Financing conditions tighten in line with monetary policy; Austrian banking sector has benefited from rising interest rates

Presentation of the 45^th Financial Stability Report of the Oesterreichische Nationalbank (OeNB)

The Austrian economy proved resilient to the effects of the war in Ukraine in 2022. Austrian banks still report low credit default rates even though inflation and, subsequently, interest rates have risen markedly in recent months and have led to tighter financing conditions for companies and households. In fact, the Austrian banking sector posted record profits in the past year on the back of rising interest margins; but challenges increasingly loom ahead.

Austrian companies and households face tighter financing conditions

“Monetary policy normalization has led to a tightening of financing conditions for companies and households,” OeNB Vice Governor Gottfried Haber pointed out at the press conference presenting the OeNB’s Financial Stability Report 45. While uncertainty about economic developments has been dampening companies’ demand for long-term loans, demand for short-term loans has picked up slightly. Given that most loans to the corporate sector are variable rate loans, debt-servicing costs have gone up markedly in recent months. Nevertheless, Austrian companies’ debt-to-income ratio decreased in 2022, thanks to substantially higher profits. Credit risks for corporate loans have, however, increased in light of higher input costs, tighter financing conditions and the tepid economic environment.

Following a period of brisk growth, the expansion of bank lending to Austrian households has been decelerating since mid-2022, especially in the residential real estate segment. To ensure that credit quality remains sound and credit default rates low, obligatory borrower-based measures are key. As a sizeable portion of new mortgages had been offered based on unsustainable lending standards in the past years, it became necessary in mid-2022 to make compliance with the existing standards for residential real estate lending mandatory. Since then, the respective lending practices have improved significantly. Apart from residential real estate loans, commercial real estate lending also warrants higher scrutiny as borrowers are facing headwinds arising from higher interest rate levels and structural shifts, such as increased online shopping and remote work.

Austrian banking sector has benefited from rising interest rates

To date, the rise in interest rates has benefited Austrian banks in terms of both interest margins and profitability, not least because borrowers’ repayment capacity is still strong. At over EUR 10 billion, the Austrian banking sector reported a record profit for 2022 (including one-off effects), more than EUR 5 billion of which came from business activities in Central, Eastern and Southeastern Europe (CESEE). The CESEE subsidiaries’ surge in profit rests on higher profits in almost all countries but a large contribution came from banking operations in Russia. Yet, the war in Ukraine and its consequences as well as strong inflationary pressures constitute substantial challenges, especially should banks’ interest margins narrow due to, for instance, rising deposit rates or should credit risks mount amid weak economic developments.

Despite many challenges, the Austrian banking sector draws strength both from banks’ diversified business models and from the solid common equity tier 1 capital ratio, which reached a record 16.3% at end-2022. This was also corroborated in the recent financial market turmoil when bank turbulences in the United States and Switzerland left the Austrian financial market unaffected and Austrian banks’ liquidity position remained solid. “As has been confirmed by S&P Global Ratings in early 2023, the Austrian banking sector continues to rank among the most stable in the world,” said OeNB Vice Governor Gottfried Haber. Still, especially Austria’s larger banks need to catch up relative to their European peers in terms of capitalization. 

The OeNB’s recommendations for strengthening financial stability in Austria

For the Austrian banking sector to cope with the increased risks, the OeNB recommends that banks

• strengthen the capital base by exercising restraint regarding profit distributions,
• adhere to sustainable lending standards for residential and commercial real estate financing,
• ensure that credit and interest rate risk management practices adequately reflect changes in the risk environment, especially considering the past long period of low risks and interest rates,
• continue efforts to improve cost efficiency to ensure structurally strong profitability, and
• further develop and implement strategies to deal with the challenges of new information technologies, increased cyber risks 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 insights into specific topics related to financial stability.