European Stress Test Confirms Expected Results for Austria’s Banks

(, Vienna)

Five Austrian banks have sufficient capital buffers even under the most adverse stress scenarios; restructuring of Österreichische Volksbanken-AG must be moved forward rapidly and consistently

On November 4, 2014, the European Central Bank (ECB) will assume direct supervision of the most significant cross-border credit institution groups in the euro area. In preparation, these banks underwent an in-depth review referred to as “comprehensive assessment.” The results published today show the expected outcome for Austria’s major banks. Five of the six reviewed credit institution groups – Erste Group Bank AG, Raiffeisen Zentralbank Österreich AG, BAWAG P.S.K. Bank für Arbeit und Wirtschaft und Österreichische Postsparkasse AG, Raiffeisenlandesbank Öberösterreich AG, Raiffeisenlandesbank Niederösterreich-Wien AG – performed well in the assessment and have sufficient capital buffers even under the most severe stress scenario. For Österreichische Volksbanken-AG (ÖVAG), which is known to be in the midst of a fundamental restructuring process, the stress test has confirmed the analyses of the national supervisory authority and has shown a capital shortfall of EUR 865 million for 2016 if no restructuring measures are taken. Currently, however, ÖVAG meets the regulatory requirements.

Strategy to Strengthen Capital Is Successful

“The results correspond to our expectations. The figures for ÖVAG come as no surprise, either. All in all, Austrian banks are found to have become more resilient to crises in recent years,” noted OeNB Governor Ewald Nowotny by way of comment. Helmut Ettl, Executive Board Member of the Austrian Financial Market Authority (FMA), observed that “the comprehensive assessment confirms how important and forward-looking the national supervisory authorities’ strategy to strengthen Austrian banks’ capital base above and beyond the minimum requirements was and in doing so not just focus on the amount of equity, but also on the loss absorbency of capital components.” FMA Executive Board Member Klaus Kumpfmüller went on to specify that “the result of the comprehensive assessment also indicated how important it is that the restructuring of ÖVAG is moved forward rapidly and consistently.” As OeNB Vice Governor Andreas Ittner pointed out, “banks will have to take further measures to improve their capital base and their profitability.”

Thorough and Stringent Health Check

The comprehensive assessment, which was conducted from November 2013 to October 2014, consisted of two main components: an asset quality review (AQR) and a stress test. The AQR, which was undertaken by the ECB together with the national competent authorities and external experts, assessed the accuracy of the valuation of banks’ assets, in particular credit portfolios, but also capital investment, on the basis of a uniform European methodology. The stress test, which was carried out in cooperation with the European Banking Authority (EBA), examined the resilience of banks’ solvency to two hypothetical scenarios: the baseline scenario based on a forecast of expected economic conditions, and the adverse scenario based on severely deteriorating macroeconomic developments. The stress test assessed the impact on Common Equity Tier 1 (CET1) under both scenarios. This was the first stress test to have been based on the results of an AQR. It is crucial to emphasize that the adverse scenario is not a forecast; it is a hypothetical assumption of a severe economic downturn.

The results for Austrian banks are as follows:

European Stress Test  
Baseline Scenario Cet1R YE13 Basis Point Change AQR adjusted Cet1R Basis Point Change Stress Test Cet1R Baseline
Erste Group Bank 11,2% −117 10,0% 117 11,2%
Raiffeisen Zentralbank 10,4% −65 9,7% −22 9,5%
BAWAG P.S.K. 14,5% −21 14,3% −244 11,9%
OeVAG 11,5% −115 10,3% −308 7,2%
RLB OOE 11,4% −112 10,3% 101 11,3%
RLB NOE−W 17,5% −67 16,9% 26 17,2%
Risk Weighted Average 11,5% −91 10,5% 4 10,6%
 
Adverse Scenario Cet1R YE13 Basis Point Change AQR adjusted Cet1R Basis Point Change Stress Test Cet1R Adverse
Erste Group Bank 11,2% −117 10,0% −242 7,6%
Raiffeisen Zentralbank 10,4% −65 9,7% −193 7,8%
BAWAG P.S.K. 14,5% −21 14,3% −576 8,5%
OeVAG 11,5% −115 10,3% −824 2,1%
RLB OOE 11,4% −112 10,3% −237 7,9%
RLB NOE−W 17,5% −67 16,9% −509 11,8%
Risk Weighted Average 11,5% −91 10,5% −310 7,4%
 
Footnote: CET1R = Common Equity Tier 1 ratio.
Note: Based on CET1 ratios (column 1) as on December 31, 2013.  Column 3 "AQR adjusted CET1R" shows the CET1 ratio after the AQR. The threshold for the AQR-adjusted CET1 ratio was set at 8%. Column 5 shows the CET1 ratios under stress. Banks were required to maintain a minimum CET1 ratio of 8% under the baseline scenario and a minimum CET1 ratio of 5.5% under the adverse scenario.

The table shows that all Austrian banks have met the required 8% of CET1 after the AQR. In the stress test, five banks reached the required CET1 ratio of 8% under the baseline scenario and the required CET 1 ratio of 5.5% under the adverse scenario. All calculations are based on banks' 2013 financial statements, which means that capital measures – capital increases or the repayment of government participation capital – have not been taken into account.

The results for the Austrian banks are somewhat below the euro area average, which is primarily attributable to the fact that Austrian banks’ actual capital base is lower than that of their euro area peers.

Restructuring of ÖVAG to Be Moved Forward Consistently

Turning to ÖVAG, it must be pointed out that the bank currently meets all applicable regulatory requirements. The stress test showed, however, that ÖVAG has a capital shortfall under both the baseline scenario and up to EUR 865 million under the adverse scenario in 2016 unless sufficient restructuring measures are implemented. ÖVAG has been working on plans to restructure the entire Volksbanken sector for several weeks to close this potential capital gap. At present, the bank is in intense talks about these restructuring plans with its owners and the competent supervisors – the ECB, the OeNB and the FMA. 

“The comprehensive assessment has been another important step toward strengthening public and market confidence in the banking sector and enhancing transparency and stability,” OeNB Governor Nowotny concluded. FMA Executive Board Member Ettl added, “the comprehensive assessment, the most inclusive review of European banks' balance sheets so far, is a firm basis for us – the national supervisory authorities – and the ECB to build the Single Supervisory Mechanism.”

The comprehensive assessment has been an unprecedented challenge in terms of analytical depth and scope for both the ECB and the national supervisory authorities, in Austria the OeNB and the FMA. For the participating Austrian credit institutions alone, more than 8,000 individual credits together worth EUR 57 billion were analyzed in Austria and seven Central and Eastern European countries. In addition to OeNB supervisory teams, who were mainly responsible for quality assurance, experts of four international auditing firms and the international management consulting firm Oliver Wyman conducted the analyses. During the most intense phase of the assessment, more than 300 examiners and analysts were involved.

The results for each individual participating credit institution can be downloaded from the ECB and EBA websites.