Decline in risk provisioning supports banks’ profits

Presentation of the 33^rd Financial Stability Report of the Oesterreichische Nationalbank (OeNB)

The Austrian banking sector has become more resilient in recent years, not least owing to supervisory measures. Despite weaker operating results and persistently high costs, banks booked strong profits in 2016 thanks to reduced risk provisioning. For the time being, low interest rates and a high proportion of variable rate loans support the debt-servicing capacity of Austrian enterprises and households, which continue to face considerable interest rate risks, though.

In 2017, ongoing monetary accommodation has helped improve macrofinancial conditions in the advanced economies, including the euro area economy, which has continued to expand. “The Eurosystem’s accommodative monetary policy stance has reduced lending rates in the entire euro area. This helped bring down financing costs in the real economy and contributed to stimulating lending in the euro area,” OeNB Governor Ewald Nowotny explained at the presentation of the OeNB’s 33^rd Financial Stability Report.

In line with the cyclical recovery, corporate lending in Austria also accelerated markedly in the course of the year, growing by an annual rate of 2.9% in May 2017. Particularly loans with a maturity of more than one year – which are relevant for financing investments – expanded significantly. Short-term corporate financing, by contrast, has recently come to rely more heavily on trade credit. The annual growth rate of housing loans to households has stabilized at around 4% over the current year.

The debt-servicing capacity of the real economy remained stable in 2016, and the debt ratios of the Austrian corporate and household sectors have remained below the corresponding euro area levels. Together with low interest rates, this low level of indebtedness helps keeping the interest expenses of the real economy at low levels for the time being. Given the still relatively high – albeit recently reduced – share of variable rate loans in new lending, however, enterprises and households continue to face considerable interest rate risks over the longer term. Moreover, and despite a further decline in foreign currency lending, households continue to be exposed to elevated exchange rate risks. In addition, the funding gaps in outstanding bullet loans linked to repayment vehicles continue to pose a risk for borrowers, even if these are mostly higher-income households.

Austrian banks continued their restructuring efforts in 2016 and posted substantial profits. These results were supported in particular by a decline in loan loss provisioning – a development that will yet have to prove its sustainability, however. But as operating profits (before risk provisioning) are going down, banks will have to become more efficient. “Austrian banks should take advantage of the currently benign profit situation and invest in the future, e.g. with a view to enhancing digitization. There is also an ongoing need to adjust to the low interest rate environment and to reduce costs further,” OeNB Vice Governor Andreas Ittner pointed out. As a consequence of profit retention and one-off effects from restructuring measures, the Austrian banking system was able to clearly improve its capitalization in 2016; at the same time, credit quality improved both in Austria and at banks’ subsidiaries in Central, Eastern and Southeastern Europe (CESEE).

Systemic risks arising from real estate financing remain limited in Austria. Results from an OeNB survey among banks show that mortgage lending in Austria is mostly based on sustainable lending standards. Moreover, lending in Austria has so far been shaped by rather conservative conditions, which means that the quality of outstanding loans is high. With regard to keeping lenders from applying riskier lending standards in view of low interest rates and rising real estate prices, the OeNB explicitly welcomes the recent adoption of a bill creating a macroprudential toolkit for containing systemic risks in real estate financing. The OeNB continues to closely monitor developments in this area, which is of importance for Austria’s financial stability.

Supervisory measures and banks’ increased efforts have succeeded in significantly strengthening financial stability in Austria. Nevertheless, the domestic banking sector continues to face great challenges. The OeNB therefore recommends that banks i.a. continue to improve their profitability and efficiency, ensure sustainable lending standards for real estate financing, address funding gaps in bullet loans linked to repayment vehicles in good time and further enhance their credit quality and capitalization.

The OeNB’s semiannual Financial Stability Report provides analyses of Austrian and international developments with an impact on financial stability and includes studies offering in-depth insights into specific topics related to financial stability.