New legislation to harmonise Austria’s triple regulatory framework could proceed to parliament shortly, according to funding officials, and its implementation could positively influence issuance, but the likelihood of legislative SME covered bonds being introduced is said to be falling.

Hannes Meixner, RLB Steiermark

Hannes Meixner, head of institutional sales and treasury solutions at Raiffeisen Landesbank Steiermark, said that the introduction of a single law that unifies the current triple covered bond regulation is a factor that could boost Austrian issuance.

Austrian covered bonds are either Pfandbriefe issued under the Mortgage Banking Act or the Pfandbriefe law, or Fundierte Bankschuldverschreibungen. Erste Group Bank and UniCredit Bank Austria, for example, issue under the Mortgage Banking Act, while Kommunalkredit Austria and Bawag PSK issue Fundierte Bankschuldverschreibungen.

“The three laws date back to the end of the 19th century and two of them are a legacy of the Austrian Imperial laws,” said Meixner. “Issuers cannot choose freely between the three as they are specific to the organisation of the bank, and the triple regulation brings about confusion among investors.

“So it would be beneficial for the covered bond market if the three laws were unified in a single one.”

Progress towards a single covered bond regulation has been made and the new law could be enacted as early as this year, according to Meixner.

He said that after consultations with the Austrian financial authorities, issuers are now waiting for feedback from the Austrian Ministry of Finance, Financial Market Authority and the Oesterreichische Nationalbank, the Austrian central bank.

“We expect the feedback to be positive and the law to move to parliament shortly,” he said.

However, he added that approval of the law could be subject to delays if the process is not completed before general elections in the country, scheduled for September.

Alexa Mezei, member of the group strategic solution team at Erste Group Bank and of the Austrian Pfandbrief & Covered Bond Forum, said that Austrian banks are actively pushing for the new covered bond framework to reach parliament in the next four months so that it could be approved before the elections and enacted by the end of the year.

“Austrian banks are hoping that the new regulation could be implemented soon,” she said. “The law would improve transparency for investors, and the new regulation is seen as strong, for example by the rating agencies.”

“It would also allow all Austrian banks to issue mortgage covered bonds,” she added.

Under prevailing legislation Austrian credit institutions require a special licence to operate as covered bond issuers. Last year five Austrian banks tapped the public covered bond market with benchmark issues: Erste Group Bank, UniCredit Bank Austria, HYPO NOE Gruppe Bank, RLB NOe-Wien, and Bawag PSK.

“Austrian banks are pushing for the new law to be approved as they are really interested in using covered bonds as they see them as a cheap funding option,” said Mezei.

Consultations on the new regulation also included discussions on the introduction in Austria of covered bonds backed by corporate loans.

Meixner said the possibility of the introduction of this new asset class is far from certain.

“The topic is being discussed, but I see the likelihood of the introduction of SME covered bonds decreasing the longer the discussion lasts,” he said.

Mezei said that Austrian banks are discussing some “open issues” on SME loan eligibility criteria.

“Issuers disagree on the prerequisites for SME loans to be included in cover pools, such as which quality standards they should meet,” she said.

“So unless those issues are solved, SME covered bonds are unlikely to be introduced in the country as part of the new legislation,” she added.

Despite uncertainty over how long implementation of the new law could take, some structural factors could also influence the volume of covered bond benchmarks in 2013.

Meixner expects Austrian covered bond issuance this year to be higher than in 2012, because covered bonds are increasingly been seen as attractive funding instruments by Austrian banks, with new issuers looking at tapping the covered bond market.

“We may see some new names issuing beyond the traditional ones,” he said. “Large regional banks will be looking at choosing covered bonds to meet part of their funding needs.”

He added that private rather than public placements could be their initial option.

Meixner said that Austrian banks have traditionally relied on retail funding to refinance their lending.

“Putting money in a saving account is part of the Austrian culture,” he said, “so Austrian banks were able to enjoy consistent levels of deposits, and apply very low interest rates — one of the lowest in Europe — making savings accounts an extremely cheap way of refinancing, even in a European context.

“But with the decline in Euribor last year,” he added, “margins on deposits decreased significantly, so the comparative cost of issuing covered bonds has decreased compared to saving accounts.”

However, he noted that the cost of senior unsecured funding has also decreased in the past year.

“If this trend continues, the growth in covered bonds issuance could be endangered,” he said.

“But if the trend reverses, and Euribor levels remain low, then covered bonds may become a more attractive funding option for many banks,” he added.