Challenges to the Austrian Financial System Persist(, Vienna)
Presentation of the 27th Financial Stability Report of the Oesterreichische Nationalbank
Tensions in international financial markets continued to ease in the first half of 2014. The sovereign debt crisis subsided further, which has been reflected in decreasing spreads. “On the one hand, this improvement was attributable to EU countries’ reform efforts, with Ireland, Spain and Portugal exiting their respective support programs. On the other hand, central banks’ unconventional measures as well as progress in establishing the Single Supervisory Mechanism and the Single Resolution Mechanism in the euro area were major contributing factors. Still, credit markets in the euro area have remained highly fragmented,” Ewald Nowotny, the Governor of the Oesterreichische Nationalbank (OeNB), said at the presentation of the 27th issue of the OeNB’s Financial Stability Report.
Against this background, the Eurosystem decided in June to cut its interest rates further. At the same time, the ECB introduced targeted longer-term refinancing operations as a new monetary policy instrument to help reduce the ongoing fragmentation of credit markets in the euro area and to support bank lending to nonfinancial corporations and households (excluding housing loans to households). This measure is of particular importance to those countries in which loan growth has contracted for a prolonged period.
In Austria, the moderate upswing of the economy since mid-2013 has translated into a modest recovery of corporate profits, which, in tandem with receding investment in equipment, reduced the corporate sector’s external financing needs. Domestic corporate borrowing was hesitant, but annual loan growth remained positive nevertheless. With companies’ equity share edging up in 2013, corporate debt servicing capacity also improved slightly in the current environment of low real interest rates. The growth of loans to households also remained slow and was driven above all by housing finance. Housing loans are now granted primarily in euro, as, like in previous years, the volume of new foreign currency lending was low in 2013. Yet, the outstanding volume of foreign currency loans continues to pose a material risk both to households and to Austrian banks.
The aggregate profitability of the Austrian banking system remained under pressure in 2013. For the first time in years, the Austrian banking sector posted an annual net loss. Operations were still characterized by a comparatively high cost-to-income ratio, attributable also to persistently low interest margins. Furthermore, write-downs of goodwill linked to Austrian banks’ subsidiaries in Central, Eastern and Southeastern European (CESEE) countries and losses of Hypo Alpe-Adria-Bank International AG weighed on net results.
In CESEE, Austrian banks again reported profits in 2013, which, however, were offset almost completely by goodwill write-downs. Moreover, the overall positive result was traceable to the concentration of high profits on only a few countries, implying greater vulnerability of Austrian banks to adverse developments in these countries. Austrian banks’ CESEE subsidiaries also saw an ongoing deterioration in loan quality in a number of countries in the region.
The capitalization of the Austrian banking system has improved thanks to both capital increases and a reduction of risk-weighted assets. The aggregate tier 1 ratio of domestic banks increased from 11.0 % to 11.9 % in 2013. “But in comparison with their international peers, Austrian banks’ capitalization is still below average,” OeNB Vice Governor Andreas Ittner pointed out. Banks are called upon to further improve their cost structures and the sustainability of their business models to enhance the profitability and internal capital generation capacity.
At the beginning of 2014, macroprudential supervision structures were introduced in Austria with a view to strengthening financial stability. Macroprudential supervision provides tools to address systemic risks in the banking sector. At the OeNB, the new supervisory activity also meant a substantial extension of financial stability tasks: In addition to the ongoing analysis of financial market developments and the identification of systemic risks, the OeNB is now also charged with issuing recommendations and expert opinions on specific supervisory action.
At the European level, the ECB, in collaboration with the national competent authorities, is currently performing a comprehensive assessment of significant banks, including an asset quality review and a stress test, before the Single Supervisory Mechanism (SSM) becomes effective in November 2014. In Austria, six banks are participating in the comprehensive assessment, whose objective is to enhance the transparency of banks’ balance sheets and to improve confidence in the banking sector.
The OeNB’s Financial Stability Report, which is published every six months, contains periodic analyses of financial stability-related developments in Austria and the international environment. In addition, it includes studies offering in-depth insights into specific topics related to financial stability. The Financial Stability Report 27 discusses the implications of bank deleveraging in the euro area and in Austria; macrofinancial developments in Ukraine, Russia and Turkey; capital market development in CESEE; the legal and institutional framework of macroprudential supervision in Austria and in the EU; and the integration of micro data into the macroprudential analysis of households’ risk-bearing capacity.