OeNB: Banks must improve cost structures further and build up capital()
Presentation of the 29th Financial Stability Report of the Oesterreichische Nationalbank (OeNB)
The Eurosystem’s accommodative monetary policy stance continued to be a main driver of financial market developments in Europe in the first half of 2015. The yield rise observed in euro bond markets since the end of April 2015 led to a normalization of conditions. Bank lending to the corporate sector in the euro area started to recover in the first months of 2015, and the differences between individual euro area countries diminished. In line with the European Bank Recovery and Resolution Directive, Austria has adopted the Federal Act on the Recovery and Resolution of Banks (BaSAG). “What we see is a paradigm shift in banking regulation that will result in a sustained strengthening of financial stability in Austria,” OeNB Governor Ewald Nowotny said at the presentation of the OeNB’s 29th Financial Stability Report.
Until May 2015, the growth rates of Austrian banks’ lending to corporations and households remained positive, albeit still low. Bank lending to the corporate sector was still cautious in the first quarter of 2015, while loan demand by corporations was also modest. As a result, investment growth was not hampered by loan supply constraints.
With the aim of strengthening the Austrian banking sector’s capitalization and resilience, the Financial Market Stability Board adopted recommendations to the Austrian Financial Market Authority (FMA) on June 1, 2015 to activate macroprudential capital buffers. “The systemic risk buffer is to address the structural risks of the Austrian banking sector, and the buffer for other systemically important institutions will enhance the resilience of systemically important banks in Austria,” OeNB Vice Governor Andreas Ittner explained.
Foreign currency loans and loans with repayment vehicles continue to pose a risk. Due to supervisory measures, the outstanding amount of Swiss franc-denominated loans, which account for the lion’s share of foreign currency loans in Austria, has halved since end-2008 (in exchange rate-adjusted terms). However, since the appreciation of the Swiss franc in early 2015, the funding gap between the expected value of repayment vehicle investments and the loan amount at maturity has widened for loans with repayment vehicles. At the end of April 2015, this funding gap equaled approximately EUR 6 billion. Although households with foreign currency loans do have higher average incomes and therefore a higher risk-bearing capacity than other
borrowers, both the borrowers concerned and their banks should proactively address the risks associated with foreign currency loans and loans with repayment vehicles.
Austrian banking sector developments in 2014 were marked by structural changes. After posting a net loss in 2013, domestic banks recorded a consolidated net profit of around EUR 1.4 billion in 2014. But the sector’s profitability is still under pressure and persistent structural weaknesses continue to affect Austrian banks’ domestic earnings situation. The launch of consolidation and restructuring measures, however, is set to improve banks’ profitability in the medium term. Austrian banks’ CESEE subsidiaries recorded a significant decline in profits in 2014, which can be traced to, among other things, sustained low credit quality and losses from foreign currency lending as well as repercussions of geopolitical tensions between Russia and Ukraine. Consequently, Austrian banks’ profitability was below that of their European peers. “For this reason, the OeNB recommends that credit institutions continue to improve their cost structures and earnings situation,” Vice Governor Ittner concluded.