Austrian banking sector moving ahead with necessary structural reforms

Presentation of the 32^nd Financial Stability Report of the Oesterreichische Nationalbank

Political and macroeconomic uncertainty led to an increase in volatility in international financial markets in 2016. At the same time, the operating environment for Austrian banks remained challenging, characterized by the prolonged period of low interest rates and subdued economic growth. In this demanding situation, banks have continued to implement necessary reforms, thereby contributing to safeguarding the stability of the Austrian financial market. These are among the main findings of the 32nd Financial Stability Report, which the OeNB published on Monday, December 5, 2016.

The persistent low interest rate environment reflects the continued weakness of economic productivity as well as the effects of the financial crisis on the real economy and the ensuing low price pressures. “The moderate recovery in the euro area continued, supported by the Eurosystem’s monetary policy measures. This helped strengthen investors’ confidence in the markets,” OeNB Governor Ewald Nowotny said at the presentation of the OeNB’s 32nd Financial Stability Report.

Austrian businesses have ample liquidity, which is why corporate demand for loans, especially for short-term loans, has remained subdued. At the same time, however, the volume of long-term loans, which are of crucial importance for investment activity, has expanded.

Austrian households’ debt remained stable and clearly below the euro area average in the first half of 2016. Housing finance accounts for a large share of household debt; its outstanding volume continued to increase in 2016. For this reason, macroprudential supervisors have been monitoring mortgage lending more closely. In a risk warning published recently, the European Systemic Risk Board (ESRB) pointed to potential risks in connection with the Austrian residential real estate market in the medium term. The OeNB takes a more differentiated approach in its risk assessment; in the OeNB’s view, the current systemic risks emanating from housing finance in Austria are limited.

Turning to foreign currency loans, their outstanding amount in Austria has been decreasing since 2008 owing to a number of supervisory measures, and this trend continued in 2016. Yet, according to an OeNB survey, risks for borrowers persist, in particular in connection with bullet loans linked to repayment vehicles as the latter display substantial funding gaps; in most cases, however, such loans have been taken out by high-income borrowers.

Austrian banks’ profits increased in the first half of 2016. This rise was to a large extent attributable to lower risk provisioning, however, while income from core business lines, such as interest and commissions income, was down on the previous year. The decline in operating profits accelerated banks’ restructuring and adjustment measures as deemed necessary by the OeNB. “Banks have moved ahead with their adjustments and launched structural reforms to ensure sustained profitability,” OeNB Vice Governor Andreas Ittner pointed out.

Over the past few years, restructuring at individual banks has been a key driver of improvements in the Austrian banking sector’s credit quality. That said, the amount of nonperforming loans, which are to a large part in the books of Austrian banks’ CESEE subsidiaries, remains a burden for some banks that should be addressed proactively in order to support new lending.

The capitalization of the Austrian banking sector has improved significantly since the onset of the financial crisis. This trend continued into the first half of 2016. However, domestic banks’ capital ratios were still below the European average at mid-2016.

In this challenging environment, the Austrian supervisory authorities have contributed to safeguarding the stability of the domestic financial system, among other things through macroprudential capital buffers, minimum standards for foreign currency loans and loans with repayment vehicles as well as the “Sustainability Package.” Yet banks are called upon to push ahead with their efforts geared at safeguarding profitability, ensuring sustainability in housing finance, reducing the funding gap in outstanding repayment vehicle loans, and improving credit quality and capitalization levels.

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 as well as in-depth studies on selected topics.