Decisive monetary and fiscal policy action has contributed substantially to improving global economic conditions and, as a consequence, the situation in international financial markets in the course of 2009. “There is no reason, however, to be overly optimistic in the current situation.The global financial system is still facing major challenges that must be tackled immediately, all the more as some aspects of the current recovery are attributable solely to short-term effects,” Ewald Nowotny, Governor of the Oesterreichische Nationalbank (OeNB), cautioned on the occasion of the presentation of the OeNB’s latest Financial Stability Report. Moreover, a string of highly profitable years had masked the existing structural weaknesses in the Austrian banking system, which must, however, be addressed in the medium term.
Financing Conditions Remain Difficult
While the Austrian economy returned to positive growth in the second half of 2009, the effects of the crisis have became increasingly visible in corporate balance sheets, which showed both declining corporate profits and a pronounced decrease in external financing.The latter has been driven not only by still dried-up equity financing but increasingly also by weakening bank lending.The slowdown in bank lending to the corporate sector seems to have both supply- and demand-side reasons.Although financing conditions have improved recently on the back of low interest rates, economic policy support and smaller risk premiums, many companies – which have already suffered under the economic downturn – are facing difficulties obtaining funds.
In view of price losses in the capital market since the onset of the crisis, households have relied above all on secure forms of investment, especially deposits.At the same time, foreign currency loans to households have decreased considerably since end-2008 (by EUR 2.3 billion); at some EUR 36 billion, the level of foreign currency debt remains high, though.Mirroring the slump in consumer confidence, household loan demand has remained subdued and financing conditions difficult.
Austrian Banks Benefit from Improved Framework Conditions, but Loan Defaults Continue to Rise Quickly
At the international level, banking sector profitability has improved considerably in recent months.As this improvement is to a large extent attributable to capital market business in the wake of rising trading and fee income, profitability cannot yet be considered to have recovered sustainably.
Austrian banks too increased their operating income:unconsolidated operating profit climbed by some 14% year on year to EUR 4.9 billion in the third quarter of 2009. Trading income, and, in particular, stable interest income (mounting by 9% net year on year) have contributed to this result.Operating results are even better in the Central, Eastern and Southeastern (CESEE) business segments.In particular, the coordinated support provided by the EU, the IMF and other financial institutions in cooperation with national supervisory authorities and international commercial banks active in CESEE have helped stabilize conditions in the region and have prompted all parties involved to act responsibly.
So far, the good operating results have offset in some cases strongly rising loan loss provisions in banks’ domestic as well as international business.“The level of loan loss provisioning continues to be high both in the Austrian and the CESEE business segments,” OeNB Governing Board Member Andreas Ittner clarified.As a result, one of the major risks to the Austrian banking sector is another pronounced increase in the loan loss provision ratio of Austrian banks’ CESEE subsidiaries, which has already climbed by some 65% year on year to reach 4.6% in the third quarter of 2009, but also that of the domestic business, which rose to 2.6% in the third quarter of 2009. The persistently high share of foreign currency credit in Austrian banks’ exposure to CESEE adds to this risk.Since the aforementioned support measures by supranational institutions are temporary, limiting this risk will have to be one of the priorities in the years to come.
Stress tests carried out on a regular basis by the OeNB indicate that Austrian banks’ risk-bearing capacity is acceptable overall, albeit with the crisis affecting some credit institutions more than others.“Our stress tests show that capital adequacy levels must be raised further in the medium term.This applies to both the quality and the amount of banks’ own funds,” Ittner emphasized.
The Austrian insurance sector too has benefited from the recovery in capital markets, but premium income growth remains subdued in light of the situation in the real economy.Demand for Austrian mutual funds has stabilized after falling substantially in the past.