Economic Policy Has Stabilized International Financial Markets, but Challenges Remain High

Presentation of the Financial Stability Report 25 of the Oesterreichische Nationalbank
(, Vienna)

Financing conditions in the international financial markets improved in the first half of 2013. A number of monetary and fiscal policy measures noticeably calmed uncertainties in the markets. Still, market confidence remains fragile, and conditions diverge considerably among euro area countries. “Continued efforts to strengthen the financial sector remain necessary to ensure a sustainable recovery,” the Governor of the Oesterreichische Nationalbank (OeNB), Ewald Nowotny, said at the presentation of the 25th issue of the OeNB’s Financial Stability Report.

The outlook for the global economy remained subdued in the first half of 2013. The euro area is facing its second year of economic weakness. By contrast, the uncertainty in euro area financial markets eased noticeably overall in the first half of 2013. A range of monetary and economic policy measures have contributed to this, in particular the announcement of the option to conduct Outright Monetary Transactions (OMTs) by the ECB, as well as progress toward fiscal and structural reform and a banking union. A significant decline in sovereign bond yields reflected this improvement. Recently observed bond yield rises in the international markets were primarily due to liquidity considerations rather than a change in credit assessments.

Austria could not escape the negative effects of cyclical developments in Europe – Austrian GDP growth has been stagnating since the second quarter of 2012. Enterprises reduced their use of external financing sources considerably in 2012. While corporate bond issuance remained buoyant, the growth of bank lending to corporates weakened steadily in the second half of 2012 and in the first few months of 2013. This was the result of both enterprises’ declining demand for bank loans because of reduced investment activity and of banks tightening their credit standards somewhat. With lending rates dropping further, loan conditions for the corporate sector and for households remained favorable nevertheless.

However, the growth of bank lending to households recently also lost momentum; only housing loans continued to register positive growth rates, although these remained below the still vigorous rise in housing prices. New borrowing in foreign currency remained low. “Even though the share of foreign currency loans in total loans to households contracted by 8 percentage points to 23% from 2008 to the first quarter of 2013, foreign currency lending still represents a key risk both to households and to banks,” emphasized OeNB Executive Director Andreas Ittner.

Starting from a low level, the profitability of the Austrian banking system improved markedly in 2012, albeit driven also by positive one-off effects. Lower risk provisioning needs for securities and declining depreciation allowances for fixed investment property had a positive impact on banks’ profitability too. However, the key items supporting profits – interest and fee-based income – fell year on year. In view of these developments, Austrian banks still have to make an effort to sustainably boost efficiency and profitability.

Although Austrian banks made further strides in restructuring their balance sheets in 2012, the fears of a credit crunch in Austria and at Austrian subsidiaries in Central, Eastern and Southeastern Europe (CESEE) did not materialize. The CESEE subsidiaries made a major contribution to Austrian banks’ consolidated profitability again in 2012, as the average return on assets of all CESEE subsidiaries of roughly 0.8% was noticeably higher than the return on assets on banks’ business in Austria at 0.3%. However, the performance of the subsidiaries in individual countries of the region diverged further. It must also be noted that the higher profitability of Austrian banks’ CESEE subsidiaries is linked to higher risks.

Austrian banks’ capital ratios continued to improve in 2012, with the tier 1 ratio rising by some 65 basis points to 11.0%. “Comparable international banks still have considerably higher capital ratios, but they also have higher leverage ratios,” Ittner noted. The most recent stress tests of the OeNB, which were conducted under the Financial Sector Assessment Program (FSAP) in cooperation with the IMF, concluded with a solid result for the banking system as a whole. However, individual institutions remain conspicuous.