Ten years after the onset of the financial crisis: Austrian banks are back to normal

Presentation of the 35^th Financial Stability Report of the OeNB

Ten years after the onset of the financial crisis, the situation of the Austrian banking system is back to normal. Following large-scale restructuring in the past few years, bank profits have returned to their pre-crisis levels. Nevertheless, it remains important for banks to go ahead with efficiency-enhancing measures to increase their competitiveness and to retain profits with a view to further strengthening their risk-bearing capacity. Moreover, banks are called upon to pursue sustainable lending policies, in particular in real estate lending, to contribute to lasting financial stability.

“The most recent market turbulence has led to an increase in risk premiums on government bonds and a drop in stock prices in European markets. This highlights the necessity of proceeding as swiftly as possible with establishing a stable framework for the European banking and financial market,” Governor Ewald Nowotny said during the presentation of the 35^th Financial Stability Report of the Oesterreichische Nationalbank (OeNB). In 2017, the Austrian economy grew at a brisk pace again. Both corporate and household borrowers benefited from historically low interest rates. Economic activity was also buoyant in Central, Eastern and Southeastern Europe (CESEE), which was also reflected in the profits of Austrian banks’ subsidiaries in the region.

The robust economic expansion in 2017 supported the profitability of Austrian businesses, easing their debt servicing burden and at the same time strengthening their internal financing capacities. At the same time, the ongoing recovery of investment activity increased Austrian businesses’ demand for funding. Despite an increase in equity financing, debt instruments continued to make up the lion’s share of nonfinancial corporations’ external funding. For the first time in five years, the domestic financial sector was the most important provider of funding for the Austrian corporate sector, accounting for almost half of the total funding volume. In the two preceding years, the largest share of funding had come from foreign sources.

Households’ financial investment declined as the saving ratio decreased in 2017. In the low interest rate environment, households continued to show a strong preference for highly liquid bank deposits, while net investment in life insurance and pension plans was negative in 2017. Loans to households continued to grow, driven mostly by real estate financing. But also, consumer lending, which had been contracting since the onset of the crisis, started to grow again in 2017. The share of foreign currency loans in outstanding loans and the share of variable rate loans in total new loans to households continued to decrease but remained high by European standards.

Ten years after the collapse of U.S. investment bank Lehman Brothers in 2008, the situation of Austrian banks has normalized. “In 2017, the consolidated profitability of the Austrian banking sector reached its highest level since the onset of the crisis. This means that Austrian banks are back to normal, albeit it’s a new normal,” Vice Governor Andreas Ittner explained. Restructuring and consolidation have changed the Austrian banking system, while banks have built up additional capital and reduced credit risks, thereby contributing to improving financial stability.

Austrian banks again increased their profits in 2017, both at home and abroad. However, this profitability very much rests on historically low risk costs. Therefore, it remains important for banks to strengthen the sustainability of their operational profitability, which means optimizing cost structures further. Systemic risks emanating from real estate financing are limited in Austria at present; to keep such risks at bay also in the future, sustainable lending standards remain key. According to the OeNB, sustainability in lending can best be achieved through an adequate minimum level of own funds from borrowers, setting sensible limits to their debt service in relation to their net income as well as maturities that are not excessively long and take into account borrowers’ income profile over time.

In light of the developments described above and with a view to strengthening financial stability, the OeNB recommends that banks

• safeguard sustainable profitability by enhancing efficiency so they can further increase capitalization levels and invest in information technology;
• ensure sustainable lending, in particular in real estate financing;
• continue to reduce nonperforming loans; and
• continue to comply with the supervisory minimum standards for foreign currency and repayment vehicle loans as well as 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.