Austrian banks benefit from upswing

Presentation of the 34th Financial Stability Report of the OeNB

Austrian banks reported another increase in profits in the first half of 2017, following major restructurings in recent years. Banks benefited from the favorable market environment and low risk costs. This notwithstanding, raising efficiency continues to be a top priority for banks with a view to increasing competitiveness and safeguarding financial stability over the longer term. Systemic risks arising from real estate lending have remained subdued, but close supervisory monitoring is warranted.

“Thanks to the broad-based economic expansion we see today, growth prospects are looking up, not just at the global but in particular also at the European level,” Ewald Nowotny, Governor of the Oesterreichische Nationalbank (OeNB) said while presenting the OeNB’s 34th Financial Stability Report. The economic recovery has also taken hold in Central, Eastern and Southeastern Europe (CESEE), prompting banks active in the region to increase their lending activities.

In this favorable environment, the Austrian economy likewise strengthened further. The exceptionally strong investment cycle increased the financing needs of nonfinancial corporations. Internal financing remained the most important funding source, but external financing grew markedly in the first half of 2017. Corporate lending by Austrian banks also expanded, with loans with medium-term and longer maturities being highest in demand, which reflected rising investment and historically low interest rates.

Austrian households continued to display a strong preference for highly liquid assets in the current low interest rate environment. Bank lending to households continued to increase, with housing loans still being the main driver of growth. At the same time, the proportions of foreign currency and variable rate loans diminished further. As disposable income expanded at a faster pace than liabilities, households’ indebtedness contracted slightly in relative terms.

The Austrian banking sector benefited not only from the above-mentioned favorable developments but also reaped the rewards of major restructurings seen in recent years. As a result, the number of banks (head offices) declined by almost one-fifth over the past five years, which – to a certain extent – also boosted Austrian banks’ operating profits. Consolidated profits continued to rise in the first half of 2017, also thanks to persistently low write-downs and credit risk provisioning. Furthermore, the profitability of Austrian banking subsidiaries in CESEE again provided an important contribution. The highest profits in the first half of 2017 were earned by subsidiaries in the Czech Republic, Russia and Hungary.

“Given that their profitability has been on an upward trend in recent years, Austrian banks improved their capitalization further in the first six months of 2017. This, in turn, strengthened financial stability in Austria,” explained OeNB Vice Governor Andreas Ittner. Banks’ improved risk-bearing capacity (and stable liquidity situation) was confirmed by OeNB stress tests, whose solid results were also ascribable to a reduction both in banks’ activities abroad and in foreign currency loans.

Real estate-induced systemic risks remain subdued in Austria, but close supervisory monitoring is warranted in light of the fact that a rising share of new housing loans to households shows relatively high loan-to-value, debt service-to-income and debt-to-income ratios. These developments underline the importance of the Financial Market Stability Board’s communication regarding sustainable credit standards in real estate lending.

Notwithstanding the recent positive developments, which were supported by a number of supervisory measures, Austrian banks should use the window of opportunity, which the currently benign market environment provides, and further improve structural efficiency to raise their profitability and, in consequence, their risk-bearing capacity, while not taking on excessive risk, above all in real estate lending. The OeNB moreover recommends that Austrian banks address potential risks emanating from the low interest rate environment, continue efforts to resolve nonperforming loans in CESEE and comply with the FMA minimum standards regarding foreign currency loans and repayment vehicle loans and the sustainability package.

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.