Management summary ¹

In 2023, the Austrian banking sector earned a record profit of EUR 14 billion. Its common equity tier 1 capital ratio climbed to 17.5%. The capitalization of Austrian significant institutions surpassed the average in the Single Supervisory Mechanism (SSM) after years of trailing it. This means that Austrian banks have used their profits to increase their resilience to future uncertainties. Profits were driven by a rising net interest margin, as monetary policy tightened and ensuing rate rises translated into higher income from borrowers on variable interest rates. At the same time, loan loss provisioning was stable despite rising loan defaults. For the first time ever, the sector recorded a cost-to-income ratio slightly below 50%. Earning EUR 5.5 billion, the subsidiaries in CESEE also continued to be highly profitable in 2023.

Loan growth lost further momentum in Austria. Real estate lending growth turned negative in mid-2023 and the demand for corporate loans declined. Depositors continued to shift savings from sight to term deposits. This increased banks’ funding costs. Credit quality started to deteriorate in late 2023, especially in the corporate loan portfolio. By contrast, the quality of loans to households remained stable. At the end of 2023, the Austrian banking sector recorded an increase of the consolidated ratio of nonperforming loans (NPLs) to 2.6%, up from around 2%, where the rate had stood since 2021. Compared to historical figures, however, an NPL ratio of 2.6% is still moderate. The coverage ratio decreased on the back of new NPLs, for which provisions are still low, and the write-down of highly provisioned vintage NPLs. While the share of variable rate loans in new residential real estate (RRE) lending fell, it was still above 40% at the beginning of 2024. This is more than double the euro area average. Interestingly, this share remained high even though interest rates for variable rate loans exceeded those for fixed rate loans – indicating that market participants expected falling rates.

In a rapidly changing macrofinancial environment, systemic risks from real estate markets continue to be elevated. They are, however, being addressed effectively by borrower-based measures. Since these measures were introduced, lending standards have improved significantly. The share of sustainable loans ² has risen substantially, namely from 12% to 80%. A large part of the exemptions to the regulation for sustainable lending standards for residential real estate financing (KIM-V for short) remained unused in 2023, which suggests that this regulation is not a major factor behind declining lending volumes. When it comes to commercial real estate (CRE) lending by Austrian banks, both exposure and riskiness are high. At end-2023, 30% of CRE loans had a loan-to-value ratio above 100% or were unsecured. For one thing, this is attributable to cyclical factors, such as higher interest rates that led to a deterioration in the credit quality of CRE loans. For another, structural pressure is at play, including the trend toward remote work, online shopping or the need for climate-related adaptations.

The revised EU instant payments regulation published in March 2024 will lead to further innovation in financial services. Cases in point are the promotion of real-time transfers and the introduction of IBAN checks that verify that the beneficiary’s IBAN and name match. Last, but not least, the EU is one of the first jurisdictions that has implemented a recovery and resolution framework for central counterparties that will strengthen the resilience of securities markets.

Recommendations by the OeNB

• Continue to safeguard or, where appropriate because of exposed business models, the risk situation or the current capitalization, further strengthen the capital position by exercising restraint regarding profit distributions (i.e., dividend payments and share buybacks).
• Adhere to sustainable lending standards for residential as well as commercial real estate (CRE) financing and prepare for higher risk weights for CRE loans as defaults increase.
• Ensure adequate credit and interest rate risk management practices, including higher provisioning and conservative collateral valuations.
• Ensure sustainable profitability by
• maintaining cost discipline and
• investing in new information technologies as well as protection against cyber risks and the impact of climate change.

Austrian economy in a moderate recovery, while CESEE economies are cooling down

Declining inflation drives moderate economic recovery in Austria ³

The risks to the growth forecast are balanced. Geopolitical tensions and Austria’s dependence on Russian gas represent downside risks, while a stronger recovery in domestic demand represents an upside risk.

Table 1: OeNB June 2024 Economic Outlook for Austria – main results  

	2023	2024	2025	2026
	Annual change in % (real)
Gross domestic product (GDP)	–0.7	0.3	1.8	1.5
Harmonised Index of Consumer Prices (HICP)	7.7	3.4	2.7	2.5
	%
Unemployment rate (national definition)	6.4	6.7	6.5	6.3
	% of nominal GDP
Current account balance	2.7	2.8	2.9	2.9
Budget balance	–2.7	–3.1	–3.3	–3.0
Government debt	77.8	77.3	77.6	78.2
Source: 2023: Statistics Austria; 2024 to 2026: OeNB June 2024 outlook.

The Austrian economy was in recession in 2023. This was due to persistently high inflation, the very weak external economic environment and the resulting poor sentiment.

The OeNB expects the economy to stabilize in 2024. Private consumption is recovering due to a significant rise in real wages, and exports are also contributing positively to economic growth. Gross fixed capital formation, by contrast, will shrink again. High financing costs and poor profit expectations are dampening investment in residential construction and equipment, which is very sensitive to economic cycles. The OeNB’s Economic Indicator signals slight quarter-on-quarter growth of 0.3% for the second quarter of 2024 and 0.4% for the third quarter. In 2025 and 2026, the economy is forecast to grow by 1.8% and 1.5%, respectively, amid an improvement in the external economic environment, but above all due to very strong growth in real consumption.

The labor market is proving resilient to the crisis. After the unemployment rate rises slightly to 6.7% (national definition) in 2024, it will be down at 6.3% again in 2026.

In 2024, the public budget balance will deteriorate to –3.1% of GDP (2023: –2.7%) and thus slightly exceed the Maastricht limit. The main reason for this is the delayed impact of the inflation shock on public finances. While deteriorating further in 2025, the budget balance will improve again to –3.0% in 2026. The debt ratio falls to 77.3% of GDP in 2024 but is expected to increase in the following years, to reach 78.2% in 2026.

HICP inflation is expected to fall by more than half, to 3.4% in 2024 (7.7% in 2023), according to the OeNB’s June 2024 Economic Outlook for Austria. In 2025 and 2026, the inflation rate will edge down further, to 2.7% and 2.5%, respectively.

The core inflation rate, i.e. HICP inflation excluding energy and food, will also drop significantly, to 4.2% in 2024, 2.9% in 2025 and 2.6% in 2026. It will, however, remain above HICP inflation over the entire forecast horizon. From 2024 to 2026, both overall inflation and the core inflation rate will therefore remain well above their long-term averages (from 2011 to 2019: 1.9% and 2.0%, respectively).

The risks to the inflation forecast are on the upside. Geopolitical tensions, Austria’s dependence on Russian gas and a stronger recovery in domestic demand could lead to stronger-than-expected inflation.

Table 2: OeNB June 2024 Economic Outlook – inflation  

	2023	2024	2025	2026
	Annual change in %
HICP inflation	7.7	3.4	2.7	2.5
Food	10.0	4.0	3.5	2.3
of which: unprocessed food	7.6	2.3	2.7	x
of which: processed food	10.6	4.4	3.7	x
Industrial goods excluding energy	6.4	1.6	1.3	x
Energy	6.9	–4.7	–0.5	2.6
Services	7.8	5.7	3.7	x
HICP excluding energy	7.8	4.2	3.0	2.5
HICP excluding energy and food	7.3	4.2	2.9	2.6
Source: 2023: Statistics Austria; 2024 to 2026: OeNB June 2024 outlook.

The decline in the inflation rate in 2024 is attributable to all main components of the HICP, but above all to industrial goods excluding energy as well as energy and food. This is due to weak demand and falling producer prices. In addition, household energy prices are expected to go down further in the second half of 2024. In the case of services, the dynamic development of wage costs is counteracting a stronger decline in the inflation rate.

Fiscal measures primarily influence energy and service inflation. At the beginning of 2025, the expiry of fiscal policy measures (electricity price brake, reintroduction of the electricity and natural gas levy, reintroduction of the renewables levy) and the increase in the CO2 price will raise the HICP inflation rate by around 0.6 percentage points. The cap on rent increases implemented by the government in August 2023 and the suspension of the fee adjustment will slightly reduce service inflation in 2024 and the following years.

Austria’s inflation difference to the euro area narrowed substantially during recent months. The inflation differential between Austria and the euro area average was 2.3 percentage points on average in 2023. In May 2024, the inflation differential was only 0.7 percentage points. The decline is primarily attributable to energy, but also to industrial goods excluding energy. In 2025 and 2026, the inflation differential will return to the long-term average (2011–2019) of 0.6 percentage points. One reason for the normalization of the inflation differential is the pass-through of lower wholesale prices for household energy to end consumers. Furthermore, services inflation will decline significantly in 2025 and contribute to the narrowing of the inflation gap.

CESEE economies within the EU cool down, while economic growth in Ukraine and Russia recovers moderately from the war-induced slump

The wave of inflation observed in the CESEE EU member states from mid-2021 peaked at the beginning of 2023. The average inflation rate fell from peaks of over 16% to close to 4% in February 2024. The decrease was strongly influenced by declining energy and food price inflation. The disinflationary process, however, was much broader based and encompassed large parts of the consumption basket. In February 2024, some 80% of all items within the HICP reported falling inflation rates. These trends were based on three factors: First, weaker cyclical demand pressures and inflation expectations supported the restrictive monetary policy stance. Second, declining producer and commodity prices were slowly feeding through the price chain. Third, upstream price pressures generally decreased and external supply shocks faded.

This enabled the region’s central banks to end their interest rate hike cycles, with some central banks initiating a turnaround. In Hungary, the effective policy rate was reduced from 18% at the beginning of 2023 to 8.25% in April 2024. In Poland, the policy rate was lowered from 6.75% to 5.75% in the same period, and in Czechia, it was cut from 7% to 5.75%. By February 2024, inflation rates in all three countries had returned to their respective target rates.

Ukraine’s economy recovered and grew by 5.3% in 2023, after GDP had contracted by 28.8% in the first year of the war. Remarkably, the recovery clearly exceeded earlier projections. Better-than-expected growth was due to a strong harvest, a rather stable situation in the energy sector as well as the establishment of export routes. In general, loose fiscal policy supported domestic demand: investments were underpinned, among other things, by defense spending and reconstruction, consumer demand through social programs and military allowances. Wage growth in the private sector also backed private consumption, while the private sector in turn contributed to soaring investment growth. Ukraine’s success in creating its self-managed Black Sea corridor facilitated exports not only of grain, but also of other goods.

Nonetheless, the Ukrainian economy continues to deal with an immense burden as a result of Russia’s aggression. First, the energy infrastructure is exposed to constant threats. Second, labor supply is constrained due to migration and mobilization. Third, the public deficit is deeply in the red, which reflects high expenditure needs and revenue losses. External financial support, however, helps build up international reserves and – in tandem with high real interest rates – stabilizes the foreign exchange market. A further considerable disinflation was brought about by an only moderate depreciation of the hryvnia, a good harvest, lower global energy prices and a moratorium on raising some utility tariffs.

The Russian war economy drove up output growth to 3.6% in 2023. Substantially rising budgetary outlays, a sharp increase in consumer spending and growing capital expenditure contributed to accelerating growth in the second half of 2023. Hence, the recovery rested on booming war-driven armaments production, rising household incomes and dynamic lending. The economy has clearly been showing signs of overheating, however. The unemployment rate declined to below 3% in early 2024, i.e. a new post-Soviet record low, and real wages reached record levels. This indicates a very tight labor market saddled with persisting shortages of skilled staff. Price growth was fueled by this as well as swelling consumer demand, the expansionary fiscal stance and the substantial decline of the ruble. By February 2024, inflation had moved up to 7.7%, after having declined to 2.3% in April 2023. The monetary authority reacted energetically with a series of tightening steps, bringing the key rate from 7.5% in June 2023 to 16% in April 2024 – a level more than twice as high as ten months earlier.

Austrian banks generated record profits in 2023, but loan defaults are increasing

The size of the Austrian banking sector remained largely constant

Austrian banks’ balance sheets have a high share of variable interest rate positions. The balance sheet of the Austrian banking sector is marked by a comparatively high share of variable interest rate assets. The same is true for its liabilities, given that demand deposits – which generally have variable interest rates – are reported with an “undefined” interest structure (see chart 3). Compared to the EU, Austrian banks consequently have higher shares of variable interest rates, both on the assets and the liabilities side. It is, however, possible to alter the ultimate interest structure of balance sheets by using derivatives. As the share of demand deposits remains high in Austria, the maturity of liabilities is rather short (see chart 4).

Table 3: Balance sheet of the Austrian banking sector  

	End-2020	End-2021	End-2022	End-2023	2023 vs. 2022
	Consolidated figures in EUR billion or %				%	EUR billion
Cash and cash balances at central banks	164	186	161	152	–5.8	–9.3
Loans and advances	752	787	814	820	0.7	6.1
Debt securities	134	138	146	164	12.0	17.5
Equity instruments	9	9	9	10	7.2	0.6
Tangible assets	12	24	11	13	18.1	2.0
Intangible assets	3	3	3	3	2.1	0.1
Investments in proportionally consolidated subsidiaries	21	23	23	25	9.2	2.1
Other assets	42	27	32	30	–7.3	–2.4
Deposits of central banks	74	96	63	25	–60.8	–38.3
Deposits of credit institutions	102	106	106	113	6.0	6.4
Deposits of nonbanks	656	686	709	717	1.0	7.4
Debt securities issued	153	152	163	195	20.2	32.9
Provisions	13	14	12	12	0.2	0.0
Equity and minority interests	96	101	108	119	9.7	10.5
Other liabilities	43	41	39	37	–5.7	–2.2
Total assets/liabilities	1,136	1,197	1,200	1,216	1.4	16.7
Source: OeNB.

The domestic business of Austrian banks shrank slightly in 2023, whereas foreign activities flourished. Loans to Austrian companies, while still posting a growing volume, could not completely offset the decline in central bank holdings and loans to households in 2023. Hence, domestic business contracted slightly. At the same time, foreign exposures – that account for around 40% of assets – grew by more than EUR 17 billion, mainly driven by expansions in neighboring countries like Czechia, Germany, Slovakia and Hungary.

Austrian banking sector reached record profit

The Austrian banking sector’s net interest income (NII) continued its strong growth, predominantly driven by a margin expansion. In 2023, the Austrian banking sector managed to raise its consolidated net interest margin by half a percentage point to 2.1%. This was due to the interest structure of banks’ balance sheets (see chart 3 above) and the varying speed of rate pass-throughs on variable rate loans and deposits as well as some depositors’ stickiness. With average total assets remaining fairly stable during the year, nearly the entire boost to banks’ NII came from higher pricing. Chart 6 shows that during and shortly after the pandemic, price pressures weighed on NII in a very low interest rate environment and net new lending played a counterbalancing role. The picture reversed as rates rose in 2022 and 2023, when a higher net interest margin took over as the driver of higher operating income.

Rising cost for staff and non-recurring impairments on equity participations marked the development of operating expenses in 2023. Personnel cost accelerated by 13% year on year, as wage increases started to catch up with inflation. Administrative expenses rose by 5%. The biggest cost swing occurred in impairments on equity participations: one-off costs of EUR 1.9 billion in 2022 reversed to a minor write-up in 2023 (see chart 7). Consequently, operating costs fell by 4% to EUR 18 billion. Driven by strong NII, the cost-to-income ratio dropped to a historic low of 49%.

The environment of rising net interest margins and very low credit risk costs may not last. Austrian banks profited from rising incomes from the automatic repricing of variable rate loans. Moreover, low unemployment and the post-pandemic recovery kept provisioning low. However, the net interest margin will fall again if interest rates on loans start to decline and depositors lock in comparatively high rates. ⁴ At the same time, lagged effects of tighter monetary policy may affect the macroeconomic situation further. This may, in turn, lead to more nonperforming loans. Also, wage increases are likely to continue to exercise pressure on operating costs.

The return on equity (RoE) of the Austrian banking sector was 15.7% in 2023. A simple analysis highlights the sensitivity of banks’ profitability, however. An RoE of 15.7% equaled the highest yearly level of the Austrian banking sector since 2008, when the global financial crisis started. ⁵ This strong result was driven by several factors: (1) an operating income margin (OIM) of slightly above 3%, (2) a cost-to-income ratio (CIR) of just below 50%, (3) provisioning that only cost 14% of the operating profit (before risk) and (4) leverage of 13 times. ⁶ Each of these parameters can be altered to simulate profitability paths. Currently, the most relevant scenario is one of a falling OIM and rising risk costs. Based on 2020 as a worst-case scenario, the OIM was at a low 2.3% and risk costs were elevated, i.e. they consumed 45% of the operating profit before risk. When we keep all other profitability drivers at their 2023 levels, the 2020 scenario would yield an RoE of 7.5%. Note that the RoE of EU banks was slightly below 7% in 2022, according to the ECB. The result of 7.5% for the Austrian banking sector is likely to be positively biased: the CIR would very likely deteriorate from today’s solid levels, as, under strong margin pressure, costs are likely to prove stickier than income.

Record profit boosted capitalization

The consolidated leverage ratio of the Austrian banking sector improved to 8.4% at the end of 2023. Besides the CET1 ratio, the leverage ratio is one of the major elements of the Basel III framework and its implementation in the EU. The leverage ratio serves as a prudential backstop. It sets a bank’s regulatory tier 1 capital in relation to its on-balance and off-balance sheet total exposure. Unlike risk-based capital requirements like the CET1 ratio, individual exposures are not risk weighted for the purposes of the exposure measure. The leverage ratio’s aim is, inter alia, to counteract the fundamentally cyclical effect of risk-based capital requirements. As a supplementary, it is meant to ensure a minimum level of capital, thus having a backstop function. As CET1 capital increased in 2023, the leverage ratio of the Austrian banking sector rose to 8.4% at end-2023 (+37 basis points year on year).

The capitalization of Austria’s largest banks surpassed that of their European peers, after years of trailing the average in the Single Supervisory Mechanism (SSM). Given current uncertainties, however, Austrian banks should continue to safeguard or, where appropriate, further strengthen their resilience. Austrian significant institutions (SIs) increased their CET1 ratio to 16.0% in the last quarter of 2023, surpassing the SSM average of 15.7%. Over the last two years, their leverage ratio had increased steadily, reaching 7.4% at the end of 2023 (SSM average: 5.8%). Nevertheless, given macroeconomic and geopolitical uncertainties, banks should continue to safeguard or, where appropriate, further strengthen their resilience.

Credit growth weakened further and loan defaults started rising

At Austrian banks, new nonperforming loans are crowding out legacy NPLs amid rising volumes. At the same time, the coverage with provisions has been falling. Austrian banks continued reducing legacy NPLs, i.e. loans that have been nonperforming for at least two years. In contrast, the share of newer NPLs is continuously increasing. Austrian banking groups that report under the IFRS regime ⁸ reported a net NPL increase of more than EUR 3 billion. The NPL volume of all Austrian banks reached EUR 21 billion at end-2023. At the same time, Austrian banks only cautiously provisioned for loan losses in 2023. The percentage of NPLs covered with provisions therefore fell to nearly 40%, with even lower figures for CRE and RRE loans. Therefore, banks should reinforce loan loss provisioning in times of high profitability as credit quality is expected to deteriorate further.

The decline in Austrian banks’ loan quality in 2023 was more pronounced than in other European countries. The deteriorating credit quality faced by Austrian banks was, among other things, driven by a weak macroeconomic environment. In Austria, the fall in credit quality was more pronounced than in other European countries. Within the euro area, Austrian significant institutions showed the second-highest increase in NPL ratios after Luxembourg. The SSM average stagnated in 2023, as southern European countries like Greece, Portugal and Italy even reported loan quality improvements.

Although the trend to variable interest rate loans reversed in 2023, their high share poses a challenge. Although the proportion of variable rate loans in new RRE lending fell in 2023, it still amounted to around 44% at the beginning of 2024 (see chart 11). This is well above the euro area average of 19%. In Austria, this share remained high, although interest rates for variable rate loans exceeded those for fixed rate loans. This suggests that market participants expect falling rates. The situation warrants close monitoring, as variable rate loans carry additional credit risk for the banking system.

The volume of foreign currency loans continued to decline sharply, and the remaining stock is small. In March 2024, the volume of outstanding foreign currency loans extended to Austrian households stood at EUR 7.1 billion, down 17% year on year (exchange rate adjusted). Their share dropped to 4%. Foreign currency loans are almost entirely denominated in Swiss francs. In October 2008, the Austrian Financial Market Authority (FMA) recommended that banks refrain from granting new foreign currency loans to households. Since then, their volume has shrunk by EUR 32 billion or 87%, as adjusted for exchange rate effects. Austrian banking subsidiaries in CESEE also continued reducing their foreign currency loans to households. In 2023, their volume fell by 48% to EUR 4.5 billion, as adjusted for exchange rate effects (21% adjusted for the effect of Croatia’s introduction of the euro). The percentage of foreign currency loans in total loans dropped to 5.3%. The lion’s share (81%) of these loans is denominated in euro.

Macroprudential measures for residential real estate (RRE) lending continue to be effective

A large part of exemptions from the KIM-V lending standards remained unused in 2023. This underpins that the regulation does not limit lending to households. In the first half of 2023, 50% of all banks did not even use half of the exemption volume available to them (see chart 13). In the second half, the same was true for 45% of all banks. As a result, banks did not use approximately EUR 1 billion of possible exemptions. Each bank has a theoretical exemption volume of 20%. However, effective exemptions do not correspond to only 20% of the new lending volume for various reasons. First, further exemptions apply, such as a minimum exemption volume of EUR 1 million per bank. Second, banks may choose the reference period (previous or current period). And third, bridge loans and small loans ¹⁰ are exempted. In the end, effective exemptions accounted for 42% of the new lending volume in the first half of 2023, and for 33% ¹¹ in the second half. In an international comparison, the KIM-V thus provides generous exemptions. The large share of unused exemptions indicates that the decline in the lending volume is due to low demand for new loans. The latter is primarily attributable to the increase in interest rates. This finding is consistent with observations in other euro area countries, where new lending volumes exhibit similar developments. In addition, Austrian banks have given the increase in interest rates as the main reason for the decline. ¹²

The necessity of the regulation for sustainable lending standards for residential real estate financing was confirmed in the current macroeconomic environment. Systemic risks from the RRE sector continue to be elevated in light of major macroeconomic changes. The latter include a spike in inflation, a subsequent reduction in disposable real income, interest rate hikes, the reduction in the new lending volume and weaker house price growth. That the KIM-V regulation was necessary, adequate and sufficient to address these systemic risks was confirmed by several institutions: the Constitutional Court of Austria ¹³ , the European Systemic Risk Board ¹⁴ and the International Monetary Fund ¹⁵ .

Austrian banks are substantially exposed to commercial real estate (CRE) loans

Since the start of the interest rate hiking cycle, overall credit quality in the CRE segment has deteriorated. Various indicators for CRE loans point to worsening credit quality. For instance, NPLs increased substantially, namely from EUR 2 billion at end-2022 to EUR 6.3 billion at end-2023. As is evident from chart 15, the NPL ratio rose from 1.1% (end-2022) to 3.3% (end-2023). ¹⁹ The largest increase was observed in the fourth quarter of 2023, when the NPL ratio doubled. Consequently, banks have also increased credit provisioning in this segment: from EUR 1.8 billion (end-2022) to EUR 3 billion (end-2023). Plus, ratings of counterparties engaged in CRE loans have been downgraded. NPL ratios of non-CRE loans to legal persons have moved sideways and, at 0.8% at end-2023, have remained significantly lower. Rising NPLs also reflect the high share of CRE loans that are exposed to rising interest rates; three-quarters of the CRE loan volume exhibit a variable component in interest rates. Additional strain on NPLs is due from a volume of EUR 46 billion of CRE loans that will mature by the end of 2025. The predominant share of these loans does not have a fixed amortization schedule. Based on data provided by the European Banking Authority, ²⁰ the NPL ratios of CRE loans in Austria do not particularly stand out in an EU comparison. However, relative to their EU peers, Austrian banks are among those with the strongest increase over the course of 2023 – third after Germany and Hungary. Cyclical factors must be considered together with structural factors: remote work and online shopping have been changing the demand for office, retail and logistics properties. Furthermore, the need to adapt to climate-related challenges induces another level of heterogeneity in real estate values.

The OeNB calls upon banks to further shore up their capital levels – to brace for more headwinds in the CRE market. Currently, Austrian banks’ profits and capital are large enough to cushion the impact of deteriorating CRE markets. In the face of these risk-absorbing capacities, the bankruptcies of large real estate companies have but limited isolated effects on financial stability. However, the market remains vulnerable to second-round effects arising from contagion via price and confidence channels. Overall, higher NPLs lead to higher risk weights through various channels. The OeNB reminds banks of its recommendation to use the headroom generated by strong profits over the last years to shore up risk provisions and capital cushions in the CRE segment. Banks should also apply caution in determining market values of properties used as collateral and should aim for timely revaluations. Similar calls have been issued by Austria’s Financial Market Stability Board and Financial Market Authority as well as the European Systemic Risk Board and the ECB.

Austrian banks adapted funding plans as central banks provide less liquidity

In 2022, issuances of Austrian covered bonds reached a new high of EUR 32 billion and remained at almost the same level in 2023. One reason is the new Austrian covered bond act (Pfandbriefe Act) that was enacted in July 2022 and transposed the EU’s Covered Bond Directive. This helped boost foreign investors’ interest in Austrian covered bonds. Banks also tapped into the asset purchase program (APP) and the pandemic emergency purchase program (PEPP). They anticipated a stop of Eurosystem investments in the covered bond segment and frontloaded their funding plans. APP reinvestments continued until mid-2023, and PEPP reinvestments are due to continue until the end of 2024. This helped neutralize the negative impact that the TLTRO III repayments had on banks’ liquidity coverage ratios. Plus, it helped diversify the maturity profiles. A shrinking maturity profile of Austrian covered bond issues was observable in 2023 compared to 2022 (see chart 17). In other words, maturity profile buckets of up to four years accounted for 27% of total issuances, maturities between four and six years for nearly 70%. Maturities of over seven years were reduced from 45% to just 5% of total issuances. In 2023, covered bond issue volumes almost reached the record level of the year before. Notably, banks also diversified their funding structure by raising the share of bonds with other payment ranks, such as senior preferred or senior unsecured bonds (see chart 18).

Monetary tightening caused banks to reshuffle their liquidity positions. The Austrian banking sector’s total holdings of high quality liquid assets (HQLA) remained broadly stable in 2022 and 2023, fluctuating around 21% of total assets (see chart 19). What has been changing is their composition, however. Given that the ECB started reducing excess liquidity in the Eurosystem in 2022, cash and reserve holdings have decreased. Banks have substituted them with higher government and covered bond holdings. Despite this shift, central bank liquidity is still the centerpiece of banks’ liquid asset holdings. Under the short-term market stress scenario of the liquidity coverage ratio (LCR), central bank liquidity exceeds the aggregate expected net outflows. On the liability side, the relative importance of overnight deposits and central bank funding has decreased with monetary tightening (see chart 20). Banks increasingly relied on funding from securities and term deposits. A platform the OeNB launched at the end of 2023 has increased the comparability of interest rates on term deposits. ²¹ The change in banks’ funding mix mainly reflects the slow and incomplete transmission of interest rate increases to overnight deposits. Term deposits and bonds, by contrast, reacted more in line with market rates. ²²

Despite less central bank liquidity, the funding position of the Austrian banking sector remains sound. In 2023, the liquidity coverage ratio (LCR) of the consolidated Austrian banking sector remained broadly stable at a weighted average of 161%. This reflects the overall solid short-term liquidity position of the Austrian banking system. The consolidated net stable funding ratio (NSFR), which measures the ability of the banking sector to resist funding shocks in the medium term, increased slightly in 2023. At year-end, it stood at a weighted average of 134%. On a disaggregated level, all Austrian credit institutions without a liquidity waiver reported LCR and NSFR levels above the respective regulatory minimum at end-2023. ²³ The average LCR and NSFR of Austrian SIs stood above the average of their SSM peers.

Systemic liquidity risks need to be monitored more closely. Liquidity monitoring through both the LCR and the NSFR is an important aspect of microprudential supervision. Yet, these metrics tend to underestimate systemic aspects of liquidity risks, such as contagion risk; interconnectedness; market liquidity risk, especially during periods of market stress; off-balance sheet exposure or liquidity risks from nonbank financial institutions. Therefore, the LCR and the NSFR might underestimate a bank’s liquidity externalities for other market participants, which can significantly affect financial stability. To monitor systemic liquidity risks, a set of indicators is currently being developed. If significant unmitigated liquidity risks are identified, appropriate macroprudential instruments could mitigate these risks and further enhance financial stability. The first indicator that has been identified is the ratio of encumbered assets in the entire banking sector. This ratio measures the ability of banks to use collateral for their liquidity needs. The monetary tightening begun in 2022 has had no significant effect on the ratio of encumbered assets. Therefore, this indicator does not point to increased systemic liquidity risk. Furthermore, asset encumbrance for Austrian banks remains around the median compared with other European banks.

Austrian banks are mostly interconnected with euro area counterparties ²⁴

Austrian banks’ security portfolio is dominated by securities issued by MFIs and governments that are based in the euro area (70%, see chart 22). At end-2023, Austrian banks held EUR 140 billion of securities. Government bonds, which banks also hold to meet liquidity requirements, and securities issued by MFIs accounted for the lion’s share (EUR 120 billion). Austrian issuers represented a volume of EUR 45 billion (euro area as a whole: EUR 98 billion). In terms of all securities, the most important countries of origin are Austria (EUR 55 billion), followed by Germany (EUR 9 billion), France (EUR 8 billion) and Czechia (EUR 6 billion). The euro area as a whole accounts for a volume of EUR 115 billion, which equals 82% of the total. The banks’ portfolio is therefore well diversified geographically. Yet, the large share of securities issued by MFIs could open intrasectoral contagion channels, which require close monitoring.

The secured money market is expected to become ever more important, especially given the Eurosystem’s tighter monetary policy. While the unsecured money market segment remains dormant for the time being, the secured money market exhibits normal liquidity levels. Money market statistical reporting (MMSR) ²⁵ by euro area banks allows the analysis of secured market interconnectedness through liquidity takers and providers on the one hand and the provided collateral on the other hand. Austrian banks are typically and predominantly liquidity providers, with the share of cash lending transactions accounting for 80% in the first quarter of 2024. However, Austrian banks only represent a small fraction of around 0.2% in the MMSR aggregate market volume for the secured segment.

Subsidiaries in CESEE again recorded high profits, driven by a rising net interest margin and very benign credit risk costs

Austrian banks’ subsidiaries in CESEE were highly profitable again in 2023, as they earned EUR 5.5 billion (+5% year on year). In a benign interest rate environment, net interest income – that makes up two-thirds of operating income – was up more than 10% year on year. But despite this boost, total operating income decreased to EUR 12.7 billion, since fees and commissions were down 15% and trading income turned negative. As operating costs rose by 7% to EUR 5.5 billion, the operating profit fell by 6% to EUR 7.2 billion. These negative developments notwithstanding, the subsidiaries’ profit still increased year on year, as credit risk provisioning contracted by nearly 70% to less than EUR 300 million. Chart 24 summarizes the absolute impact all these developments had on profit evolution in 2023 (compared to 2022), highlighting the important role the rise in net interest income and very benign credit risk costs had in compensating the fall in non-interest income.

As to the positive profit drivers, net interest income was mainly boosted by renewed margin upside, while NPL ratios remained at low levels. When dissecting the rise in net interest income in 2023, two drivers can be discerned: First and foremost, the increase in the net interest margin from 2.8% to 3.0% in 2023 (“the price”) and, second, the rise in average total assets by 3% (“the volume”). Both bear testament to the fact that the higher interest rate environment helped raise banks’ operating profitability, while still allowing for balance sheet growth. As highlighted by chart 25, the post-pandemic years of 2022 and 2023 marked a clear step-up in the net interest margin, reversing previous price pressures when interest rates were low. While this was clearly positive for the subsidiaries’ income, the price effect lost some momentum in 2023. Given that local central banks in CESEE started to lower interest rates recently, this profitability driver may fade in the near future. The flip side of higher interest rates – i.e. an intensified pressure on the borrowers’ credit quality – has not yet materialized, as the NPL ratio for total loans further trended down to 2.0%. ²⁶ This benign year-on-year trend was broad based (see chart 26). The drop in credit risk provisioning mentioned above may be traceable to the very good credit quality observed during 2023, especially when compared to pre-pandemic levels. Also, NPL ratios are likely to have bottomed out at these levels.

Austrian banking subsidiaries’ risk-bearing capacity remained strong and their business model locally funded. Strong profitability in 2023 (as described above) led to a considerable increase in the subsidiaries’ CET1 ratio. The latter climbed to 18.2% (+190 basis points year on year). Furthermore, the subsidiaries are also predominantly self-funded through local deposits from nonbanks. This is highlighted by a loan-to-deposit ratio of 73% at end-2023. Credit for the sound situation today is also due to the timely implementation in 2012 of a macroprudential measure to this end. For further details, see box 4 “Success of the Austrian Sustainability Package.”

New legislation fosters stability of payment and securities clearing systems

Regarding securities clearing systems, the EU is one of the first jurisdictions in the world that has implemented a recovery and resolution framework for central counterparties (CCPs). The Central Counterparty Recovery and Resolution Regulation (CCPRRR) intends to strengthen the resilience of securities markets and to prevent adverse systemic effects for European CCPs or their participants. Similar to the requirements for credit institutions, it mandates CCPs to draft recovery plans. The resolution plans must be prepared by the respective national resolution authorities. While the recovery plans must be approved by the already existing CCP colleges for the ongoing supervision, resolution plans are assessed in newly established resolution colleges. The college setup comprises national as well as European authorities, i.e. competent authorities, central banks, exchange supervisory authorities, the ECB and the European Securities and Markets Authority (ESMA). Most recovery plans for CCPs have already been implemented. In contrast, EU-wide drafting of resolution plans started in 2023.

Austrian nonbank financial intermediaries have recovered, but real estate exposures are in focus

The environment of insurance companies ³³ has been shaped by inflation as well as higher interest rates and financial assets prices. These factors contributed to low economic growth and a reduction in real household income in 2023, which dampened insurance demand. Yet, the profitability of Austrian insurance companies recovered compared to the previous year, across all insurance segments. Index clauses widely embedded in insurance contracts led to higher premium income and mitigated claim cost inflation. Moreover, financial market performance improved in 2023 year on year, which proved beneficial for insurers’ profitability. Key figures attest to this. For example, the financial result increased by 40% to EUR 3.1 billion, and profit before tax grew by 81% to EUR 1.7 billion. Almost half of total premiums were generated abroad, with Czechia, Poland, Slovakia, Romania and Hungary among the key markets. Nevertheless, downside risks are apparent, given the high uncertainty in the macrofinancial environment.

Austrian insurance companies maintain a relatively high level of capitalization. Insurers generally benefit from rising interest rates. Technical provisions decrease and solvency ratios increase when liabilities have a longer duration than assets. Compared with their European peers, Austrian insurance companies maintain a relatively high level of capitalization, at a solvency capital requirement of 270%.

Debt securities play an important role in the asset composition, also indirectly via mutual funds. Thus, they highlight the relevance of credit risk. Banks and insurance companies have different business models: Banks mainly collect deposits and provide loans to the real economy. Insurance companies mainly provide protection against risks and mobilize and invest savings of households. Banks’ balance sheet is dominated by loans (67% or EUR 820 billion), while insurance companies’ assets are dominated by debt securities, mutual fund shares and equities (79% or EUR 104 billion). At 5% of total assets, bank-like activities in insurance are small. Figure 1 provides an overview of the assets held by Austrian insurance companies. It highlights in particular their exposure to real estate, domestic banks and the Austrian government.

Insurers are affected by developments in real estate markets. Mitigating factors are the long investment horizon and the hidden reserves built up during the real estate upswing. 10% of Austrian insurance companies’ investments are allocated in real estate. A decline in real estate market values and/or higher interest rates will lower the risk-bearing capacity. Insurance companies are only to a limited extent interconnected with domestic banks and the Austrian government. The exposure to banks amounts to a mere 4.1% of total assets of Austrian insurance companies, three-quarters of which are debt securities. Those three-quarters only represent approximately 2% of debt securities issued by Austrian banks. At 2.3%, the exposure to the Austrian government is even lower, with the majority consisting of debt securities. The combined share of assets connected to domestic banks and the Austrian government has steadily decreased over the years. It has almost halved since 2016. Possible spillover effects have therefore gone down as well.

The Austrian mutual fund market by and large followed general financial market trends, with conditions benign in 2023 and well into 2024. A major driver of markets is the expectation that monetary policy interest rates will come down in the course of 2024. Should inflation remain more persistent or should other adverse shocks occur, we might see market corrections and deteriorating market sentiment among investors. At end-2023, Austrian mutual funds had a total of EUR 213.1 billion assets under management (see figure 2), up approximately 6.5% year on year. However, this figure remains 7% below that recorded at end-2021, when the turn in the interest/yield levels occurred and consequently led to a re-evaluation of debt securities. As to the asset composition of mutual funds, debt securities are still prominent (39% of total assets), whereas shares and other equity securities gained in importance (22% of total assets, up 5 percentage points since 2020). By contrast, the cash position declined to 3% in January 2024, the lowest level since 2008. On the one hand, this reduction lowers liquidity risk for banks if mutual funds draw down their deposits suddenly. Yet, on the other hand, it increases the risk of forced sales if investors “dash for cash.” In 2023, the largest net inflows were observed in foreign equity funds and Austrian bond funds. The largest outflows occurred in Austrian equity and real estate funds. When we compare the transaction flows with the net asset value of the respective mutual fund category, it becomes apparent that the changes are relatively minor.

Open-end real estate funds showed structural liquidity mismatches between the daily redemption of fund shares for investors and illiquid real estate investments by funds. Such mismatches are also pronounced in a European comparison. ³⁴ The environment is marked by declining real estate transactions and prices as well as increased opportunity costs of holding such fund shares, e.g. higher deposit rates. Hence, risks for net outflows materialized, due to more attractive investment alternatives. In 2023, outflows amounted to around 15% of total assets. Funds therefore launched liquidity-enhancing measures like asset sales and borrowings. Even so, in October 2023, one retail fund suspended, until further notice, the unit certificate business in accordance with the Real Estate Investment Fund Act and in conjunction with the Alternative Investment Fund Managers Act. These developments are being closely monitored. In Austria, the liquidity mismatches will, from 2027 onward, be addressed by new regulations for redemptions adopted in 2021. Then, the new liquidity provisions set out in Article 11 of the Real Estate Investment Fund Act will take effect.

At end-2023, Austrian pension funds held EUR 27 billion in total assets, of which more than 90% were held indirectly through mutual funds. Investments in real estate funds increased to 5.3% of total assets at the end of 2023, strongly up from 4.1% just six months before. As defined contribution schemes dominate (81%) in Austria, the performance risk is primarily borne by prospective beneficiaries.

Key financial indicators and macroprudential stance

Macroeconomic indicators for Austria

Table A1: Bank lending  

	2017	2018	2019	2020	2021	2022	2023
%
Loan growth (year on year): households	3.4	3.5	4.2	3.6	5.3	3.5	–1.9
Loan growth (year on year): residential real estate	4.8	4.4	6.1	5.5	6.9	5.0	–2.4
Loan growth (year on year): corporations	4.9	6.9	6.2	5.0	8.7	9.2	2.7
	% of total loans
Share of variable rate loans (outstanding): households	91	69	65	60	57	51	45
Share of variable rate loans (outstanding): corporations	83	72	70	69	67	67	66
Share of variable rate loans (new lending): households	56	55	51	46	47	59	58
Share of variable rate loans (new lending): corporations	83	81	82	77	86	85	80
Source: OeNB.

Economic indicators

Selected economic measures

Interest rates and exchange rates

Consumer prices

Economic sector breakdown of households

Economic sector breakdown of nonfinancial corporations

Property market

Table A2: Debt ratios  

	2017	2018	2019	2020	2021	2022	2023
	%
Household debt (relative to net disposable income)	90.7	90.3	90.1	94.7	94.4	89.9	81.1
Corporate debt1 (relative to gross operating surplus2)	447.1	453.4	457.8	460.8	469.2	431.5	436.6
Source: OeNB.
1 Short- and long-term loans, money and capital market instruments.
2 Including mixed income of the self-employed.

Indicators for the Austrian banking sector

Table A3: Consolidated banking data  

	2017	2018	2019	2020	2021	2022	2023
	EUR billion
Total assets	949	986	1,032	1,136	1,197	1,200	1,216
Loans	668	704	744	752	787	814	820
Shares and debt instruments	139	138	137	143	147	155	173
Cash balance and deposits at central banks	71	75	75	164	186	161	152
Deposits by nonbanks	559	584	615	656	686	709	717
Deposits by credit institutions	101	103	101	102	106	106	113
Debt instruments issued	120	141	150	153	152	163	195
Profit	6.6	6.9	6.7	3.7	6.1	10.2	14.0
Operating income	22.8	24.0	25.0	24.8	25.8	31.6	36.9
Operating costs	14.8	15.7	16.7	16.5	16.8	18.7	18.0
Operating profit	8.1	8.4	8.3	8.2	9.0	12.9	18.9
Risk costs	1.0	0.4	1.0	3.7	1.4	2.7	2.7
Key ratios	%
Common equity tier 1 (CET1) ratio	15.6	15.4	15.6	16.1	16.0	16.3	17.5
Leverage ratio	7.3	7.5	7.6	7.4	7.7	7.9	8.4
Return on assets (annualized)	0.8	0.8	0.7	0.4	0.6	0.9	1.3
Cost-to-income ratio	65	65	67	67	65	59	49
Nonperforming loan (NPL) ratio1	3.4	2.6	2.2	2.4	2.1	2.1	2.6
Coverage ratio	52	51	49	49	48	46	40
Liquidity coverage ratio (LCR)2	153	148	146	181	176	163	173
Net stable funding ratio (NSFR)2	n.a.	n.a.	n.a.	n.a.	135	131	134
Source: OeNB.
1 As of 2020, the NPL ratio excludes cash balances at central banks and other demand deposits.
² Historical data calculated using the March 2024 banking sample at the highest consolidation level.

Table A4: Unconsolidated banking data1  

	2017	2018	2019	2020	2021	2022	2023
	EUR billion
Total assets	815	855	885	974	1,024	1,014	1,011
Loans	596	627	654	669	700	730	704
Shares and debt instruments	94	93	94	95	93	104	130
Cash balance and deposits at central banks	42	51	50	123	141	102	97
Deposits by nonbanks	403	426	444	474	496	505	516
Deposits by credit institutions	164	168	166	217	240	213	174
Debt instruments issued	117	128	137	140	140	160	190
Profit	4.9	5.7	4.8	2.7	6.5	5.0	12.3
Operating income	19.5	19.4	19.7	19.3	21.2	23.7	26.2
Operating costs	12.9	13.3	14.2	13.6	14.2	14.0	11.6
Operating profit	6.6	6.1	5.5	5.7	6.9	9.7	14.6
Risk costs	0.9	0.3	0.2	2.5	–0.4	3.6	1.1
Key ratios	%
Return on assets (annualized)	0.6	0.7	0.6	0.3	0.7	0.5	1.2
Cost-to-income ratio	66	68	72	71	67	59	44
Nonperforming loan (NPL) ratio (Austria)	3.0	2.5	2.2	2.0	1.8	1.7	2.4
Coverage ratio (Austria)2	60	62	61	68	70	74	62
Liquidity coverage ratio (LCR)	153	144	142	174	171	155	168
Net stable funding ratio (NSFR)	n.a.	n.a.	n.a.	n.a.	129	124	127
Source: OeNB.
1 As of 2023 and due to reporting changes, comparability to previous years’ data is limited.
2 Total loan loss provisions as a percentage of NPLs in domestic business.

Table A5: CESEE subsidiaries  

	2017	2018	2019	2020	2021	2022	2023
	EUR billion
Total assets	206	207	223	234	271	279	288
Loans	137	147	161	165	186	184	188
Shares and debt instruments	38	37	38	42	48	49	55
Cash balance and deposits at central banks	26	18	18	22	30	39	39
Deposits by nonbanks	150	154	167	178	205	211	214
Deposits by credit institutions	25	23	22	16	18	18	17
Debt instruments issued	4	4	5	11	15	12	19
Profit	2.6	2.9	2.8	1.9	3.0	5.2	5.5
Operating income	7.9	7.9	8.4	8.2	8.9	12.8	12.7
Operating costs	4.2	4.1	4.4	4.4	4.6	5.1	5.5
Operating profit	3.7	3.8	4.1	3.8	4.3	7.7	7.2
Risk costs	0.3	0.2	0.5	1.3	0.5	1.0	0.3
Key ratios	%
Return on assets (annualized)	1.3	1.4	1.3	0.8	1.2	1.9	1.9
Cost-to-income ratio	53	51	52	54	52	40	43
Nonperforming loan (NPL) ratio1	4.5	3.2	2.4	2.6	2.2	2.1	2.0
Coverage ratio	61	64	67	67	64	64	64
Source: OeNB.
1 As of 2020, the NPL ratio excludes cash balances at central banks and other demand deposits.

Structural indicators

Table A6: Financial stress indicators  

	2017	2018	2019	2020	2021	2022	2023
	Indicator value
Austrian financial stress indicator (AFSI)	–0.71	–0.24	–0.72	–0.57	–0.66	0.67	–0.29
Composite indicator of systemic stress (CISS)	0.03	0.07	0.02	0.10	0.05	0.33	0.06
Source: OeNB, ECB.

Indicators for other financial intermediaries in Austria

Mutual funds

Pension funds

Insurance corporations

Overview of the macroprudential stance in Austria

For an overview of the currently applicable risk warnings and recommendations by the FMSB, see table A7 and the FMSB’s website .

Table A7: Overview of capital-based and borrower-based measures in Austria  

As at January 1,	CCoB	CCyB	O-SII buffer	SyRB	Borrower-based measures
Rate	2.5%	0%	0.25% – 1.75%	0.5% – 1.0%	90% LTC, 40% DSTI, max. maturity of 35 years
Number of banks	All banks	n.a.	7 (consolidated)	12 (consolidated)	All banks
			8 (unconsolidated)	10 (unconsolidated)
Source: OeNB.
Note: For more details, see www.fmsg.at/en . CCoB = capital conservation buffer; CCyB = countercyclical capital buffer; O-SII buffer = capital buffer for other systemically important institutions; SyRB = systemic risk buffer; LTC = loan-to-collateral ratio; DSTI = debt service-to-income ratio.