Monetary and supervisory measures of the past years have strengthened financial stability

Presentation of the 37th Financial Stability Report of the OeNB

The ECB’s monetary policy measures have significantly reduced funding costs in the euro area. Moreover, the OeNB’s targeted supervisory activities have contributed to a considerable strengthening of financial stability in Austria over the past few years. At the same time, Austrian banks have been able to increase their profits further in 2018. Times will remain challenging, however, as economic activity is expected to slow down and banks face continued pressure to adapt their business models.

“The unconventional monetary policy measures have contributed to the stabilization of the banking system and its macroeconomic function. They have reduced banks’ funding costs and supported the pass-through of the low interest rates to businesses and consumers, but at the same time also increased investors’ risk appetite,” Governor Ewald Nowotny said at the presentation of Financial Stability Report 37, published by the Oesterreichische Nationalbank (OeNB). In early June, the Governing Council of the ECB decided to keep the key ECB interest rates unchanged at least through the first half of 2020, and in any case for as long as necessary, given that geopolitical risks continue to cloud the economic outlook and it expects euro area inflation to remain below the price stability target over the next few years.

After years of strong growth, the weakening of international economic conditions has been weighing on economic activity in Austria. The slowing momentum in the second half of 2018 notwithstanding, economic growth has continued to support Austrian nonfinancial corporations’ profitability. Companies’ most important source of funds, internal financing, remained at the high level of the past few years, while companies’ use of external financing more than halved in 2018 in spite of attractive conditions offered by the prevailing low interest rates. While other forms of debt financing were declining, lending by Austrian banks increased. In fact, in early 2019, corporate loans granted by Austrian banks expanded at their highest annual rate in more than ten years, which was mostly due to lending to the real estate sector. The main contribution to growth of bank lending to households – which increased slightly in recent months – came from housing loans. Overall, companies’ and households’ indebtedness increased moderately but remained below euro area averages (in relation to income). In addition, their debt-servicing capacity improved on account of higher profits and incomes. The low interest rates likewise had a positive impact given that the share of variable rate loans is still sizeable. Borrowers currently benefit from low interest payments, but they are also exposed to substantial interest rate risk.

“Since the establishment of the Financial Market Stability Board (FMSB) five years ago, macroprudential measures have further strengthened the resilience of the Austrian banking sector,” Vice Governor Andreas Ittner pointed out. Despite the successful supervisory work done so far, some challenges remain. Mortgage lending continues to warrant close supervisory monitoring as interest rates on real estate loans are still falling, loan growth remains high and real estate prices continue to rise. Moreover, a nonnegligible share of new loans has been granted without adequate borrower deposits, and debt service in relation to income has been increasing. This is why the OeNB again calls attention to the FMSB’s quantitative guidance relating to sustainable real estate lending standards; at present, the OeNB is evaluating banks’ compliance.

Austrian banks once more increased their consolidated profit in 2018 thanks to higher revenues and historically low risk costs. At the same time, their operational cost efficiency remained weak. A reduction of nonperforming loans and higher loan growth resulted in improved credit quality both in Austrian and in Central, Eastern and Southeastern European (CESEE) loan portfolios. Despite higher profits, the Austrian banking sector’s aggregate capital ratio dropped slightly because of higher risk-weighted assets and a doubling of the dividend payout ratio.

The insurance sector is still faced with sustained low yields attributable to the low interest rate environment, which is a particular challenge in the life insurance business. As a result, the sector’s aggregate profitability deteriorated in 2018. The solvency capital ratio of the Austrian insurance sector is, however, at a high level that corresponds to the European average.

As economic activity is expected to slow down, Austrian banks should seek to reinforce their resilience further. In light of the developments described above and with a view to strengthening financial stability, the OeNB recommends that banks

• safeguard sustainable profitability by further increasing efficiency to continue improving capitalization (especially at significant institutions) and to be able to bear future credit risk arising from strong loan growth,
• apply sustainable real estate lending standards in compliance with the FMSB’s quantitative guidance,
• develop and implement adequate strategies for tackling challenges in connection with innovations in IT and digitalization,
• continue to reduce nonperforming loans, especially in CESEE; 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.