Bank profits rebound in the first half of 2021, risks from housing loans on the rise

Presentation of the 42^nd Financial Stability Report of the Oesterreichische Nationalbank (OeNB)

Profits were up in the Austrian banking sector in the first half of 2021, with both operating profit and risk costs having improved significantly. Corporate loan growth has slowed in the course of the year as businesses are in a strong liquidity position. In the Austrian residential property market, by contrast, price and loan growth rates have remained vivid, which puts banks’ compliance with sustainable lending standards under increased supervisory scrutiny.

The Austrian economy continued to recover in the fall of 2021 but is expected to lose momentum in the coming months given the current pandemic situation and persistent delivery bottlenecks. “The comprehensive monetary policy measures of the Eurosystem have been ensuring favorable financing conditions, thereby supporting businesses and banks during the pandemic,” OeNB Governor Robert Holzmann said at the presentation of the 42^nd issue of the OeNB’s Financial Stability Report.

Bank lending key to companies’ liquidity
Bank loans have been key to maintaining Austrian companies’ liquidity during the pandemic. In the course of this year, their pace of growth slowed down, as companies were in a good liquidity position and had ample internal financing, which was up also thanks to comprehensive public support measures. These two factors helped strengthen companies’ debt sustainability even though debt levels were on the rise in the first half of 2021.

Housing loans continue to grow at a rapid pace
The Austrian residential property market remained buoyant in the first half of 2021. On the one hand, house prices increased at a markedly faster pace than in the euro area; on the other, housing loans to households picked up further speed on the back of very favorable financing conditions and ongoing high housing demand. At 6.8%, the annual growth rate of housing loans was also higher in Austria than in the euro area in September 2021. Almost 40% of new housing loans to households are still variable rate loans, which means that borrowers of such loans are exposed to interest rate risk. In light of the high price and lending growth seen in the residential real estate sector, macroprudential supervisors are critical of lenders’ continued noncompliance with the criteria for sustainable lending issued by the Financial Market Stability Board (FMSB). “Particular attention needs to be paid to the sustainability of lending, especially real estate lending. The FMSB’s recommendations need to be complied with,” OeNB Vice Governor Gottfried Haber explained.

Improvement in bank profitability
The Austrian banking sector’s profit rebounded strongly in the first half of 2021 on the back of an economic recovery helped by comprehensive public support measures and ongoing credit growth. As operating profit increased markedly and risk costs declined visibly, the sector’s aggregate net profit quadrupled year on year, to reach EUR 3.7 billion, a level already slightly above the whole year’s net profit in pandemic-ridden 2020. The sharp drop in risk costs was attributable to still very low credit default volumes, while the share of nonperforming loans was only 1.9% by mid-2021. That said, leading indicators suggest that credit quality may deteriorate in the wake of the pandemic. Still, banks’ common equity tier 1 (CET1) ratio has been stable at 16.1% since end-2020, and stress tests conducted by the OeNB show that the well-capitalized Austrian banking sector would be braced for another economic downturn and able to perform its function of providing funding for the real economy.

The OeNB’s recommendations to Austrian banks
The pandemic has caused renewed uncertainty recently, which is why it is difficult at present to assess its final impact. To safeguard financial stability, the OeNB recommends that Austrian banks

• continue to exercise restraint with regard to profit distributions to achieve a sustainable strengthening of the capital base,
• apply sustainable lending standards, particularly in real estate lending to comply with the quantitative guidance issued by the FMSB (including down payments of at least 20% and debt servicing of no more than 30% to 40% of households’ net income),
• ensure an adequate loan loss provisioning policy, especially after the expiration of COVID-19-related support measures,
• continue efforts to improve efficiency in order to ensure sustainable profitability,
• develop and implement strategies to deal with the challenges of digitalization and climate change.

The OeNB’s semiannual Financial Stability Report provides analyses of Austrian and international developments with an impact on financial stability and includes studies offering in-depth insights into specific topics related to financial stability.

Today’s press conference is being recorded and will be available on the OeNB’s YouTube channel.