Austrian banking sector’s resilience remains high, but risks from commercial real estate loans are increasing
(, Vienna)Presentation of the 48th Financial Stability Report of the Oesterreichische Nationalbank
The Austrian economy is in its second year of recession in 2024, and no strong recovery is expected in 2025. Despite this challenging environment, the Austrian banking sector generated very high profits and demonstrated its resilience, with supervisory measures reducing risks in residential real estate lending. Risks from commercial real estate loans continue to intensify, however. To limit these risks, an additional capital buffer will be introduced in mid-2025.
Austrian economy remains in recession
In 2024, the Austrian economy is showing pronounced weakness for the second year in a row. This is driven by two key factors: an industrial recession and weak growth in private consumption. As a result, the Oesterreichische Nationalbank (OeNB) revised down its growth forecast. Economic output is expected to shrink this year, and to grow at only a modest pace in 2025.1) In this difficult environment, demand for corporate loans remains subdued, particularly for longer-term investments. However, residential real estate lending is picking up somewhat, as rising incomes and slightly falling financing costs have improved affordability. In addition, the share of variable rate mortgages, a focus of supervisory attention due to the interest rate risk for borrowers, has declined to as little as one-fifth of new loans.
The Austrian banking sector’s profitability remained high, which further strengthened its capitalization, but risks from corporate loans are increasing
Driven by continued high net interest income, the Austrian banking sector earned a profit of EUR 7 billion in the first half of 2024, down just slightly from the record set in the first half of 2023. A strong contribution was made by foreign business, which accounts for more than 40% of total assets. The profits of Austrian banking subsidiaries in Central, Eastern and Southeastern Europe rose to a new high of just over EUR 3 billion. By retaining earnings, banks strengthened their resilience. The sector’s common equity tier 1 (CET1) capital ratio reached 17.7%, with large Austrian banking groups exceeding the average of their European peers.
However, credit quality deteriorated in the first half of 2024. The nonperforming loan ratio rose to 2.7%, as the Austrian economy has been undergoing a period of pronounced weakness. Commercial real estate (CRE) loans and loans to small and medium-sized companies saw some of the largest increases. Risk provisioning, however, did not keep pace with this development. Nevertheless, the Austrian banking system proved resilient to potential shocks in a stress test recently conducted by the OeNB, where the adverse scenario simulated falling interest rates (and margins) and a deterioration in the quality of CRE loans.
Supervisory measures that address residential real estate lending in Austria (KIM-V) are effective and have strengthened financial stability. In the first half of 2024, the share of sustainable new housing loans was above 80%,2) and the nonperforming loan ratio remained low. At the same time, nearly two-thirds of banks did not even use half of the exemption volume available to them. In the CRE loan segment, which has been under supervisory scrutiny for years, risks are mounting as recent interest rate increases have laid bare the vulnerabilities of the sector’s funding. The number of corporate defaults has increased, as has the volume of nonperforming loans on banks’ balance sheets. As a result, the share of nonperforming CRE loans in Austria more than doubled from its 2020 low to 5.5% as of mid-2024. CRE prices – an important cushion to protect banks from losses in the event of defaults – have been under pressure as well. In this context, Austria’s Financial Market Stability Board (FMSB) found that potential losses from CRE loans, in the event of a further deterioration of the economic environment, could pose an increased risk to financial stability. For this reason, the FMSB recommended that Austria’s Financial Market Authority set a sectoral systemic risk buffer of initially 1% starting from mid-2025.3)
The OeNB’s recommendations for strengthening financial stability in Austria
For Austrian banks to meet the challenges ahead and to further strengthen financial stability, the OeNB recommends that banks:
- Continue to safeguard or, where appropriate, further strengthen their capital position by exercising restraint regarding profit distributions.
- Adhere to sustainable lending standards for real estate financing and prepare for stricter supervisory requirements for commercial real estate loans.
- Ensure adequate risk management practices, including higher risk provisions and a conservative valuation of collateral.
- Ensure sustainable profitability by maintaining cost discipline while investing in information technologies as well as in protection against cyber risks and the impact of 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.
2) Sustainable loans are loans with a loan-to-collateral ratio of up to 90%, a debt service-to-income ratio of up to 40% and a maturity of up to 35 years.
3) For more information, see Press release on the 42nd meeting of Austria’s Financial Market Stability Board