In spring 2010, uncertainty about the sustainability of public finances in several euro area countries increased markedly. “However, Austrian banks’ exposure to these countries is not very large by international comparison, as Austrian banks have invested more in Central, Eastern and Southeastern Europe (CESEE), a region for which the most recent forecasts of the IMF and the European Commission show the onset of a moderate recovery,” Ewald Nowotny, Governor of the Oesterreichische Nationalbank (OeNB), explained on the occasion of the presentation of the 19th issue of the OeNB’s Financial Stability Report.
The business environment for the Austrian financial system remains difficult nevertheless. While banks’ earnings situation has improved, it still remains exposed to risks. Loan loss provisions are expected to stay high because of the sharp economic downturn.
Crisis Continues to Overshadow Corporate and Household Financing
The ongoing crisis is still impairing the financing of Austrian companies, although the situation has eased slightly since fall 2009. After the key interest rate cuts in 2008 and 2009, interest rates on loans are historically low. Annual growth in bank lending has been negative since end-2009. This decline in financing volumes is likely to have had both demand- and supply-side causes. On the one hand, the drop in investment activity reduced the need for corporate financing. On the other hand, owing to ratings that had deteriorated in the wake of cyclical developments, the banking sector’s lending policies stayed cautious in spring 2010.
Households have increased their borrowing by only a very modest extent so far. Low levels of both new household debt and interest rates have reduced households’ debt ratio and interest expenses. The share of foreign currency loans in lending to households is still very high despite banks’ recent very pronounced caution in foreign currency lending – a change brought about not least by the establishment, by the Financial Market Authority (FMA) and the OeNB, of additional minimum standards governing the extension of foreign currency and repayment vehicle-linked loans to Austrian households. The most recent developments of the euro exchange rate against the Swiss franc once again demonstrated the risk involved in this type of lending. Stress tests for private households also confirmed that while interest rate developments have the greatest influence in absolute terms on households’ ability to meet their payment obligations, foreign currency loans involve particular risks in relative terms.
Business Environment Remains Difficult for Austrian Banks despite Improvements
The crisis has weighed on Austrian banks’ profits, but overall, the banking system has remained profitable. At the same time, though, the profitability results of individual banks have begun to differ more strongly. However, the most recent improvements in profitability draw partly on a historically steep yield curve, high trading results and ample central bank liquidity. Moreover, credit quality has declined further, resulting in a need to increase loan loss provisions. “In view of current economic conditions, we would assume that the level of loan loss provisions will remain high,” OeNB Executive Director Andreas Ittner cautioned.
Austrian banks’ CESEE subsidiaries made a positive contribution to banks’ income in 2009 despite persistent uncertainties in the region. Adjusted for taxes, the consolidated end-of-period result of all CESEE subsidiaries came to about EUR 1.8 billion in 2009 (2008: EUR 4.2 billion). Here, too, the differences between individual banks results have increased significantly. The anticipated tendency toward economic recovery in CESEE suggests that Austrian banks’ CESEE subsidiaries may expect some improvement in their situation; however, the risks in the region will remain elevated with the possible unwinding of international support measures.
Thanks to capital inflows from the private and public sectors, the consolidated core capital ratio of Austrian banks rose by about 2 percentage points from its low in 2008 to 9.3% at the end of 2009. As Ittner emphasized, “This rise has certainly increased banks’ risk-bearing capacity. However, in view of ongoing regulatory initiatives, the Austrian banking sector is expected to require additional capital in the medium term.”
The most recent stress tests the OeNB conducted in spring 2010 show an improvement from the fall 2009 results, but Austrian banks’ capitalization has remained comparatively low. In addition, the ongoing structural adjustment measures in the Austrian banking sector must be continued.
The OeNB’s semiannual Financial Stability Report provides regular analyses of Austrian and international developments with an impact on financial stability. In addition, it includes studies offering in-depth insights into specific topics related to financial stability. The current issue provides analyses of stress testing of Austrian households, of the effects of the Payment Services Act on the Austrian financial market, of the relevance of Austrian fund management companies and mutual funds for financial stability, and of banking development in Kazakhstan.
Vienna, 6/25/2010
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