Banks proved resilient in the pandemic, but sustainability of housing loans warrants heightened attention

Presentation of the 41st Financial Stability Report of the Oesterreichische Nationalbank (OeNB)

Despite a sharp drop in profits, the Austrian banking sector has demonstrated its resilience in the face of the COVID-19 pandemic. Government measures helped keep companies and households afloat, which also indirectly benefited banks, but corporate and household debt went up accordingly. In this context, supervisors are paying increasing attention to banks’ compliance with sustainable lending standards for residential real estate financing.

The COVID-19 pandemic has continued to weigh on economic activity both worldwide and in Austria. Most recently, however, economic signals have been predominantly positive in light of receding infection rates and easing containment measures. Presenting the 41st issue of the OeNB’s Financial Stability Report, OeNB Governor Robert Holzmann pointed out that “the Eurosystem’s comprehensive monetary policy measures have been dampening yields while supporting lending to businesses and households.”

Importantly, the Eurosystem’s monetary policy measures – combined with national payment moratoria and public guarantees – underpinned bank lending, which proved crucial for maintaining the flow of credit to the corporate sector. The annual growth of loans to nonfinancial corporations has remained high throughout the pandemic, with continued strong credit demand driving up corporate debt. At the same time, businesses have, however, also built up significant liquidity reserves in the form of cash and deposits. Moreover, thanks to large-scale government support measures, nonfinancial corporations’ gross operating surplus diminished only marginally in 2020.

Over the course of the pandemic, households’ debt-to-income ratio has registered the highest growth rate in 15 years, which is traceable to increased borrowing and reduced incomes. While consumer loans went down markedly in sync with contracting consumption of durables, housing loans kept growing at a rapid pace given favorable financing conditions and persistently strong housing demand.

Despite the challenging environment in 2020, the Austrian banking sector kept on supporting the real economy. The buildup of macroprudential capital buffers in recent years and regulatory guidance on retaining earnings caused banks’ capital ratios to increase, which enables banks to assist the economy also in its upswing. In tandem with public support measures, this strengthened the stability of the financial system and improved market participants’ and rating agencies’ confidence in the Austrian financial sector even during the pandemic. In 2020, banks increased risk provisioning early on to prepare for a pandemic-induced rise in credit risk. These precautionary measures, however, significantly weighed on the sector’s profit last year.

Even though some support measures have already expired, credit quality at Austrian banks has not yet deteriorated. The historically low interest rates and pandemic-related changes in housing demand have buoyed both credit and price growth in the residential real estate segment, while variable interest rate loans still account for a significant share of new loans. The current lending standards for housing loans are increasingly exceeding the threshold criteria for sustainable residential real estate lending defined by the Austrian Financial Market Stability Board (FMSB). “The down payments for more than half of new loans fall short of 20% of total financing needs, and debt service exceeds 40% of borrowers’ net income in the case of one-fifth of loans,” explained OeNB Vice Governor Gottfried Haber. These developments call for closer scrutiny to ward off any potential systemic risks from residential real estate lending at an early stage.

To safeguard financial stability in these trying times, the OeNB recommends that Austrian banks take the following measures:

• focus on a solid capital base, i.e. avoid share buybacks and carefully consider profit distributions in accordance with European recommendations;
• prepare for the time when payment moratoria and public guarantees for loans expire and ensure transparency about the quality of loan portfolios;
• apply sustainable lending standards, particularly to residential real estate loans according to the quantitative guidance issued by the FMSB;
• continue efforts to improve efficiency, even under the currently challenging circumstances, in order to ensure sustainable profitability;
• develop and implement strategies to deal with the challenges of digitalization and climate change.

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.