Financial Stability Report 2023

Financial stability means that the financial system – financial ­intermediaries, financial markets and financial infrastructures – is capable of ensuring the efficient allocation of financial resources and fulfilling its key macroeconomic functions even if financial ­imbalances and shocks occur. Under conditions of financial stability, economic agents have confidence in the banking system and have ready access to financial services, such as payments, lending, deposits and hedging.


Management summary 1

Financing conditions tighten in line with monetary policy

While the European economy has proved resilient to the initial effects of the war in Ukraine, persistent inflation, the effects of monetary tightening and high ­geopolitical uncertainties now weigh on the outlook. Since mid-2022, economic growth in Austria has decelerated and companies and households are confronted with tighter financing conditions. Uncertainty about economic developments has been dampening companies’ demand for loans, as they are more cautious about investments. Given that most loans to the corporate sector are variable rate loans, companies’ debt-servicing costs are rising significantly. However, due to a marked increase in companies’ profits in 2022, their debt-to-income ratio went down last year, sinking below historic levels by year-end. Still, high input costs, tightening financial conditions and the clouded economic outlook, which have increased ­potential credit risks, are particularly challenging for more vulnerable firms. Amid rapidly rising interest rates and banks’ tightening supply policies, the growth of bank lending to Austrian households has been decelerating since mid-2022. Apart from housing loans, where lending growth slowed down most strongly, consumption and other loans have also exhibited declining growth rates. Dynamics in Austria’s residential real estate market have likewise been slowing. Credit default rates still remain low. To preserve this, binding ­borrower-based measures are key to ensuring sustainable lending practices.

Austrian banks benefited from rising interest rates

In 2022, the Austrian banking sector profited from rising interest rates, as banks passed them on to both new borrowers and borrowers with variable rate loans, while deposit repricing was still slow. Given that fees and commissions also grew markedly, credit quality remained good and profits from Russia were exceptionally high, the Austrian banking sector reported a record profit of more than EUR 10 billion. Half of it came from subsidiaries in Central, Eastern and Southeastern Europe (CESEE). The recent turmoil following bank failures in the United States and Switzerland had rather small (and only indirect) effects on the Austrian banking sector, whose exposure to debt securities is relatively limited and whose liquidity position is solid. Furthermore, the sector’s capitalization has improved, mirrored in a CET1 ratio above 16%. It is noteworthy, however, that the largest banks’ ­capital ratios trail behind those of their smaller competitors. Macroprudential ­supervisors in Austria decided at the end of 2022 to phase in further structural capital buffer requirements until 2024. These efforts support favorable external assessments, as confirmed by a rating by S&P Global Ratings that ranks the ­Austrian banking industry among the most stable worldwide.

Lending for residential real estate (RRE) is marked by a fragile environment, with prices having doubled in Austria over the past ten years and interest rates starting to rise rapidly in 2022. These developments are reducing the affordability of RRE and related loans. In the fourth quarter of 2022, the OeNB RRE price ­index declined for the first time in many years and dropped further at the beginning of 2023. Moreover, new lending volumes decreased substantially amid rapidly ­increasing interest rates. A sizeable portion of new mortgages continued to be ­offered at unsustainable debt service-to-income and loan-to-value ratios before compliance with borrower-based measures was made mandatory. Also, the previous trend of increased fixed rate borrowing reversed in 2022, with half of new RRE lending being granted at variable rates again. These developments underline the importance of sustainable lending standards. Last year, borrower-based instruments became binding to maintain a high-quality loan portfolio and address potential ­systemic risks from RRE financing. As of August 2022, Austrian banks must ­adhere to a legally binding regulation when granting RRE loans. The provisions include upper limits for loan-to-value ratios (90%), debt service-to-income ratios (40%) and loan maturities (35 years). Plus, according to a recent amendment, bridge loans are excluded and the de minimis threshold for housing loans to ­couples has been raised. Lending standards have improved markedly as a consequence. ­Finally, commercial real estate (CRE) lending also warrants increased scrutiny, as headwinds are ­arising from higher interest rate levels as well as structural shifts, such as the ­increasing importance of environmental building criteria, online shopping and ­remote work.

Recommendations by the OeNB

Past efforts by Austrian banks and forward-looking prudential measures to raise banks’ risk-bearing capacity have paid off. In the years following the global financial crisis, Austrian banks have significantly improved their capital ratios and funding structures. In 2022, their profits reached record levels, while credit risks stood at historic lows. Persistent inflationary pressures and the consequences of monetary policy tightening as well as the war in Ukraine now pose substantial challenges for the Austrian banking sector, however. The situation might deteriorate if the ­benign effects of higher interest rates faded, credit risk costs rose or operations in Russia ceased to be an important profit driver. Given today’s uncertain macrofinancial and geopolitical conditions, the OeNB recommends that banks further strengthen financial stability by taking the following measures:

  • Strengthen the capital base by exercising restraint regarding profit distributions.
  • Adhere to sustainable lending standards for residential and commercial real ­estate financing.
  • Ensure that credit and interest rate risk management practices adequately reflect changes in the risk environment, especially considering the past long period of low risks and interest rates.
  • Continue efforts to improve cost efficiency to ensure structurally strong profitability.
  • Further develop and implement strategies to deal with the challenges of new ­information technologies, increased cyber risks and climate change.

1 For a German-language management summary of the Financial Stability Report 45, see Finanzmarktstabilitätsbericht - Oesterreichische Nationalbank (OeNB) .

The economic outlook remains characterized by high and persistent inflationary pressures

Global growth held back amid persistent inflation, monetary tightening and high uncertainty

The global economy showed some resilience in the second half of 2022, but fragilities have started to materialize. Despite price pressures, tightening monetary and financial conditions and increasing geopolitical tensions, the global economy showed some resilience on the back of the fiscal support provided during the pandemic and strong pent-up demand. Nevertheless, fragilities have started to materialize as persistent inflation and increasing borrowing costs revealed financial stability risk, while the world economy is facing increasing geopolitical fragmentation and high levels of both private and sovereign debt. Moreover, energy security and climate concerns are still looming. Due to the challenges ahead and the highly ­uncertain global economic outlook, the International Monetary Fund (IMF) has revised downward the world growth forecast, now projecting a deceleration from 3.4% in 2022 to 2.8% in 2023. According to the IMF, advanced economies are going to experience a very pronounced slowdown, from 2.7% in 2022 to 1.3% in 2023 in the baseline scenario. In a more adverse scenario with further financial stress materializing, growth is expected to be even lower.

Table 1.1: GDP growth and inflation forecasts  
April 2023 IMF WEO projections
Real GDP growth Annual HICP/CPI ­inflation
2023 2024 2023 2024
Euro area 0.8 1.4 5.3 2.9
UK –0.3 1.0 6.8 3.0
Japan 1.3 1.0 2.7 2.2
China 5.2 4.5 2.0 2.2
USA 1.6 1.1 4.5 2.3
World 2.8 3.0 7.0 4.9
Source: IMF.
Note: WEO = World Economic Outlook.
This is Chart 1.1.

The global economic outlook remains characterized by high and ­persistent inflationary pressures. Energy price shocks hitting in 2022, stronger than expected domestic conditions and tight labor markets have put further ­pressure on prices and wages after the pandemic and have caused global inflation to reach its highest level since the 1980s, which weighs on the cost of living of households, especially those on lower incomes. As a response to high and ­persistent inflation, central banks around the world have undertaken monetary policy tightening unprecedented in its speed, size and width. Due to increasing rates and the fallout from the energy price shock of 2022, global headline inflation peaked in the third quarter of 2022. Nevertheless, inflation remains well above target. Its core component was still on the rise in most advanced economies in March 2023 and is expected to ­decrease only sluggishly in 2023 and 2024 due to the persistence of second-round effects. Moreover, additional risks are looming on the horizon – the threat of growing commodity prices persists because of renewed pressures to ­supply chains due to increasing geopolitical fragmentation, possible further energy supply shocks and a rise in demand for commodities from China, which suddenly discontinued its zero-COVID policy in December 2022. 2 All of these factors might put renewed pressure on inflation and, consequently, on monetary authorities that would have to keep interest rates high for longer.

Monetary policy tightening and restrictive financing conditions reveal fragilities in the financial system. The rapid rise of borrowing costs and the asset depreciation accompanying the policy reversal after a decade of ultralow ­interest rates have revealed financial stability risks. Low interest rates and ample liquidity provision granted after the global financial crisis and additional support during the pandemic have favored the buildup of debt and financial leverage. Global nonfinancial debt rose from 182% to 257% of global GDP between 2008 and 2021 and increasing financial leverage has been observed especially in nonbank financial institutions. 3 Giving rise to the risk of liquidity mismatch, the latter might trigger investor runs and asset fire sales which, in turn, amplify price declines. 4 Financial market volatility has been elevated during the last months; yields on ten-year UK, US and German government debt have increased by over 200 basis points since the start of 2022, currently standing at their highest levels since the global financial crisis. The rapid increases in interest rates on long-term government debt globally and considerably tightened financial conditions could lead to sharp adjustments. Banks hold large portfolios of debt on their balance sheet including long-term ­government debt and real estate debt the prices of which have been affected since monetary tightening started. Signs of financial distress materialized in ­September 2022, with the liquidity spiral in UK pension funds caused by the ­so-called mini-budget, and in the spring of 2023, with the failure of several banks in the USA and of Credit Suisse in Europe, which led to a sharp drop in share prices around the world. While there are concerns that persistent inflation and monetary tightening could cause further stress in credit and financial markets, risks have to date been contained thanks to public intervention, regulatory requirements and the injection of short-term liquidity in the banking sector.

This is chart 1.2.
This is Chart 1.3.

Financing conditions have tightened significantly and some sectors are facing contraction and increasing bankruptcy rates. With the steep rise of interest rates, credit volumes started to fall, and the real estate sector showed signs of slowdown in most regions in 2022. 5 In the business sector, bankruptcies also started going up in several countries. In Europe, business bankruptcy declarations increased substantially in 2022, reaching the highest levels since the start of data collection in 2015 (see chart 1.4). 6 The sharpest increases in bankruptcy declarations between the third and fourth quarter of 2022 were observed in Luxembourg (71.8%), Spain (59.5%) and Hungary (41.6%). Loan defaults are also expected to increase as interest rates rise. For instance, a jump in defaults has recently been observed in the UK as interest rate hikes continue and price ­increases remain in double-digit territory. Even if defaults and nonperforming loans (NPLs) so far remain below pre-pandemic levels in most countries, the risks of global debt vulnerabilities crystallizing have increased, both in the private sector and at the sovereign level. Low-income and emerging economies are struggling to pay rising debt-servicing costs, while facing high commodity prices and low growth prospects amid weak global demand and limited fiscal space.

This is chart 1.4.

Geopolitical tensions, trade fragmentation, commodity markets security risks and climate risks continue to loom ahead. Given the high uncertainty in the economic, financial and geopolitical environment, the outlook has deteriorated over recent months, while downward risks still prevail. The volatility of data and expectations is particularly high and might trigger speculative behavior and increase risk aversion among investors. The currently intensifying geopolitical fragmentation, including the use of sanctions and protectionist measures, also ­reduces the diversification of investments and poses a risk both to commodity ­markets security and to investments in the energy transition. 7 Multiple challenges arise from the persistently high inflation and uncertainty about monetary policy reactions, together with reduced opportunities to diversify investments across ­regions and sectors; this also raises volatility both in the real economy and in financial markets. 8 Moreover, the effect of market fragmentation might be even more ­pronounced in emerging markets and developing economies which, already dependent on commodity imports and high level of external debt, are more exposed to sudden reversals of cross-border capital flows.

CESEE: Banking sectors perform reasonably well despite strong headwinds – for growth and inflation – resulting from the war in Ukraine

The war in Ukraine clearly determined economic activity in Central, Eastern and Southeastern Europe (CESEE) in 2022. Average economic growth in the region declined from 7% in 2021 to 0.7% in 2022, mainly driven by ­contractions of Russian and Ukrainian output.

Even so, economic activity proved to be surprisingly robust to the ­initial effects of the war in the first half of 2022, at least in the CESEE EU member states. In this period, GDP growth was mainly supported by solid ­consumer demand, which can be attributed to the earlier boost in savings as people were spending less during the lockdowns, and to favorable labor market conditions. At somewhat below 4% throughout 2022, the average unemployment rate was only marginally above its end-2019 trough. In the middle of the year, both employment and labor participation rates rose to historic highs or even beyond, which translated into strong nominal wage increases. Investment also provided a stable contribution to growth, reflecting high capacity utilization, high corporate financial surpluses, increased inventory accumulation following the restoration of key supply chains and, in some cases, beginning disbursements of EU funds.

However, as the year 2022 progressed, the economy became a lot less resilient to the effects of the war in Ukraine. Confidence indicators were ­deteriorating significantly from early summer 2022 onward, with consumer ­confidence falling to a lower level than at any time during the COVID-19 ­pandemic. From fall 2022 onward, activity indicators were weakening as well. Almost all segments of the industrial sector were affected by the downturn, in particular ­export-oriented industries. In the retail sector, sales of everyday goods increased, while sales of durable goods and fuels weakened. The loss of purchasing power in the wake of strong inflation became increasingly apparent as well. As a result, quarter-on-quarter GDP growth largely turned negative in the second half of 2022, with Czechia and Hungary meeting the criteria for a technical recession.

The war in Ukraine fueled inflation in CESEE. It did so by exacerbating supply-demand imbalances in some areas, increasing energy and food prices and significantly weakening, at least temporarily, the external value of some CESEE currencies. This pushed up inflation to the highest level in decades. In contrast to 2021, almost all areas of the consumption basket were affected by inflationary pressures in 2022, which caused core inflation to go up markedly as well. At the end of the year, however, inflation rates stabilized somewhat after lower world market prices for crude oil and country-specific household energy relief packages had led to a slowdown of energy inflation.

CESEE central banks tightened monetary policy in the face of rising inflation and the associated risks of second-round effects as well as the risk of a de-anchoring of inflation expectations. Interest rate hikes not only continued in 2022, but even picked up speed in most countries, also in response to pressures emanating from foreign exchange markets. Ultimately, key interest rates were at a multiyear high at the end of 2022. However, during the year, the underlying conditions for monetary policy became increasingly challenging, as any further interest rate moves had to be weighed against the incipient economic slowdown. The Czech and Polish central banks have therefore refrained from any further interest rate hikes since June and September 2022, respectively. And the Hungarian central bank (MNB) has not changed its operational policy rate further since October 2022. However, this was preceded by a strong monetary tightening in reaction to a depreciation of the forint: after the MNB had hiked its operational policy rate by 125 basis points to 13% in late September 2022, it communicated the end of its hiking cycle. This collided with market expectations and the forint came under pressure and, on October 13, 2022, depreciated to its lowest value against the euro (HUF 430 per EUR). The following day, the MNB called an emergency meeting in which it made several adjustments to its rate tool kit and hiked its operational policy rate to 18%. Since then, the policy rate has stayed at this level – the highest since 1998.

This is Chart 1.5.

Restrictive monetary conditions should have a significantly dampening effect on prices going forward. Real (ex ante) interest rates have turned positive in recent months. The large interest rate differential to the euro area and a more constructive risk environment have supported regional currencies. This applies not least to Hungary, where the forint has recovered significantly from its crash in ­October 2022 and is currently trading around 2% below its value from the ­beginning of 2022. This compares to a depreciation of 2% of the Polish złoty, a largely stable development of the Romanian leu and an appreciation of the Czech koruna by 6%.

This is Chart 1.6.

CESEE foreign exchange markets were only temporarily impacted by the most recent turmoil in the global financial sector following troubles at several mid-sized US banks and Credit Suisse. The Czech koruna lost 2.5% and the Hungarian forint 6% of value against the euro in mid-March 2023, but both currencies recovered quickly.

Surveys suggest that credit supply conditions already tightened over the second half of 2022. The most important reason for this development was said to be a weak local market outlook (related to the war in Ukraine, high inflation and the general economic slowdown). All credit segments have been affected by tighter credit standards, though the tightening has been particularly strong in the mortgage market. More resilient than supply, credit demand has increasingly been driven by short-term demand for working capital and debt restructuring. At the same time, geopolitical uncertainty and the weak economic outlook have started to negatively influence long-term fixed investments and consumer confidence. Among households, housing market prospects as well as non-housing-related ­consumption expenditure are expected to drag down demand further.

This increasingly restrictive momentum in CESEE banking sectors is not yet fully reflected in credit market data. Credit dynamics in the CESEE region decelerated in the second half of 2022 against a slowdown in new lending due to higher interest rates, more early repayments than in previous years and ­declining volumes in housing transactions. The weakening, however, was not ­observed across countries and sectors evenly. Credit growth rates, for example, remained broadly stable in Croatia and Hungary amid some deceleration in credit growth to households and largely unabated corporate sector credit dynamics. Meanwhile, credit growth to corporates weighed heavily on credit market developments in Czechia, Poland and Romania.

This is Chart 1.7

Despite the economic headwinds, the CESEE banking sectors posted generally sound results and balance sheets in 2022. Profitability was ­bolstered by higher net interest income and – despite partly higher (personnel) ­expenses and provisioning – remained at around the levels observed in 2021. Credit quality also improved across CESEE, and NPL ratios even reached multiannual lows in some countries. Pockets of vulnerabilities exist, however. While NPL ratios are at a historic low, stage 2 loans (for which banks are less certain of credit quality) are well above NPLs and increasing in several cases (e.g. Czechia, Croatia and Hungary). Furthermore, fast rising interest rates could expose banks with large fixed income assets (as shown by the example of Silicon Valley Bank in the USA). In case of need, for instance due to funding shocks triggered by ­changing market sentiment, these assets would have to be sold at a loss. Such ­unrealized losses, often associated with sovereign assets held to maturity, are ­significant for a number of countries, but high capital adequacy ratios provide a buffer. Tier 1 capital ratios hovered between 16.7% in Hungary and 24% in ­Croatia at the end of 2022.

This is Chart 1.8.

Russia’s banking sector operated in a difficult environment amid far-reaching international sanctions. The Russian economy has proven ­remarkably resilient to the international sanctions imposed after Russia’s invasion of Ukraine. Once the first shock had been digested, GDP growth bounced back in the second half of 2022. Quarter-on-quarter growth came in at 0.5% in both the third and the fourth quarter, limiting the annual GDP contraction to –2.1% for the whole year. Russian GDP dynamics benefited from higher (war-related) government spending and from substantially higher prices for energy. Despite inter­national sanctions, the country managed to provide the world market with ­substantial quantities of its energy carriers, in part by redirecting crude oil exports from sanctioning to non-sanctioning countries. With sanctions severely curtailing imports from Western economies, the current account surplus rose to more than 10% of GDP in 2022. After having depreciated by some 40% against the US dollar within the first week after the invasion, the Russian ruble recovered rather quickly. It was buoyed by a huge hike in the Russian key policy rate (from 9.5% to 20%), several measures targeted at the foreign exchange market and the large current account surplus. The strong currency and subdued domestic demand lowered ­consumer price growth substantially and allowed the Russian central bank to ­normalize its policy rate. After several cuts that had started in April 2022, the ­policy rate has since September 2022 remained at 7.5% or 100 basis points below its pre-war level. More recently, the ruble also returned to its external value ­observed at the beginning of 2022 as both new EU and the US sanctions on Russia’s energy exports in late 2022 and early 2023 weighed on the price of Urals crude oil. Banks continue to do business in a regime of regulatory lenience by the local ­regulator, flanked by subsidized lending programs related to strategic enterprises, SMEs and households. Mortgage loans continue to benefit from a preferential state program providing generous interest rate subsidies and rates had largely returned to pre-invasion levels. This kept the expansion of credit to the private sector broadly stable throughout 2022. The banking sector had suffered a loss of around USD 25 billion (or about 12% of the sector’s regulatory capital) in the first half of 2022, largely due to foreign exchange transaction losses in the wake of the ­imposition of financial sanctions in February/March 2022 and to sharply rising provisions. Banks subsequently recovered somewhat, thus offsetting the loss in
the second half of 2022 and achieving a very modest overall profit of about USD 3 billion in 2022 as a whole (which is less than one-tenth of the 2021 figure). While a number of banks had to raise additional capital, a systemic recapitalization ­exercise has (so far) not been necessary, according to the Central Bank of the ­Russian Federation.

This is Chart 1.9.

2 According to OeNB simulations with the Oxford Global Economics Model, increasing activity in China (with GDP growth going up from 3% in 2022 to 5.2% in 2023 and 4.5% in 2024 as forecast by the IMF in its April 2023 World Economic Outlook) might drive up world oil and gas prices by 8.3% and 4.5%, respectively. As a consequence, global inflation would rise by 0.3 percentage points compared to a scenario in which Chinese growth ­remains at 2022 levels.

3 See the IMF Global Financial Stability Report (GFSR) of April 2023.

4 According to the IMF GFSR, the main vulnerabilities are related to high financial leverage, liquidity and ­interconnectedness.

5 Real house prices decreased from peaks reached in 2021/early 2022 in most European, American as well as Asian and Pacific developed economies, with a few exceptions (e.g. Japan).

6 Eurostat data. Please note that, in the first two quarters of 2020, bankruptcy declarations decreased on account of the extraordinary financial support provided by governments in the first months of the pandemic.

7 Both the EU and the USA strongly rely on Chinese imports of critical components for the development of electric ­vehicles and solar energy devices.

8 The IMF warns that barriers to trade, investment and technological transfer would limit growth and estimates that the long-term cost of trade fragmentation between the USA and China could amount to around 7% of global GDP.

Austrian borrowers face tighter financing conditions

The Austrian economy grew by 5.0% in 2022 and will cool off markedly in 2023. Since mid-2022, economic growth has decelerated due to high inflation rates as a consequence of the war in Ukraine. The slowdown of the global economy has put a damper on export demand, which is expected to remain low in the first half of 2023. High lending rates (see chart 2.1) due to a tightening of monetary policy are dampening (construction) investment. As inflation is expected to come down only modestly over the course of 2023, lending rates are expected to remain high for quite some time. In spite of the economic slowdown, the labor market is very robust, and the unemployment rate remains low. Easing tensions in energy markets are gradually raising economic ­sentiment among companies and households. In the second half of 2023, the Austrian economy is projected to regain momentum and economic growth will come to around 0.5% for 2023 before accelerating further in 2024. Despite high inventories, disruptions in energy supply remain the main downside risk to activity in the near future.

This is Chart 2.1.

Rise of loan demand from companies came to a halt

During the last half-year, Austrian companies have been borrowing less. The growth rate of bank loans to companies started to decelerate in September 2022 and amounted to 8.3% (year on year) in March 2023, which is still high ­relative to historical levels (see chart 2.2). While this development applies to all loan maturities, the declining trend is most visible for short- and medium-term loans (i.e. loans with maturities of up to five years), whose growth had accelerated particularly rapidly in the year before. According to the Austrian results of the euro area bank lending survey (BLS), the overall slowdown in credit growth is mainly attributable to a significant change in credit standards. Banks have comprehensively tightened their supply policies for corporate loans since the second quarter of 2022 and a further – albeit slighter – tightening is also expected for the second quarter of 2023. A less favorable risk assessment of the general economic situation is the main reason why banks implement stricter guidelines.

This is Chart 2.2.

The increasing loan demand of Austrian companies came to a halt in the fourth quarter of 2022, according to the results of the BLS. While the demand for short-term loans continued to grow, the need for loans with terms of one year or more declined. Despite fading supply chain problems, financing needs for inventories and working capital are still high as companies aim to secure future deliveries. On the other hand, the uncertainty about the economic development dampens the demand for medium- and long-term loans. According to the surveyed banks, companies are more cautious about investments or are postponing them. This does not apply to investments in sustainable or renewable energies though, which are not affected by the decline in loan demand. For the second quarter of 2023, banks do not expect any further changes in overall loan demand.

Austrian companies’ gross operating surplus grew more strongly than the sector’s debt level. Overall debt in the corporate sector (i.e. loans and bonds) increased by EUR 11 billion in 2022. However, due to a marked increase in companies’ profits, the aggregate corporate sector’s debt-to-income ratio (DTI) 9 dropped by 10 percentage points within the last year. Standing at 307% at end-2022, the ratio remains below both the average value of 318% observed during the last ten years and the euro area ­average of 339% (end-2022). Hence, aggregate debt statistics so far do not point to any steady debt accumulation in the corporate sector. Still, credit risks are likely to increase for more ­vulnerable firms given high input costs, the tightening in financial conditions and the clouded economic environment.

This is Chart 2.3.

Companies’ debt-servicing costs are rising amid increasing ­interest rates. As the bulk of bank loans to companies are variable rate loans, indebted corporates are exposed to considerable interest rate risk. Over the last ten years, the average share of variable rate loans in total new (euro-­denominated) loans amounted to 86%, which is slightly higher than in the euro area (see chart 2.3, left-hand panel). Given this high share and the rise in interest rates, the ratio of companies’ interest ­payment obligations for domestic bank loans to gross operating surplus surged by more than 2 percentage points and stood at 4.8% at end-2022. This is the highest level observed within the last ten years. Abstracting from interest rate risks, ­companies in Austria are less vulnerable compared to the euro area average when it comes to foreign currency and refinancing risks. As the share of short-term loans (with maturity periods of up to one year) make up only a small share of companies’ outstanding loan volumes (15%), the related refinancing risks are rather moderate (see chart 2.3, right-hand panel). Also, the share of loans that are denominated in foreign currencies is very low (1.2%). Hence, possible losses from unfavorable ­exchange rate fluctuations are so far limited (see chart 2.3, middle panel).

Liquidity buffers (deposits and undrawn credit lines) are still above pre-pandemic levels. Companies’ overnight deposits held by Austrian banks have been declining since the beginning of 2022 and have returned to levels seen before the COVID-19 pandemic. The observed reduction could reflect the gradual expiry of government support measures taken during the pandemic, which had significantly driven up firm deposits. However, in addition to overnight deposits, companies have a substantial amount of undrawn credit lines at their disposal. These credit lines also increased at the beginning of the COVID-19 pandemic but have remained constant so far.

For the first time, there were slightly more insolvencies compared to the period before the start of the pandemic. In the first quarter of 2023, the number of insolvencies stood at 619, compared to 535 in the first quarter of 2019. There were, however, no signs of an upward trend within the first quarter of 2023. The low number of insolvencies observed during the pandemic is a consequence of government support programs, which aimed to mitigate adverse developments in the corporate sector. As mitigating measures are now expiring, insolvencies are returning to pre-pandemic levels. Those industries that were strongly supported are still seeing significantly fewer insolvencies. This particularly applies to the restaurant industry. Overall, though, companies are challenged by the current economic environment and are likely to increasingly feel the effects of tighter ­financing conditions. Hence, over the medium term, while currently still low, the number of corporate insolvencies is likely to rise.

9 Defined as the consolidated gross debt of the corporate sector as a share of gross operating surplus.

Austrian banks benefited from rising interest rates in 2022, while nonbanks were hit by the financial market downturn

High inflation affects the banking sector in multiple ways

Inflation reduces disposable incomes and causes monetary policymakers to raise interest rates. The rapid increase in inflation, predominantly driven by higher import costs (e.g. for energy), was the main macrofinancial challenge in 2022. Annual consumer price inflation in Austria reached double-digit levels not seen since the 1970s, 10 which proved to be a challenging environment for many households and firms. As inflation expectations rose and central banks hiked rates to bring inflation back to target, borrowing costs for the real economy increased. Despite the higher nominal interest rates, real rates are deeply negative.

This is Figure 3.1.

In general, rapidly rising interest rates are likely to increase both credit and interest rate risk for banks. Lower disposable real incomes and higher ­financing costs make loans more likely to become nonperforming, raising banks’ credit risk costs. Banks’ maturity mismatch and their holdings of long-term fixed income assets also expose them to interest rate and market risk. When ­interest rates rise, funding costs can adjust faster than the income from assets and the market value of long-term fixed income assets drops. Therefore, inflation and correspondingly rising interest rates can exert pressure on banks’ profitability via higher risk costs and lowered margins, not only in the interest business, but also due to rising operating costs.

But so far credit risk has remained low at Austrian banks and higher interest rates have created a tailwind for profitability. As this report highlights, nonperforming loan ratios at Austrian banks decreased to a historic low by the end of 2022 and credit risk costs stayed moderate. Default risks for borrowers have so far been mitigated by strong fiscal support measures, high saving buffers and the post-pandemic recovery as well as the fact that real interest rates remain negative. However, as these factors are easing off and given the relatively high share of variable rate loans in Austria, credit risks could materialize in the medium term. As documented in this issue of the Financial Stability Report, rising interest rates have in fact had a positive impact on Austrian banks’ profitability. On the one hand, due to the high share of variable rate loans, banks were able to pass on most of the interest rate increases to their borrowers. On the other hand, despite their short maturity, customer deposits, especially from households, prove to be sticky and rather insensitive to changes in the interest rate. As a consequence, deposit repricing is slow. So far, the interest rate increases have markedly improved the Austrian banking sector’s net interest margin.

Austria still has numerous banks despite continuing consolidation efforts

The size of the Austrian banking sector relative to GDP is above the EU average, and Austrian banks account for almost one-fifth of all EU banks. 11 In the aftermath of the 2008 global financial crisis, many banks entered a consolidation period and their balance sheets shrank. In 2008, Austrian banks’ total assets amounted to EUR 1,176 billion and declined by almost one-fifth over the next eight years. However, this trend reversed in 2016 and balance sheets started to grow again, along with brisk credit growth. In 2021, Austrian banks’ total assets already surpassed their 2008 level, and stood at EUR 1,199 billion at end-2022. With respect to GDP, the balance sheet of the Austrian banking sector is still larger than the EU average. In 2008, the ratio between total assets and GDP equaled 400% for Austria and 303% for the EU. Latest figures show a ratio of 268% for Austria compared to 227% for the EU (see chart 3.1, left-hand panel). The average Austrian credit institution holds assets worth around EUR 2.4 billion, while the assets per bank in the EU average out at EUR 13 billion, according to the latest available data. The median size of Austrian banks, however, is a mere EUR 400 million, as the sector is quite concentrated, with just five banks accounting for close to 40% of total assets. Since 2008, the number of banks in Austria has decreased substantially, namely by more than 40%, totaling 493 at end-2022, while the EU recorded a reduction in banks of 36% (by the third quarter of 2022; see chart 3.1, right-hand panel). Currently, Austrian banks still account for almost one-fifth of all banks in the EU, which reflects the high number of small cooperative banks. In terms of total assets, by contrast, the Austrian banking sector accounts for just 3% of the EU banking sector.

This is Chart 3.1.

From a euro area perspective, the total assets-to-GDP ratio stands at 250%, which also remains below Austria’s ratio. The number of euro area banks decreased over the past years and totaled 2,055 (in the third quarter of 2022), while the number of euro area branches decreased by 39% to 114,000 as at end-2021.2 In comparison, the number of ­Austrian bank branches decreased by 22% from 2008 to end-2022, when it totaled 3,297 (see chart 3.2, left-hand panel). Nonetheless, a high density of banks remains; on average any Austrian citizen can reach a bank branch in less than two kilometers and in Vienna in less than one kilometer. 12 The average Austrian bank served 18,470 clients in 2022 compared to the euro area average of almost 161,000 (as at end-2021). Back in 2008, an Austrian bank served around 9,600 clients, compared to the euro area average of 115,200.

Since 2008, Austrian and euro area banks reduced their staff by around 16% and 22%, respectively (see chart 3.2, right-hand panel). 13 In 2022, 67,422 employees worked in the Austrian banking sector, accounting for less than 1% of the total population. On average, Austrian banks had 137 employees, while the average euro area bank had seven times more staff. This translates to one Austrian bank employee serving around 135 customers, while the euro area average is 197 customers.

Cash remains the preferred means of payment in Austria, which is unique in the euro area. 14 The dense network of both bank branches and automated teller machines (ATMs) ensures easy access to cash. Austria ranked among the few countries that increased the number of ATMs over the last five years. In contrast, ATMs decreased in the euro area by around 10%. According to the most recent data available, Austria had 981 ATMs per million inhabitants, while the euro area average was 713. 15

Austrian banks’ consolidation efforts are well in line with European developments. The consolidation effort in the Austrian banking sector is thus well aligned with EU and euro area developments. Nevertheless, the sector remains large in terms of its balance sheet, the number of banks and the dense branch network.

This is Chart 3.2.

Austrian banks’ profit is at a record high, with rising rates boosting net interest margins

The Austrian banking sector’s profit in 2022 came in at a record high. Banks generated consolidated net profits – including profits of foreign subsidiaries – of EUR 10.2 billion, which was the first double-digit billion profit in history. This corresponds to a profitability level of 0.9% of average total assets, which was ­surpassed just once before, when a strong one-off effect in 2006 propelled proceeds from divestment.

This is Chart 3.3.

Rising interest rates caused the consolidated net interest margin to increase. The cost-to-income ratio of the Austrian banking sector ­improved in 2022 thanks to strongly rising operating income and a moderate lift in operating expenses. Operating income expanded by almost one-quarter ­compared to the previous year. This was driven by a rise in net interest income that was propelled by continued lending, but especially the increase in the interest ­margin. After three consecutive years of falling interest margins, 2022 marked a turning point. Rising interest rates drove up the consolidated net interest margin by 27 basis points to 161 basis points (see chart 3.4, left-hand panel). As can be seen in chart 3.4 (right-hand panel), the price effect, which was negative in the three years from 2019 to 2021, pushed net interest income up and by far outpaced the effect of new lending (volume effect). Compared to other European banks, the margin of Austrian banks continued to be well above the average of 139 basis points thanks to higher margins at foreign subsidiaries. Fees and commissions ­income also grew markedly, while Austrian banks’ trading income was negative for the second year in a row. The comparatively moderate lift in operating ­expenses was caused by elevated impairments on participations, whereas personnel expenses almost stagnated and other administrative expenses went up gradually. Consequently, the relation between costs and income improved significantly to 59%, which is tantamount to the lowest (i.e. best) result since 2010. Much of the ­improvement came from businesses in CESEE and especially Russia (see details below).

This is Chart 3.4.

The doubling of risk costs was almost offset by profits from investments in subsidiaries, joint ventures and other affiliates. Austrian banks’ operating profit was EUR 12.9 billion in 2022, up more than 40% year over year. Although risk provisioning nearly doubled and pushed up the cost of risk to a still moderate 0.3%, 16 this increase was almost offset by extraordinary profits that resulted from investments in subsidiaries, joint ventures and other affiliates accounted for using the equity method. While no large-scale credit ­defaults materialized, credit risk is still looming. Amid quickly rising rates, the high share of loans with variable interest rates exposes borrowers to considerably higher interest expenses. Together with high inflation, this jeopardizes debtors’ repayment capacity and might weigh on the cost of risk in the medium term.