Stepic, 66, again denied wrongdoing in using front companies
in the Caribbean and Asia to buy flats in Singapore in 2006 and
2008 – deals exposed by the Offshore Leaks investigative
journalism project – but said he decided to quit out of loyalty
to Raiffeisen.

“Given the media reports, I soon became aware that, despite
the facts, a debate was taking place that threatened to do
massive harm to my company,” a drawn-looking Stepic told a news
conference packed with journalists and television cameras.

RBI’s supervisory board has still to accept Stepic’s
resignation, but his fate seems sealed, and officials said a
formal decision was due within days.

Top members of the board issued a statement calling Stepic’s
action “a sign of great loyalty to the company. It is great
credit to him that he shows with this difficult decision
willingness to avert reputational damage.”

Stepic says he did not need to notify his bank or regulators
about three apartments in Singapore he bought via “project
companies” set up with the help of Swiss bank UBS in
the British Virgin Islands and Hong Kong.

Those deals are now under investigation by Austria’s central
bank, its Financial Market Authority (FMA) watchdog and
Raiffeisen itself, which has said it will check if his action
violated the law or internal guidelines.

Stepic’s abrupt fall from grace removes a larger-than-life
figure who made Raiffeisen into central and eastern Europe’s
second-biggest lender, with 60,000 staff in 17 countries.

“As I see it, these affairs were in his private sphere, but
we have different sensibilities about these things from what we
had 10 or 15 years ago,” said Wilhlem Rasinger, president of the
Austrian Shareholders’ Association.

Shares in Raiffeisen fell as much as 3.6 percent on the news
before paring losses to trade down 1.9 percent at 26.49 euros by
1114 GMT.

Nearly 80 percent of the bank is held by Raiffeisen
Zentralbank, itself controlled by hundreds of private
cooperative banks in Austria.

PUBLIC FACE OF THE BANK

Guenter Hohberger, central and eastern Europe banks analyst
at Erste Group, said Stepic would be hard to replace.

“I don’t believe the bank will abandon its strategy – the
central and eastern Europe business is its fundamental
business,” he said. “The question is, who can complete it?
Probably there is no-one who has this experience.”

Stepic’s deputy is Karl Sevelda, 63, who is in charge of
corporate clients. He has tended to shun the limelight as much
as it was sought by Stepic, who relishes promoting his
charitable foundation and showing off his collection of African
art.

Former Austrian Finance Minister Josef Proell, who stepped
down for health reasons in 2011, also works at Raiffeisen, which
is closely aligned with the conservative People’s Party, the
junior partner in Austria’s governing coalition.

Raiffeisen officials appeared taken aback by the prospect of
life without Stepic, whose contract runs until the end of 2015.
A burly man with a trader’s quick instincts and a booming voice,
he has very much been the public face of the bank.

The FMA investigated Stepic last year over a reported real
estate deal in Serbia financed with a loan from another bank
that went sour, but the watchdog’s spokesman said it took no
action because the investigation showed he had withdrawn from
the project.

Stepic, who once called success “the biggest drug there is”,
again on Friday insisted that the Singapore property deals were
above board because he had made the investment with money taxed
in Austria and had also paid tax on revenue from a sale.

In a calm but low voice, he said he was proud of what he had
accomplished in four decades at Raiffeisen, creating tens of
thousands of jobs in the former Communist East and making 800
million euros ($1.03 billion) in profit over the past five years
as the financial crisis raged.

Austrian bank executives can in principle invest their own
money as they see fit as long as they uphold required standards
for orderly business and personal reliability, the FMA says.

But those who use deals to circumvent the law, avoid tax or
launder money are subject to review. Whether bankers need to
inform employers of deals transacted on their own account
depends on banks’ internal guidelines, it adds.

Stepic made headlines in April when he returned 2 million
euros of his 2012 pay package, saying he felt morally obliged to
cut his overly generous compensation.

In a career spanning decades at the group, Herbert Stepic,
66, forged Raiffeisen into central and eastern Europe’s
second-biggest lender and he remains a towering figure at the
bank. He has denied any wrongdoing.

The central bank will look into the matter along with the
Financial Market Authority, which shares oversight of Austria’s
banks, Governor Ewald Nowotny told a news conference.

“We have to evaluate this based on facts, not a newspaper
report,” he said.

Raiffeisen Bank International’s chairman, Walter
Rothensteiner, also said he would review the facts and discuss
them with the board.

Austrian magazine News reported the deals after Stepic was
named in the International Consortium of Investigative
Journalists’ Offshore Leaks project, a campaign to expose the
owners of trusts in tax havens.

Stepic has not denied the deals, but has said he did not
need to notify his bank or regulators about the purchase of
three flats in Singapore through what he called “project
companies” in the British Virgin Islands and Hong Kong.

The money used to buy the flats had already been taxed in
Austria, he said.

Banking sources said the bank’s own review of Stepic’s deals
could take until late next week. Raiffeisen has said it is
looking into whether Stepic had complied with the law and
internal guidelines.

A burly man with a trader’s quick instincts and a booming
voice, Stepic is very much the public face of his bank, which is
closely aligned with the conservative People’s Party, junior
partner in Austria’s ruling coalition. Stepic’s contract runs
until the end of 2015.

Stepic’s deputy is Karl Sevelda, 63, who is in charge of
corporate clients. He tends to shun the limelight as much as it
is sought by Stepic, who relishes promoting his charitable
foundation and showing off his collection of African art.

The Financial Market Authority investigated Stepic last year
over a reported real estate deal in Serbia financed with a loan
that went sour, but the regulator took no action because Stepic
had exited the investment, an FMA spokesman said.

Asked why he did not make public the firms he had used for
the latest transactions, Stepic said the arrangement was offered
as standard by Swiss bank UBS to preserve the privacy
of customers. UBS declined to comment.

Stepic said he had always acted in line with tax regulations
when it came to income from a property sale.

Austrian bank executives can in principle invest their own
money as they see fit as long as they uphold required standards
for orderly business and personal reliability, the FMA says.

But those who use deals to circumvent the law, avoid tax or
launder money are subject to review. Whether bankers need to
inform employers of deals transacted on their own account
depends on banks’ internal guidelines.

Stepic made headlines in April when he returned 2 million
euros ($2.6 million) of his 2012 pay package, saying he felt
obliged to cut his overly generous compensation.

($1 = 0.7766 euros)

(Editing by Matthew Tostevin)

Vienna’s warning was aimed at Britain and other allies which want to help Syrian rebels by lifting an EU arms embargo – doing so, minister Gerald Klug told Reuters, would rob Austrian troops of their neutrality in a Syrian conflict that has already seen foreign peacekeepers come under fire and some even held hostage.

He stopped short of saying an end to the EU arms ban would automatically prompt the departure of the 380 Austrian soldiers. But their withdrawal after four decades keeping the peace since the 1973 Arab-Israeli Yom Kippur war would leave a huge hole in the already troubled, 1,000-strong U.N. force separating two of the world’s biggest armies, which are technically still at war.

“My view is that if the arms embargo were not extended, then the impartiality of the peace mission could no longer be maintained,” Klug said in an interview a day before EU leaders in Brussels will discuss an arms embargo that expires on June 1.

“Our mission would be additionally fraught and it would no doubt come to a new assessment of the situation.

“I cannot of course prejudge the discussions,” he said of the negotiations within the European Union. “But without doubt there are several options in the political discussion, and withdrawal is one of these options.”

Klug’s comments underscore Vienna’s resistance to British-led efforts to end or dilute the arms ban in order to help the rebels fighting President Bashar al-Assad. Austria has argued that providing more weapons would only fan the fighting and may snuff out chances for peace talks.

The blue-helmeted ranks of UNDOF, the United Nations Disengagement Observer Force, have already seen Japanese and Croatian troops depart since the Syrian conflict began in 2011 and the Philippines, the other main contributor of combat troops along with Austria, has said it may also withdraw after several incidents in which Syrian rebels have held its men prisoner.

Diplomats have said that Fijian soldiers are likely to fill some of the existing gaps. But the disappearance of the critical Austrian contingent would cause the U.N. major difficulties.

Klug said it would be up to the United Nations to decide if UNDOF could live without them but added: “Given the quantitative importance that Austrian soldiers have on the Golan I would have serious doubts that the mission could be maintained.”

DESPITE RISKS, WILLING TO STAY

Austrian troops have beefed up their armour and, reflecting international concern over the fate of Assad’s stockpiles of unconventional weaponry, have, Klug said, been issued with new protection against nuclear, biological and chemical attack. But they were ready to continue their 39-year mission in the zone.

UNDOF, essentially with Austrians in the north and Filipinos in the south, polices a 75-km (47-mile) ribbon of demilitarised zone running from the mountainous Lebanese border in the north to Jordan in the south, separating Syria from the Israeli-held Golan Heights, a plateau first seized from Syria in 1967.

Forty-four of its members have died since it was set up in 1974, some in accidents, but the ceasefire had until the past two years proved one of the most stable in the Middle East, with neither Syria nor Israel willing to challenge the status quo.

As the neighboring U.N. force in southern Lebanon, UNIFIL, has shown in 35 years of watching Israelis and Lebanese wage wars, the peacekeepers have limited military means to prevent conflict but do represent the will of the U.N. Security Council.

UNDOF’s restricted scope for action has been seen as Syria’s civil strife has intruded; rival Syrian groups fight nearby and Israel is concerned about the appearance of anti-Assad forces, notably Islamist militants, willing to attack the Jewish state.

It has made clear it will act inside Syria if it sees its interests threatened; Israeli warplanes have bombed targets near Damascus, just 50 km (30 miles) from the Golan buffer zone, three times this year, targeting suspected arms shipments from Assad’s ally Iran to the Lebanese Hezbollah movement.

Just on Tuesday, Syria said its troops destroyed an Israeli vehicle that crossed into its territory, while Israel said the incident took place on its side of the line and the vehicle was only damaged. Both sides said Israel fired back.

Filipino peacekeepers have on two occasions been held for days by the Syrian rebel Yarmouk Martyrs’ Brigade. In November, two Austrian peacekeepers were hurt when their convoy came under fire near the airport in Damascus.

Klug called the Golan situation “tense but manageable” and declined to go into detail on what elements of EU policy changes might prompt an exit: “There is a Plan B for every foreign mission, not just for the Golan,” he said. “It makes little sense to discuss red lines in public, but they are there.”

Klug, a center-left Social Democrat in the right-left grand coalition in Vienna, took charge of the ministry in March and visited the Austrian troops on the Golan this month.

They had, he said, curtailed patrol areas and taken extra equipment including body armour, armoured vehicles and equipment for handling nuclear, biological or chemical (NBC) warfare – though Klug played down any risk of chemical weapons attacks.

“To me the safety of Austrian troops is the most important thing in this context,” he said. “But I also say that Austria has clearly shown in years past that it is a reliable provider of troops and Austria wants to remain a reliable provider of troops.”

Northern areas patrolled by the Austrians were generally less tense than the south of the zone, closer to the city of Deraa where the revolt began. But Klug said his troops, with their backs to Israeli positions on the heights, still saw a mix of both Syrian government forces and rebels on the Syrian side.

It was hard to determine who was who, he said, adding: “You can see them with binoculars. They get pretty close.”

(Editing by Alastair Macdonald)

The sale of Kommunalkredit, a public-sector finance
specialist nationalised in 2008, was required under the terms of
Austria’s bailout. Its failure adds to the country’s problems
with the European Commission, which is already questioning state
aid to another Austrian bank.

The sale of Kommunalkredit was supposed to close by mid-2013
but offers proved unacceptably low in a tough market for selling
bank assets, the bank said in a statement.

“The privatisation process was not completed on the basis of
existing offers. A value-preserving transaction for shareholders
was not possible in the current market environment,” it said.

But Helmut Ettl, co-head of Austria’s Financial Market
Authority watchdog, told reporters the fact that Kommunalkredit
had stopped new lending did not mean it would be wound down.
“There is still a chance to sell it,” he said.

Missing the deadline means the European Commission has the
right to appoint a trustee to sell the bank, but the government
asked Brussels not to take that step. In return, Kommunalkredit
will halt fresh lending but continue with loans it had already
made or promised, the bank said.

The European Commission had no immediate comment.

Ettl said he assumed Brussels would not install its own
trustee at Kommunalkredit.

The Austrian government had earmarked revenue of 250 million
euros ($322 million) this year from the sale of the bank, whose
book value is around 200 million euros.

Vienna and Brussels are already at loggerheads over the pace
of overhauling another nationalised bank, Hypo Alpe Adria
, with the Commission keen for its operating assets to
be sold by the end of the year.

Austria, which has poured more than 2 billion euros of state
aid into Hypo, is fearful that rushed sales could hurt state
finances ahead of elections due by late September.

Kommunalkredit, which hived off toxic assets into “bad bank”
KA Finanz, is in better shape than Hypo.

Hits on Greek debt had tipped it to a 2011 loss of nearly
149 million euros, but it made a 2012 profit of 18 million euros
and expects to make money again this year, its chief executive
said last month.

The bank has nearly 16 billion euros in total assets and no
non-performing loans.

Austria last year hired U.S. investment bank Morgan Stanley
as exclusive adviser for the sale of Kommunalkredit,
formerly owned by Oesterreichische Volksbanken and
Dexia.
($1 = 0.7775 euros)

(Reporting by Georgina Prodhan and Michael Shields; Editing by
Erica Billingham and David Holmes)

Hypo Alpe Adria, rescued from collapse by the state in 2009,
has already swallowed more than 2 billion euros ($2.6 billion)
in government aid.

Reuters reported last week that Austria might adopt a “bad
bank” model used in Ireland to help reorganise Hypo Alpe Adria
before an end-May deadline from the European Commission for a
new revamp plan.

But such a plan would need backing from private investors,
most likely the country’s banking sector, which is already
paying a levy that was increased last year to help finance the
rescue of another troubled bank, Volksbanken AG.

“I decidedly rule out a commitment on our part,” Unicredit
Bank Austria Chief Executive Willibald Cernko said
when asked by Reuters on Wednesday about investing in a bad bank
to take over assets from Hypo and make its banking units more
attractive to buyers.

Martin Gruell, finance chief at Raiffeisen Bank
International, took a similar stance in an interview
this week with the Wirtschaftsblatt paper.

“We will not let ourselves be put under pressure by
politicians,” he said.

Erste Group Bank and BAWAG PSK said
they had not been approached so could not comment on the idea.

Brussels and Vienna are at loggerheads over the pace of
overhauling Hypo, with the Commission keen for its operating
assets to be sold by the end of the year while Austria is
fearful rushed sales could hurt state finances ahead of
elections due by late September.

Hypo Alpe Adria has said a quick sale of its businesses in
Austria, Italy and the Balkans could saddle taxpayers with
losses of between 5 billion and 6 billion euros.

The attraction of Ireland’s approach is that its bad bank -
the National Asset Management Agency – has a special investment
vehicle in which three private investors held the majority, thus
allowing Ireland not to count NAMA debts as state debt.

Former Austrian central bank chief Klaus Liebscher, who is
advising the government on Hypo, said in an interview late on
Tuesday with national broadcaster ORF he favoured the creation
of a bad bank backed by private investors.

“I cannot expect that the initial reaction from banks that
are approached will be glowingly positive,” he said. “If we go
this way, some persuasion will be needed.”

Finance Minister Maria Fekter has in the past opposed
creating a bad bank for nationalised lenders, partly because it
could undermine plans to generate a budget surplus by 2017 and
get state debt under 60 percent of GDP by the end of the decade.

Creating a bad bank for Hypo Alpe Adria would also need
approval from BayernLB, its former owner and major
creditor.
($1 = 0.7705 euros)

(Editing by Jane Merriman)

The EU has to decide this month whether to renew or amend its sanctions on Syria, where more than 70,000 people have died in a two-year uprising against President Bashar al-Assad.

Member states are divided on whether to change the arms ban, which would require the support of all 27 members. Without an accord, all EU measures against Syria, including asset freezes and travel bans, expire on June 1.

Western countries, including the United States, Britain and France, support the rebels fighting against Assad with non-lethal aid although they have yet to provide weapons. A British proposal backed by France would amend the EU embargo to allow arms for the rebels.

This has been opposed by Austria, which fears for the safety of its 375 soldiers working as peacekeepers in a 1,000-strong U.N. international force on the Israeli-occupied Golan Heights.

“We are against this in principle,” Faymann told reporters after a cabinet meeting. “In areas like the Middle East and Syria there can be absolutely no relieving or resolving the situation by delivering yet more weapons.”

He said he would make the point at an EU summit next week.

“We will defend this clear position of Austria – even if we are the only ones – that we are not of the opinion that the arms ban in Syria should be lifted.”

Asked if Austria could support a compromise in which only certain rebel groups could get a limited arsenal, Foreign Minister Michael Spindelegger said: “We are against more weapons in Syria. There are already enough there, we don’t need more.”

In a paper circulated to EU peers before foreign ministers meet on May 27 and seen by Reuters, Austria argued that lifting the embargo could torpedo a U.S.-Russian initiative for a peace conference. U.S. Secretary of State John Kerry said on Tuesday the conference could be held in early June.

One French official said lifting the embargo could help persuade Russian President Vladimir Putin to drop Moscow’s diplomatic protection for Assad.

“Just giving him hugs is not going to make him change his mind. There has to be a change in the balance of power and that means a stronger opposition and the threat of arming the rebels,” the French official said.

He also played down concerns that arms would end up in the hands of rebels out of the control of the main opposition block.

“We learnt our lessons from Libya. You aren’t going to see random air drops,” he said, adding that months of cultivating ties with the Syrian rebels had given Western countries more confidence they could steer arms only to selected fighters.

“No decision has been taken to give weapons. There is no legal basis for now anyway. Once the embargo is lifted or eased then we will have some leverage and then we will think about it,” the French official said.

(Additional reporting by John Irish in Paris; Editing by Peter Graff)

Brussels and Vienna are at loggerheads over the pace of
overhauling Hypo, with the Commission keen for its operating
assets to be sold by the end of the year but the Austrians
fearful rushed sales could hurt state finances ahead of
elections due by late September.

To break the impasse, Austrian officials are looking to
Ireland’s National Asset Management Agency (NAMA), often
referred to as the country’s “bad bank”, as a potential model,
two sources close to the matter said.

Dublin set up NAMA in 2009 to relieve pressure on a banking
sector crushed by excessive property lending. It bought deeply
discounted loans – both good and bad – worth a nominal 74
billion euros from banks in return for state-backed bonds.

Its goal was to wring as much money as possible from the
loans over a decade. What makes the model attractive to Austria
is that NAMA set up a special investment vehicle in which three
private investors held the majority, thus allowing Ireland not
to count its debts as state debt.

Just which investors Austria could attract remains a
problem.

“If you want to do such a model, you can only force banks
and insurers to take part, but this is feasible only if certain
incentives are there: meaning they need something in return,”
one source familiar with the discussions told Reuters.

“I don’t think that private institutions will take part in a
major way,” the source said, noting most big Austrian lenders
had already taken state capital themselves and were not paying
it back for the time being.

Another suggested the financial sector might have to be
pushed into taking part in the plan, but did not say how.

Spain’s bad bank, which is broadly based on the NAMA model,
has 4.8 billion euros in private capital, more than half of
which was contributed by Spain’s healthy banks to reduce the
burden on state books.

DILEMMA

Hypo Alpe Adria, which has swallowed more than 2 billion
euros in state aid, has said a quick sale of businesses in
Austria, Italy and the Balkans could saddle taxpayers with
losses of between 5 billion euros and 6 billion. The bill could
be even higher given its 16.5 billion in publicly guaranteed
debt.

But European Union Competition Commissioner Joaquin Almunia
has lost patience, warning Hypo may have to pay back its state
aid if it does not improve on its restructuring plans.

Finance Minister Maria Fekter has in the past opposed
creating a bad bank to handle the woes of nationalised lenders
including Hypo and Kommunalkredit, in part for fear
it could trip up her plans to generate a budget surplus by 2017
and get state debt under 60 percent of GDP by the end of the
decade.

“We have to see that wrong decisions don’t jeopardise state
finances. This is all being negotiated with the European
Commission,” she told a panel discussion late on Tuesday.

Almunia’s pressure for quick bank sales comes at a time when
it is nearly impossible to do such deals, she said.

“It is a dilemma that no one wants to buy a bank at the
moment. It will be hard to do this in a way that protects
taxpayers,” Fekter added. “All countries have state-owned banks
and they all have to sell them, so there are lots of banks on
the market but no buyers.”

Officials say Austria hopes to enlist powerful allies to
help persuade Almunia that Hypo – nationalised under EU and ECB
pressure to ensure financial stability – was too important in
the Balkans to simply shut down.

They may also argue that the traditional five-year window
which countries get to exit state aid to banks should start from
the time of Hypo’s nationalisation in 2009, rather than from the
time it first got state aid in 2008.

(Editing by Carmel Crimmins and David Holmes)

The ECB lowered its main interest rate by a quarter point to a new record low of 0.50 percent in response to a drop in inflation well below its target level, and rising unemployment.

The cut was widely expected, after ECB President Mario Draghi said last month the bank stood ready to act. He will hold a news conference at 8:30 a.m. ET to explain the decision.

Economic data over the last month have bolstered the case for action, with unemployment hitting a record high in April, when inflation saw its biggest monthly drop in over four years, to 1.2 percent.

“The ECB is playing it safe, even though they know the effect is likely to be limited,” Nordea analyst Anders Svendsen said of the cut.

“The key for the market is the tone. If the ECB comes out with other measures as well to help SME (small- and mid-sized enterprise) lending that will be positive but if they say the cut was all they had, I think there will be disappointment.”

The euro rose to $1.3191 and German 10-year government bond futures edged higher after the decision.

The sharp drop in inflation, from 1.7 percent in March, pressured the ECB to cut rates to honor its mandate to deliver price stability, which it defines as inflation close to but below 2 percent.

The sudden slump in price pressures has also raised the possibility of the ECB having to look at policy tools beyond interest rates to counter any further slide in inflation.

“Ultimately, we think the ECB will have to purchase private-sector assets in order to fix the transmission mechanism,” said Andrew Bosomworth at PIMCO, the world’s largest bond fund.

The ECB wants to improve the transmission of its monetary policy so its low rates reach all corners of the euro zone.

The bloc’s south is not benefiting to the same extent as the north from the ultra-low rates. If they are lending at all, banks there are charging companies and households more for loans than their peers in the north because of higher funding costs and credit risks.

SMALL COMPANIES, BIG PROBLEM

The ECB has repeatedly voiced its concern about the impact this has on lending to small- and medium-sized enterprises (SMEs), which have little alternative to bank funding and are a key engine for growth in the currency bloc.

It has said it is studying options to address the problem, but little is expected to have been decided at Thursday’s policy meeting. It is one of two that the ECB holds outside of Frankfurt each year.

“We suspect that the ECB will avoid making any formal statement on a potential SME program … as it continues to weigh the pros and cons of such measures,” said Frederik Ducrozet, senior euro zone economist at Crédit Agricole CIB.

Some ECB policymakers are reluctant to try to fix too many of the euro zone’s problems, eager to push onto governments the issue of dealing with SME lending. Draghi must balance this reluctance with the pressure for action.

In Germany, the ECB has even faced resistance to a rate cut.

German Chancellor Angela Merkel said last week the ECB would have to raise rates if it were looking at Germany alone.

German insurers and the county’s dominant savings and cooperative banking sector have also joined up to speak out against looser ECB monetary policy, saying it would have little economic impact and undermined savings needed to protect the country’s rapidly ageing population.

(Additional reporting by Eva Kuehnen and Paul Carrel; Editing by Jeremy Gaunt.)

The ECB lowered its main interest rate by a quarter point to a new record low of 0.50 percent in response to a drop in inflation well below its target level, and rising unemployment.

The cut was widely expected, after ECB President Mario Draghi said last month the bank stood ready to act. He will hold a news conference at 1230 GMT to explain the decision.

Economic data over the last month have bolstered the case for action, with unemployment hitting a record high in April, when inflation saw its biggest monthly drop in over four years, to 1.2 percent.

“The ECB is playing it safe, even though they know the effect is likely to be limited,” Nordea analyst Anders Svendsen said of the cut.

“The key for the market is the tone. If the ECB comes out with other measures as well to help SME (small- and mid-sized enterprise) lending that will be positive but if they say the cut was all they had, I think there will be disappointment.”

The euro rose to $1.3191 and German 10-year government bond futures edged higher after the decision.

The sharp drop in inflation, from 1.7 percent in March, pressured the ECB to cut rates to honour its mandate to deliver price stability, which it defines as inflation close to but below 2 percent.

The sudden slump in price pressures has also raised the possibility of the ECB having to look at policy tools beyond interest rates to counter any further slide in inflation.

“Ultimately, we think the ECB will have to purchase private-sector assets in order to fix the transmission mechanism,” said Andrew Bosomworth at PIMCO, the world’s largest bond fund.

The ECB wants to improve the transmission of its monetary policy so its low rates reach all corners of the euro zone.

The bloc’s south is not benefiting to the same extent as the north from the ultra-low rates. If they are lending at all, banks there are charging companies and households more for loans than their peers in the north because of higher funding costs and credit risks.

SMALL COMPANIES, BIG PROBLEM

The ECB has repeatedly voiced its concern about the impact this has on lending to small- and medium-sized enterprises (SMEs), which have little alternative to bank funding and are a key engine for growth in the currency bloc.

It has said it is studying options to address the problem, but little is expected to have been decided at Thursday’s policy meeting. It is one of two that the ECB holds outside of Frankfurt each year.

“We suspect that the ECB will avoid making any formal statement on a potential SME programme … as it continues to weigh the pros and cons of such measures,” said Frederik Ducrozet, senior euro zone economist at Crédit Agricole CIB.

Some ECB policymakers are reluctant to try to fix too many of the euro zone’s problems, eager to push onto governments the issue of dealing with SME lending. Draghi must balance this reluctance with the pressure for action.

In Germany, the ECB has even faced resistance to a rate cut.

German Chancellor Angela Merkel said last week the ECB would have to raise rates if it were looking at Germany alone.

German insurers and the county’s dominant savings and cooperative banking sector have also joined up to speak out against looser ECB monetary policy, saying it would have little economic impact and undermined savings needed to protect the country’s rapidly ageing population. (Additional reporting by Eva Kuehnen and Paul Carrel; Editing by Jeremy Gaunt.)

Erste, which battles Raiffeisen Bank International (RBI)
for second place behind regional market leader
UniCredit, has bet big on long-term growth in central
and east Europe (CEE) and its outlook is heavily dependent on
the area’s economic prospects.

“Overall we go into this year with a slightly optimistic
mood,” finance chief Manfred Wimmer said on Monday after the
Austrian bank reported first-quarter net profit nearly halved
from a year-ago period flattered by one-off items.

Like Vienna-based rival RBI, Erste expects a slight upturn
in CEE economies in the second half, although growth would stay
moderate. Austrian banks count on the region as their profit
engines given higher growth prospects than in western Europe.

“For the second quarter we do not yet expect that we will
see a real revival of lending across the board,” Wimmer told a
conference call with analysts, but he thought positive
developments in Slovakia would continue and hoped consumer
lending in the Czech Republic could slowly revive.

The bank stuck to its forecast for stable operating results,
saying it aimed to keep operating profit stable by using cost
cuts to offset slightly lower operating income, given “moderate”
loan demand and low interest rates. Wimmer defined “stable” as
plus or minus 2 percent.

Erste also reiterated its forecast that it would make money
in Romania this year, where the volume of non-performing loans
was set to peak in the first half of 2013.

RISK COSTS

Despite lower costs, Erste’s quarterly operating result fell
nearly 9 percent to 835 million euros ($1.1 billion), as
operating income shrank 5.1 percent due to lower net interest
income and a lower net trading result that was not fully offset
by higher fee and commission income.

Net profit after minorities fell 49.1 percent to 176.2
million euros, lagging the average estimate of 188 million in a
Reuters poll of analysts.

First-quarter risk costs fell nearly 31 percent as
provisioning levels fell or held steady in all markets except
Croatia and Serbia, it said, sticking to its view that risk
provisions would drop at a double-digit rate this year.

In the meantime, Erste is trying to squeeze down interest
rates on deposits while raising them for loans.

Wimmer hailed a plan by Hungary’s central bank to promote
growth by fuelling lending to small and mid-sized companies.

“We see it (as) fundamentally positive because everything
that helps growth is welcome,” he said, but added: “The question
remains whether demand from the corporate side will really be
there.”

Erste’s quarterly loss in Hungary narrowed to 27.5 million
euros – less than a third of the year-ago level – while it lost
just 3.6 million in Romania as risk costs plunged in both
countries.

Erste stock eased 0.1 percent to 24.10 euros by 1010 GMT,
while the European sector index firmed 0.5 percent.

Erste trades at around 10.5 times 12-month forward earnings
per share, a premium to RBI on around 9 times. RBI has said
selling more shares was an option, while Wimmer said Erste has a
“high priority” not to dilute shareholders with a stock issue.

Both trade at a discount to UniCredit on 16 times, according
to Thomson Reuters StarMine, which weights estimates by
analysts’ previous forecasting accuracy.

($1 = 0.7676 euros)

(Editing by Georgina Prodhan and David Holmes)