Well-capitalized banking sector can support economic recovery

Presentation of the 50th Financial Stability Report of the OeNB

The Austrian economy has performed better than expected since late 2024.  It has emerged from almost two years of recession and is now on a path of moderate growth. Activity in industry, construction and consumption has remained subdued, however, and the high saving ratio also indicates ongoing uncertainty.

Despite a drop in operating income, Austria’s banks once again posted strong profits in the first half of 2025. The capital ratio increased to 18.6% thanks to the retention of a large part of the profits earned in 2024. This has contributed to a further strengthening of financial stability. Lending for residential real estate continued to gather pace, while credit demand from businesses remained weak given a subdued growth outlook. The adverse momentum in loan defaults has shown signs of easing. Yet, banks will be faced with a marked rise in impairments of existing nonperforming loans, as required by EU rules, in the near future. This will weigh on banks’ profitability and capitalization.

Economic outlook remains subdued
The Austrian economy has overcome what was the longest, albeit not the deepest, recession since 1945 and returned to moderate growth. The recovery is being driven by public consumption, however, while activity in key sectors such as industry, construction and consumer-related services remains weak. This is also reflected in the continued rise in corporate insolvencies. Consumer spending has remained subdued despite a robust labor market and higher real incomes. Also, the household saving ratio is still high – another sign of ongoing uncertainty. In Central, Eastern and Southeastern Europe (CESEE), the economy has been growing faster than in the euro area, which has a stabilizing effect on the Austrian financial sector.

Significant increase in capital levels is making banking sector stronger
In this persistently weak macroeconomic environment, the Austrian banking sector has remained notably resilient. A net profit of EUR 5 billion marks the third-best mid-year result in the sector’s history. It was achieved despite a year-on-year drop in operating income, which was mainly due to a one-off effect. Banks’ capitalization improved considerably thanks to the retention of a large part of the high profits earned in 2024. Common equity tier 1 (CET1) capital increased by around EUR 8 billion, and the CET1 ratio stood at 18.6% at end-June 2025. The leverage ratio amounted to 9.0%, three times the minimum requirement. The results of the OeNB's 2025 stress test confirm the domestic sector’s high resilience.

High equity capital not only supports banks’ resilience, it also allows them to expand their lending activity. Credit demand continued to show signs of recovery in the first half of 2025. Increased affordability supported demand, especially in residential real estate loans. Average new monthly business in this segment has been rising steadily again since 2023. At the same time, businesses’ demand for financing remained weak. Fixed investment was still sluggish amid ongoing uncertainty, and insolvencies in the construction and real estate sectors weighed on banks’ credit quality.

The share of nonperforming loans (NPLs) in the Austrian banking sector hovered at around 3.0% in the first half of 2025. The share is significantly higher in commercial real estate (CRE) lending, though. As this segment plays an important role, a sectoral systemic risk buffer of 1% was already introduced earlier and is currently being evaluated. Based on this evaluation, the Financial Market Stability Board (FMSB) will decide in December whether the buffer level should be adjusted.

The implementation of the final Basel III rules in the EU marks an important milestone in banking supervision. The new rules will provide for more harmonized capital requirements and higher risk sensitivity as well as a clearer boundary between the trading book and the banking book. They are gradually taking effect from 2025 on. So far, adverse effects on Austrian banks’ capital levels have been very limited. That said, the provisioning needs for existing NPLs are expected to increase sharply, following the coming into effect of EU rules on risk provisioning. This will have a negative impact on banks’ profits and equity capital.

The OeNB’s recommendations for strengthening financial stability in Austria
Against the backdrop of these developments, and in order to preserve the sector’s resilience and financial stability in turbulent times, the OeNB recommends that banks

• prepare for potentially stricter regulatory requirements for commercial real estate financing and stay committed to sustainable lending standards for real estate financing;
• ensure adequate credit risk management, including the active management of NPLs, higher provisioning (especially for the unsecured parts of loans) and conservative collateral valuations;
• sustain adequate capital levels, if necessary by limiting profit distributions; and
• ensure 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.