“The implementation of the Austrian measures to strengthen the banks and the Austrian financial market as a whole has made good progress over the last six months and has increased the stability of the banks,” Ewald Nowotny, Governor of the Oesterreichische Nationalbank (OeNB), pointed out during the presentation of the OeNB’s 17th Financial Stability Report.“The international dimension of the economic and financial crisis, however, poses a considerable challenge to the Austrian financial system,” OeNB Executive Director Andreas Ittner added.The rapid and pronounced economic downturn has also caused the credit quality of Austrian banks to deteriorate.As a consequence, loan loss provisions are expected to rise.
Financial Crisis Impairs Financing Conditions and Causes Valuation Losses
As a result of the global economic and financial crisis, the world economy has been in a severe recession since the fall of 2008 and is expected to shrink markedly in 2009.Over the last few weeks, however, the situation in the international financial markets has tended to stabilize thanks to the determined joint efforts of governments, central banks, financial supervisors, the EU and international institutions like the IMF.
Still, the financial crisis has severely affected the conditions for corporate financing.On the one hand, borrowing in the equity market almost came to a standstill.On the other hand, banks tightened their credit standards and have been paying closer attention to borrowers’ risk-bearing capacity and their economic prospects.Thanks to the ECB’s interest rate cuts, however, financing costs for enterprises and households have gone down significantly so far in 2009.
The effects of the crisis on household portfolios materialized especially in the form of heavy valuation losses on capital market investments,which not only caused financial assets to shrink, but also had a negative impact on the repayment vehicles for (bullet) loans.Household borrowing went down significantly, with foreign currency loans declining in particular.Nevertheless, the stock of households’ foreign currency loans remains high.
Global Recession and Financial Crisis Hit Austrian Banks
The financial crisis and the economic downturn have significantly impaired banks’ profitability.In particular, valuation losses in trading income and higher loan loss provisions have driven down earnings.Nevertheless, the Austrian banking system reported profits in 2008, albeit considerably lower than previously.
The Austrian banking sector’s activities in Central, Eastern and Southeastern Europe (CESEE) continued to contribute a major share to this result, asprofits generated in this segment largely offset falling profits in others.Austrian banks’ consolidated return on assets went down significantly from 0.74% in 2007 to no more than 0.09% in 2008.
From the perspective of international financial markets, however, risks in this region have mounted considerably given the economic slowdown. Therefore, Austrian banks’ exposure to CESEE increasingly became the focus of critical international attention.“This group of countries must not, however, be seen as a homogeneous region. The financial crisis has affected the individual countries to widely varying degrees.Furthermore, the support measures of the IMF and the EU created confidence and helped stabilize developments in CESEE,” Ittner pointed out.
In Austria, the implementation of the bank support package, in particular, helped banks prepare for the recession-related deterioration in their loan portfolios.Since the fourth quarter of 2008, both capital and core capital ratios have trended slightly upward again, a movement that was attributable to earnings on the one hand and to external funding (i.a. government participation capital) on the other hand.Moreover, OeNB stress tests have shown that even if there were another considerable deterioration in economic conditions, the capital ratios of all major Austrian banks would remain above the minimum legal requirements.For this reason, there is currently no need for further recapitalizations.
Nevertheless, strong vigilance is warranted.In a comprehensive monitoring process including regular stress tests, the OeNB ensures that potential problems are tackled at an early stage.In the recently completed Article IV consultations, the IMF acknowledged the OeNB’s high degree of expertise and proficiency in stress testing.