Austrian banking sector continues necessary adaptation process

Presentation of the 31st Financial Stability Report of the Oesterreichische Nationalbank (OeNB)

In the first few months of 2016, the international financial markets saw a rise in volatility. “Still, the nonstandard monetary policy measures the Eurosystem has taken over the last few years have, in general, contributed to restoring confidence in the financial markets. Moreover, they have facilitated the transmission of ECB key interest rate cuts, driving down lending rates across the euro area – a key prerequisite for favorable dynamics in the real economy,” said OeNB Governor Ewald Nowotny during the presentation of the 31st issue of the OeNB’s Financial Stability Report. For the banking sector, the current low interest rate environment is a challenge, however. While banks’ performance has improved over the last year, it remains to be seen whether this uptrend will prove sustainable. “Austrian banks should therefore persistently continue to proceed on their adjustment path and push for further structural reform to ensure the sustainability of their improved profitability,” OeNB Vice Governor Andreas Ittner explained.

The Austrian economy has slowly gained momentum since mid-2015. Investment activity has started to recover, accompanied by an expansion of external financing in the corporate sector, to which both equity and debt contributed in roughly equal measure in 2015. The growth dynamics of corporate lending have remained rather subdued. While banks have tightened their lending conditions in the past few years, this move has not constrained corporate financing in Austria as corporate loan demand is still weak.

Housing loans to households have picked up since mid-2015, however. The pace of their expansion remained below the increase in residential property prices, however, which accelerated noticeably in the second half of 2015. In view of the high and still rising real estate prices, particularly in Vienna, the OeNB is paying special attention to housing finance. In this context, the OeNB supports the Financial Market Stability Board’s recommendation to take preventive action by expanding the macroprudential toolkit in place for regulating real estate lending. Variable rate housing loans to households continue to account for a high share in total loans, even if this share declined in early 2016.

Austrian banks’ profitability recovered significantly in 2015 as risk provisioning and write-downs decreased against 2014 and their CESEE subsidiaries made higher profits. Net interest income, which is the cornerstone of Austrian banks’ business models, was still under pressure, however. In Austria, the decline of banks’ net interest income was largely driven by a reduction in total assets, while in most CESEE countries, shrinking margins played a greater role. It remains to be seen whether Austrian banks’ profitability has improved sustainably, in particular since banks will have to adjust their cost structures further to match lower business volumes. Currently, this mismatch is reflected in an unfavorable cost-to-income ratio by international comparison. Moreover, some CESEE subsidiaries of Austrian banks continue to carry high shares of nonperforming loans on their books.

The common equity tier 1 (CET1) ratio of the Austrian banking system improved further in 2015 through a combination of capital increases and a reduction in risk-weighted assets. The improvement was even more pronounced than that recorded by Austrian banks’ European peers. However, additional efforts will be required to catch up with their international peers in this respect. Moreover, banks must prepare to fulfill the new regulatory requirements – e.g. the liquidity coverage ratio, the systemic risk buffer or the minimum requirement for own funds and eligible liabilities – that will (gradually) take effect in the years to come.

The OeNB’s Financial Stability Report, which is published every six months, contains analyses of financial stability-related developments in Austria and the international environment. In addition, it includes studies offering in-depth insights into special topics related to financial stability.