OeNB: Growing reform pressure on Austrian banks

(, Wien)

Presentation of the 30th Financial Stability Report of the Oesterreichische Nationalbank (OeNB)

Austrian banks are facing various challenges. Next to weak economic growth and persistently low credit quality, ultra-low interest rates have been causing additional strain for them. “Structural change in the banking sector is necessary and under way. It will help make the banking system more resilient and monetary policy more effective,” said OeNB Governor Ewald Nowotny at the presentation of the OeNB’s 30th Financial Stability Report. In a similar vein, Vice Governor Andreas Ittner added, “We recommend that banks swiftly carry out the necessary structural reforms. The OeNB will closely monitor reform efforts, however, to ensure that they do not give rise to new financial stability risks.” In the area of real estate financing, the OeNB recommends that a legal basis for macroprudential supervisory tools be put into place to make it possible to prevent credit-driven real estate price bubbles in the future.

In 2015, financial markets were affected by growing uncertainty caused by the crisis in Greece, weaker growth prospects in China and signs of prospective monetary tightening in the U.S.A. The appreciation of the Swiss franc and the strengthening of the U.S. dollar favored Austrian exports as well as exporters in Central, Eastern and Southeastern Europe. At the same time, the strong Swiss franc put a strain on households with foreign currency loans. These problems may also imply growing risks for all banks involved in foreign currency lending.

Thanks to the unconventional monetary policy measures embraced by the Eurosystem, the ECB’s interest rate cuts have reached the real economy, given that lending rates in the whole euro area have come down. The growth dynamics of corporate lending in Austria remained subdued in 2015. Banks have tightened lending conditions over the past years, which has primarily affected businesses with weaker credit ratings. At the same time, corporate credit demand in general has been declining. Overall, banks’ more restrictive lending policies have not constrained corporate financing in Austria.

Housing loans remain the main driver of credit growth in Austria. Owing to the low interest rate environment, the share of variable rate housing loans declined in 2015 – starting from a very high level by international comparison. As their share remains high, so does the interest rate risk for households.

Austria’s banks have increased their resilience over the past years. In the first half of 2015, the profitability of Austrian banks improved compared to the previous year. As this improvement was mainly attributable to lower credit risk provisioning, it remains to be seen whether this uptrend is sustainable. While low interest rates increase borrowers’ debt sustainability, banks tend to be negatively affected through shrinking interest margins. Against this background, banks need to raise operational efficiency. Aware of this need, they have begun to adjust their business models to the “new normal,” i.e. low growth and interest rates. This is important as profitability also significantly contributes to strengthening capitalization.

The capitalization of the Austrian banking sector has improved over the past years through a combination of higher capital and reduced risk-weighted assets. Compared to their European peers, however, Austrian banks continue to record below-average capital ratios. For this reason, the OeNB welcomes the recommendation by the Financial Market Stability Board to activate the systemic risk buffer (SRB) for selected Austrian banks. The SRB needs to be built up over the coming years to aid the further strengthening of financial market stability in Austria.

The OeNB’s Financial Stability Report, which is published every six months, contains analyses of financial stability-related developments in Austria and the international environment. In addition, it includes studies offering in-depth insights into special topics related to financial stability.