Presentation of the 47th Financial Stability Report of the OeNB
Vienna (OTS) – The Austrian economy was in recession in 2023. The Austrian National Bank (OeNB) expects developments to stabilize in 2024, although the economy will only grow weakly. Nevertheless, the banks were able to achieve record results in 2023 and thus further increase their capital base. As a result, the financial stability risks emanating from the banking sector have continued to decline. However, due to increased geopolitical risks and increasing credit risks, especially in the commercial real estate sector, as well as the interest rate turnaround that has been initiated, the domestic banking sector is now at a turning point.
Falling inflation enables economic recovery
The Austrian economy was in recession in 2023. The reasons for this were persistently high inflation, the very weak external economic environment and the resulting generally poor sentiment. The OeNB expects developments to stabilize in 2024, but the economy will only grow weakly at 0.3%. Private consumption will recover due to significantly rising real wages, and exports will also make a positive contribution to economic growth. Gross fixed capital formation, on the other hand, will shrink again over the year as a whole. High financing costs and poor profit expectations are particularly dampening interest-sensitive investments in residential construction and cyclically dependent equipment investments.
Banking sector posts record profits despite increasing loan defaults
In a persistently weak macroeconomic environment, Austrian banks achieved a record profit of EUR 14 billion in 2023. The increase in profits was mainly due to a further increase in the net interest margin, as interest rate increases in the context of tighter monetary policy led to higher revenues. Thanks to the high profit, the banking sector was able to significantly increase its consolidated common equity tier 1 capital ratio to 17.5%, and Austria’s major banks also raised their capitalization above the average of their European peers for the first time. “Banks have used their profits to strengthen resilience to future uncertainties. However, what applies to the overall system level does not necessarily apply to every single bank. Bank-specific risks must therefore also be addressed in a targeted manner at the individual bank level,” explained OeNB Vice Governor Gottfried Haber.
However, the banking system is now at a turning point: In addition to the uncertainties resulting from geopolitical risks, several factors are putting increased pressure on profitability. The increasing number of bankruptcies at the end of 2023 already led to an increase in loan defaults, and this trend will continue at the beginning of 2024. The cost side is also coming into focus: depositors have shifted their savings from sight deposits to time deposits, which is leading to higher refinancing costs for banks. Furthermore, wage agreements and inflation-related increases in material costs will require constant cost discipline in the future, not least in order to create space for necessary investments in new information technologies.
In addition, higher interest rates have reduced demand for loans, especially for housing finance. The systemic risks from loans in the residential real estate sector have been effectively addressed through borrower-related measures. Since their introduction, lending standards have improved significantly. Sustainable lending for real estate loans will continue to be an essential element of a stable financial market in the future. The fact that a large part of the available exception quotas remained unused also indicates that the decline in lending volume was primarily driven by increased interest rates, high construction costs and general uncertainty regarding the economic environment.
Due to the same factors, commercial real estate loans are currently experiencing stronger loan default dynamics. In addition, the adjustments in real estate valuations do not yet largely reflect the new, challenging environment.
OeNB recommendations to strengthen Austrian financial stability
The persistently weak economic growth in Austria and long-lasting geopolitical conflicts continue to pose major challenges. Due to the interest rate turnaround initiated at the beginning of June, it is to be expected that the interest margin of the banking sector will not increase any further. The increased credit risks will also put pressure on the profitability of the banks. In order to be prepared for future challenges, the OeNB recommends that banks
- safeguarding or, where necessary, further strengthening the capital base by restraining profit distributions (dividend payments and share buybacks),
- ensuring sustainable lending standards for real estate loans and preparing for higher risk weights for commercial real estate loans,
- the adequate management of credit and interest rate risks, including higher provisions and conservative collateral valuation, and
- Ensuring sustainable profitability through cost discipline and through investments in new information technologies as well as protection against cyber risks and the effects of climate change.
The OeNB’s Financial Stability Report, which is published biannually in English, analyses developments relevant to financial stability in Austria and internationally, as well as special topics related to financial stability.
The Financial Stability Report 47 can be found on the OeNB website.
Inquiries & Contact:
National Bank of Austria
Mag. Maria-Elisabeth Faulmann
Press Officer
(+43-1) 404 20-6900
maria-elisabeth.faulmann@oenb.at
www.oenb.at
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