requirements. The Commission considers that condition to be fulfilled, as explained in recitals 105-107.

Second, the new restructuring plan shows that ÖVAG is able to withstand a stress scenario. The assumptions of the stress scenario have been assessed as reasonable. As the stress scenario demonstrates that ÖVAG will exceed its regulatory capital requirements, the bank can be regarded as meeting the requirements of point 13 of the Restructuring Communication.

Consequently, the Commission considers that the new restructuring plan submitted by Austria for ÖVAG fulfils the requirements of the Restructuring Communication with regard to the restoration of long-term viability and thereby allays the doubts expressed in that respect in the opening Decision.

As stated in the Restructuring Communication, banks and their stakeholders need to contribute to the restructuring as much as possible in order to ensure that aid is limited to the minimum necessary. Thus banks should use their own resources to finance the restructuring, for instance by selling assets, while the stakeholders should absorb the losses of the bank where possible. The measures committed to by ÖVAG ensure that own resources are used and that original shareholders and private investors holding hybrid capital of the bank contribute to the restructuring.

Further, the restructuring costs are financed by proceeds from the divestments of stakes in profitable non-core entities (RZB, retail subsidiaries in Austria (already implemented in 2009-2010), VBLI).

Point 24 of the Restructuring Communication states that an adequate remuneration of the State capital is also a means of achieving burden-sharing. In that context the Commission recalls that it established in recital 90 that the State, which contributed to the 2012 recapitalisation, obtained an appropriate stake in the bank. That stake was based on a company value determined objectively by means of a market-based P/B approach. Further, as established in recital 89 the 2012 recapitalisation measure is subscribed at a sufficient discount, which is a form of an ex-ante remuneration of the capital injection. Therefore, the Commission considers the level of remuneration appropriate in association with the other burden-sharing measures.

As regards the asset guarantee, the Commission notes that the bank will pay a fee of 10 % p.a. on the amount of the guarantee, i.e. EUR 100 million. Accounting-wise, the fee is a regular expense item and does not depend on the bank's profitability. Also, any amounts called under the guarantee are remunerated at the level of 10 % until their repayment. Given the reliable character and the level of the fee, the Commission considers that the remuneration of the asset guarantee, which has in fact the character of a temporary capital increase, is adequate.

Moreover, in order to ensure that the owners of the bank participate to the maximum extent in the reconstitution of an adequate capital basis over the restructuring period, Austria committed that the bank will retain dividends and not pay any coupons which it is not under law obliged to pay until the end of the restructuring period or beyond if the State PS is not repaid by then. Thereby, in line with point 26 of the Restructuring Communication, ÖVAG should not use State aid to make payments on own funds if there are insufficient profits to make such payments.

Another aspect concerns ERGO Group, RZB and DZ Bank, the minority shareholders of ÖVAG. The Commission notes first that they have been diluted significantly in the 2012 capital increase. Second, as explained in recital 49, they committed to support the restructuring of the bank by leaving the previously provided liquidity facilities at the disposal of ÖVAG and subsidiaries that are held in common with it, taking over portfolios of assets and supporting ÖVAG in its efforts to divest those subsidiaries that are held in common with it (VBRO and VBLI), thereby accelerating the reduction of the non-core activities.

Therefore the cost reductions, divestment of profitable non-core subsidiaries and assurance of an adequate remuneration for both the capital measures and asset guarantee represent sufficient own contribution by ÖVAG to the costs of its restructuring. The losses borne by the hybrid capital holders, dilution of the original shareholders and the measures by which they contribute to the restructuring of ÖVAG, as well as profit retention, ensure appropriate burden-sharing. As the new restructuring plan can be considered as providing for an appropriate own contribution and burden-sharing, the doubts expressed in the opening Decision in that respect are allayed.

The Restructuring Communication requires that the restructuring plan proposes measures limiting distortions of competition and ensuring a competitive banking sector. Moreover, they should also address moral hazard issues and ensure that State aid is not used to fund anti-competitive behaviour.

Point 31 of the Restructuring Communication states that when assessing the amount of aid and the resulting competition distortions, the Commission has to take into account both the absolute and relative amount of the State aid received as well as the degree of burden-sharing and the position of the financial institution on the market after the restructuring. In that respect, the Commission recalls that ÖVAG has received State capital equivalent to 3,8 % of RWA. In addition, ÖVAG has obtained liquidity guarantees amounting to 5,4 % of the bank's balance sheet. The amount of aid to the beneficiary is, therefore, significant. Consequently significant measures are necessary in order to limit potential distortions of competition even when considering the appropriate own contribution and burden-sharing of the beneficiary and its shareholders over the restructuring period.

In the new restructuring plan the projected balance sheet reduction has been further increased compared to the initial restructuring plan. ÖVAG will reduce its balance sheet on the basis of a comparison with the assets at the end of 2008 by 67 %, from EUR 55,8 billion to EUR 18,4 billion in 2017. If total assets of the core segment only are taken into account (EUR [12-15] billion in 2017) the reduction amounts to [60-80] %. In terms of RWA, the bank will reduce its size by 71 % (EUR 35,2 billion in 2008 vs. EUR 10,1 billion in 2017). EUR [4-6] billion of these RWA of EUR 10,1 billion relate to the core segment, which translates into a reduction of RWA by [70-90] % when only the core segment is considered.

Furthermore, ÖVAG will liquidate its Frankfurt branch.

Altogether, the Commission considers the reduction of the balance sheet total of the bank by more than half to be sufficient to adequately limit the distortions of competition stemming from the aid.

Based on the considerations in recitals 122-129 and in view of the conclusion that the own contribution and burden-sharing are appropriate, the Commission considers that the scale and nature of measures proposed by Austria and ÖVAG are sufficient to limit distortions of competition caused by the aid to ÖVAG. Therefore the doubts raised in that respect in the opening Decision are allayed.