Austrian banks are well positioned to navigate very challenging economic times

Presentation of the 49th Financial Stability Report of the Oesterreichische Nationalbank

In 2024, the Austrian banking sector remained stable despite weak economic activity and geopolitical risks. Austrian banks posted their second-highest profits on record and used them to further strengthen their capital levels. Both profits and capital levels are close to historic highs and represent important risk buffers, especially given the current challenging economic environment. The OeNB’s latest economic outlook projects that Austria will emerge from recession in 2025, but growth will remain weak. This has been reflected in declining credit quality – particularly in corporate lending, which is highly sensitive to economic weakness and the uncertainty caused by US trade policy. Risks have continued to increase in commercial real estate (CRE) financing, a sector that remains a focus of supervisory attention.

Cyclical economic recovery in Austria, but medium-term growth prospects are subdued

In its recent economic outlook, the OeNB expects a subdued recovery in Austria. The central bank forecasts that GDP will expand at a rate of 0.2% in 2025. Economic activity continues to be weighed down partly by new US tariffs and ongoing uncertainty about international trade. Looking further ahead, the OeNB expects only moderate growth in the following years, due to the continued negative impact of higher tariffs and the dampening impact of fiscal consolidation. As a result, Austrian GDP will not return to its pre-crisis peak of mid-2022 by the end of the forecast period in 2027, weighing on corporate profits. Nevertheless, the impact on the labor market is likely to remain limited, which will continue to have a positive effect on households’ ability to service their loans.

Banking sector profitability is an important risk buffer in uncertain times

Posting EUR 11.5 billion in profits, Austrian banks achieved their second-highest annual profit on record in 2024. Banks used the majority of these profits to strengthen their capital levels. At the end of 2024, their common equity tier 1 ratio (CET1 ratio) stood at 17.5%, remaining slightly above the EU average. In addition to profits, capital levels serve as the second key risk buffer that can be used to absorb future losses. Looking ahead, banks expect profitability to decline in 2025 but remain cautiously optimistic.

In 2024, the Austrian banking sector continued to grow, partly driven by an expansion of operations in Central, Eastern and Southeastern Europe (CESEE). Demand for corporate loans in Austria remained subdued due to the ongoing macroeconomy uncertainty and a reluctance to invest. At the same time, banks tightened their risk assessments. By contrast, demand for residential real estate (RRE) loans rebounded, boosted by falling interest rates and rising household incomes.

The subdued economy had a noticeable impact on Austrian banks’ credit quality in 2024. The nonperforming loan (NPL) ratio rose to 3.0% as of the end of the year, primarily driven by loan defaults in real estate, construction, manufacturing, and wholesale and retail trade. Particularly smaller banks with a focus on Austria recorded significant increases.

Risks have continued to intensify, especially in commercial real estate (CRE) financing. Compared to other European countries, the Austrian CRE sector saw one of the sharpest increases in the NPL ratio. The high exposure and risk potential mean that monitoring CRE risks remains a supervisory priority. Due to elevated systemic risks in the CRE sector, a sectoral systemic risk buffer will be implemented as of July 2025, initially at a rate of 1%.

Lending standards in residential real estate financing continued to improve significantly in 2024. The share of sustainable lending in accordance with the regulation for sustainable lending standards for residential real estate financing (KIM-V) continued to increase in 2024 and was just under 90% as of the end of the year. Prudent lending by banks, supported by mandatory lending standards in line with KIM-V, has effectively reduced systemic risks in RRE financing. Under Austrian law, these conditions mean that the KIM-V will expire at the end of June 2025. New lending picked up noticeably in the second half of 2024 – boosted by falling interest rates and rising incomes – even though the KIM-V remained in place and banks did not fully use the generous exemptions available to them.

Persistent geopolitical tensions also affect the banking sector: The war in Ukraine, conflicts in the Middle East and increasing geoeconomic fragmentation driven by sanctions and trade barriers are substantially changing the risk environment that banks are facing. In addition, hybrid threats, such as cyberattacks on critical infrastructure, are growing. Despite these challenges, the Austrian banking sector remains resilient. Strong earnings and solid capital buffers – supported by reforms implemented following the global financial crisis – ensure the stability of the financial sector.

The OeNB’s recommendations for strengthening financial stability in Austria

In light of the challenging macroeconomic landscape, the OeNB recommends that banks preserve their resilience to financial stability risks by

• preparing for stronger supervisory requirements for commercial real estate (CRE) financing and staying committed to sustainable lending standards for real estate financing;
• ensuring adequate risk management practices in times of increased uncertainty, including higher provisioning (especially for the unsecured part of loans) and conservative collateral valuations;
• sustaining capital levels, if necessary, by holding back on profit distributions; and
• ensuring sustainable profitability, especially by
  • maintaining cost discipline and
  • investing in digitalization and cybersecurity.
     

The OeNB’s semiannual Financial Stability Report provides analyses of Austrian and international developments with an impact on financial stability and includes studies offering insights into specific topics related to financial stability.