National Bank presents its annual financial statements and annual report for 2023
Vienna (OTS) – “The Eurosystem – and the OeNB as part of it – acted with prudent monetary policy in 2023 in a difficult environment. In view of the high inflation, it continued to withdraw from the expansionary monetary policy and gradually increased key interest rates. In 2023, geopolitical conflicts and wars led to major political and economic challenges.
In addition to the ongoing armed conflict, elections will take place in several major economies in 2024. The topics of digitalization, climate change and restructuring of energy systems as well as demographic developments remain challenging for the economy and politics, but also for society as a whole,” said Robert Holzmann, Governor of the Oesterreichische Nationalbank (OeNB), today on the occasion of the presentation of the annual financial statements and the OeNB -Annual report for 2023.
In order to curb high inflation in the euro area, the ECB Council began gradually raising key interest rates in 2022. The key interest rate increases that will continue in 2023 will continue to put the business conduct of the Eurosystem’s central banks under pressure. This also applies to the OeNB.
The negative business result for 2023 is due to the so-called asset-liability mismatch: The interest that the OeNB paid for the commercial banks’ deposits with the OeNB on the liabilities side exceeded the interest income from the fixed, but currently significantly lower interest assets (assets). from the purchase programs that the OeNB holds on the assets side in its books. “Whether a central bank makes profits or losses is a secondary outcome of its mandate. We make monetary policy decisions in the Eurosystem/the ECB Governing Council with the aim of ensuring price stability in the medium term,” said Governor Holzmann. “The reported results of central banks may therefore temporarily deteriorate, as is the case with the OeNB’s negative business result for 2023,” OeNB Director Thomas Steiner continued.
In any case, the financial strength and ability to act of central banks remain unaffected by such developments and losses: the OeNB will have fulfilled all of its tasks fully and effectively in 2023. In addition to monetary policy, this particularly includes ensuring financial market stability and smooth payment transactions, the supply of cash, the creation of high-quality statistics and the preparation of the digital euro.
Total assets fall – business result negative for the first time
“Monetary policy is also the main driver for the development of the balance sheet total,” said Director Steiner, summarizing the OeNB’s business development.
The balance sheet total fell by EUR 13 billion or 5 percent at the end of 2023 compared to the previous year. On both the asset and liability sides of the balance sheet, this is primarily due to monetary policy operations. On the asset side, the volume of targeted longer-term refinancing operations (TLTRO III) continued to decline significantly due to maturities and early repayments, namely from EUR 39 billion to EUR 15 billion. The TLTRO III was offered from autumn 2019 to December 2021 with a term of three years and was heavily used by Austrian credit institutions. On the other hand, in 2023, deposits from credit institutions declined at the same time on the liabilities side.
The main reason for the OeNB’s negative business result of EUR -2,211 million for the first time was the net interest result: at EUR -2,043 million, it was significantly worse in 2023 than in the previous year. This primarily reflects the already mentioned monetary policy asset-liability mismatch, i.e. the interest rate difference between long-term low interest income from securities for monetary policy purposes (EUR 494 million) on the assets side and high interest expenses from interest on the deposit facility (–EUR 3,476 million). the liabilities side. Interest expenses for the OeNB’s TARGET balance (EUR –2,633 million) also had a significant negative impact on the result. This was offset by interest income from interest on the intra-Eurosystem balances from the distribution of euro banknotes in circulation in the Eurosystem amounting to EUR 2,066 million. The longer-term refinancing transactions (TLTRO III) resulted in interest income of EUR 1,092 million.
The OeNB’s above-average other income, including the investment of its own reserves, could not compensate for the negative net interest result. Therefore – as in the previous year – no share of the profits will be paid to the federal government. The financial burdens from the monetary policy asset-liability mismatch are expected to last for several years and will be reflected in the OeNB’s future results. The first accumulated loss for 2023, which is characterized by monetary policy operations, amounting to EUR 2,062 million will be carried forward to 2024 and offset with future profits, which is why no profits can be distributed to the federal government for the next few years. The OeNB as a central bank is different from companies and commercial banks – and the legislature has given the OeNB a clear mandate: The primary goal of the Eurosystem is to ensure price stability. The losses do not affect the ability to conduct effective monetary policy, Director Steiner informed.
Austria’s economy will be in recession in 2023
In the second half of 2022, economic output in Austria fell slightly. This was triggered by three factors: (1) the catch-up effects after the end of the COVID-19 pandemic were running out, (2) energy prices rose and (3) the international environment was weak. In the second and third quarters of 2023, economic output unexpectedly fell significantly and Austria slipped deeper into recession. The main reason for this is that private consumption and investments fell sharply and exports also recorded a decline. At the end of 2023, the braking factors weakened and private household incomes were increasingly supported by higher wage agreements. This means that economic output stagnated in the fourth quarter of 2023. Overall, Austria’s real economic output shrank by 0.7 percent in 2023.
The OeNB expects slightly positive quarterly GDP growth rates for 2024. The recovery is based primarily on stronger consumer demand; However, investments are likely to shrink again in 2024. Despite a weak start, the Austrian economy will grow moderately by around ½ percent in 2024, according to the OeNB interim forecast from March 2024.
The key monetary policy interest rate in the euro area will be 4 percent in 2023
In 2023, monetary policy was also required to slow down the high increases in consumer prices with further monetary policy measures. In 2022, the average inflation rate for the euro area reached its peak at 8.4 percent. It fell in 2023: The increase in the Harmonized Index of Consumer Prices (HICP) decreased from 8.6 percent in January to 2.9 percent in December. The annual average inflation rate in the euro area was 5.4 percent in 2023. According to its macroeconomic projections updated in March 2024, the Eurosystem expects inflation rates of 2.0 percent and 1.9 percent for 2025 and 2026, respectively.
In order to reduce inflation, the ECB Governing Council increased the key monetary policy interest rates in six steps from 2 percent to 4 percent in 2023. The interest rate for the main refinancing operations in the euro area at the end of 2023 was 4.50 percent and the interest rates for the marginal lending facility and the deposit facility were 4.75 percent and 4.00 percent, respectively.
In order to combat inflation, it was also necessary to reduce the Eurosystem’s balance sheet total and thus also that of the OeNB in 2023. Large central bank holdings of securities dampen medium to long-term interest rates. The monetary policy securities portfolios of the Eurosystem and the OeNB currently come mainly from the Asset Purchase Program (APP) and the Pandemic Emergency Purchase Program (PEPP). The moderate reduction of the APP portfolio began in 2023 and will continue in 2024. As of July 2023, expiring APP securities will no longer be replaced. The OeNB’s APP portfolio shrank by EUR 3.8 billion to EUR 71.6 billion in 2023. However, the PEPP portfolio of EUR 37.3 billion was fully maintained in line with the Eurosystem. This means that amounts from expiring securities were completely reinvested. This also applies to the first half of 2024. The PEPP portfolio should then begin to shrink moderately in the second half of the year.
At the end of 2024, in accordance with the decision of the Governing Council of the ECB on December 14, 2023, amounts of expiring PEPP securities will probably no longer be reinvested. The OeNB’s balance sheet total decreased further in 2023 due to the dismantling of the TLTRO III monetary policy refinancing operations.
Inflation rate in Austria is falling significantly
In Austria, HICP inflation peaked at 11.6 percent in January 2023. By February 2024 it gradually fell to 4.2 percent. Our analysis shows that inflation in 2022 was driven primarily by energy and other import prices. At the end of 2022, profits initially emerged as the most important cost component. From the second quarter of 2023, wage and salary costs contributed around half of the price increase in Austria. This also increased the importance of non-energy service and industrial goods for inflation; However, those of energy and food prices decreased in 2023. This is expected to continue in 2024. In its forecast from March 2024, the OeNB expects inflation to decline on average for the year:
from 7.7 percent in 2023 to 3.6 percent in 2024, 2.7 percent in 2025 and 2.3 percent in 2026. Core inflation remains above HICP inflation throughout the forecast horizon.
Resilient Austrian banking system defies challenging environment
“Consistent microprudential supervisory work, which takes place at the level of individual institutions, and macroprudential supervisory measures, which target the entire system, have effectively strengthened the resilience of Austrian banks. The Austrian banking system can therefore continue to maintain its top rating among the 11 most stable banking systems in the world,” said OeNB Deputy Governor Gottfried Haber.
The environment for banks in 2023 was difficult given military conflicts, geopolitical tensions, higher inflation, economic slowdown and, in particular, the banking turbulence in the USA and Switzerland. “The last few years in particular, with their diverse challenges and new risks, show the particular value of forward-looking and accurate micro- and macro-prudential banking supervision,” explains Deputy Governor Haber.
The banks not only successfully withstood these challenges with strengthened balance sheets, but were also able to achieve high profitability in an environment of rising interest rates. Solid capital and liquidity remain essential, especially in uncertain times, as the positive effects of the interest rate turnaround took effect quickly, while the negative effects in terms of deterioration in credit ratings and the associated higher risk costs and defaults only occur with a certain time lag.
Deputy Governor Haber pointed out that “despite the challenging environment, the macroprudential measures contributed significantly to an improved perception of the Austrian banking sector and to the top rating. The fact that the Austrian banking sector continues to be one of the most stable in the world according to the S&P rating allows banks to pass on the resulting low refinancing costs to their customers. This is a key factor in the low interest rates that the states and the federal government have to pay on public debt.”
In 2023, the OeNB increased public communication on the risk content of variable-interest financing, after having been closely monitoring this form of credit for some time. Variable-interest loans make up a significant proportion of financing in Austria. Even with extremely low long-term interest rates, such as B. from mid-2015 to mid-2022, their share was on average 45 percent of newly granted private residential real estate loans and reached over 50 percent again at the end of 2023. Loans with variable interest rates pose interest rate risks for borrowers. When interest rates rise, this leads to additional financial burdens for households – compounded by a weak economic environment with falling real incomes. This was the case in 2023. In 2023, the Financial Market Stability Board (FMSG) also explicitly pointed out the particular risk content of variable-interest loans.
In August 2022, binding borrower-related measures were introduced in accordance with international standards and recommendations. Since then, the granting standards for residential real estate loans in Austria have improved significantly, so that the risks in the area of private residential real estate financing have not led to any disruption to financial market stability despite increased burdens on households and decreasing financial flexibility as well as declining property values for the first time.
Loans to finance commercial real estate will remain the focus of micro- and macro-prudential supervision in 2023. Several factors weighed on the commercial real estate market:
rising interest rates, higher construction costs, falling property values and the generally weak economic environment. As a result, the related value adjustments and loan defaults increased in the banking sector, which were analyzed and examined in detail both at the level of the overall system and at the level of the individual banks. Commercial real estate will continue to be a focus of supervisory work in 2024.
Profitability in the banking sector in 2024 is likely to be impacted by weaker credit growth, rising refinancing costs, for example through higher deposit interest rates, and deteriorating credit quality. In addition, inflation increases cost pressure on banks. Deputy Governor Haber therefore recommends that banks continue to “use the good earnings situation in 2023 to further strengthen their capital base and therefore remain prudent, forward-looking and cautious when distributing profits.”
In the statistics business area, the OeNB published a transparency platform for savings deposit interest in Austria in 2023. The rapid implementation within a very short period of time was possible thanks to close cooperation with representatives of the Austrian banks and the Austrian Chamber of Commerce. The platform provides a market overview of interest rates for overnight deposits as well as deposits with lock-in periods of 6, 12, 24 and 36 months. This allows interested parties to determine at a glance whether their existing savings products correspond to current market conditions. The transparency platform thus offers assistance for the first step in optimizing individual investments, which can then be followed by concrete comparisons at product level with the help of private and public comparison platforms as well as discussions with the house bank or other credit institutions.
The OeNB cash basic supply model
“Cash is still the number one means of payment for Austrians,” said OeNB Director Eduard Schock. The main reasons for this are the advantages for consumers such as the protection of privacy, crisis resistance and the security of cash. Therefore, around 95 percent of the local population cannot imagine a world without cash. The fact that non-cash payment systems are in vogue and will continue to gain in importance does not change this.
The OeNB is obliged by its supply mandate to meet the still high demand from the population for euro cash. Above all, this means being able to offer Austrians unrestricted access to cash and thus the freedom to choose their means of payment in the future.
Access to cash is still very good in Austria. Compared internationally, Austria still has a high supply density of ATM machines.
Nevertheless, the nationwide supply of cash in the future is by no means guaranteed without appropriate measures. This is shown by the decline in ATMs by almost 6 percent or around 500 since 2021.
“In order to maintain the existing good infrastructure in the long term and sustainably, additional efforts are required. The OeNB is actively involved here and takes targeted measures to ensure a resilient cash supply,” says Director Schock.
One of these initiatives is the Cash Board, founded in 2023, in which strategic issues relating to the cash supply are discussed together with domestic commercial banks. The OeNB has currently developed a basic cash supply model, which will now be negotiated with the banks until the summer. The model is not primarily aimed at the number of ATMs, but rather focuses on their low-threshold accessibility. 67 percent of the population should be able to reach a cash dispenser within one kilometer, around 83 percent within a distance of two kilometers and around 97 percent within a maximum radius of five kilometers.
Preparations for the digital euro started
The Eurosystem is considering issuing a digital euro. Like euro cash, the ECB would issue, protect and regulate the digital euro, making it an equally trustworthy means of payment. Governor Holzmann summed up the advantages of the digital euro: “Central banks must ensure that public money and an independent monetary policy are maintained. The digital euro should be available for everyday payments. It is central bank money in digital form that private individuals and companies can use in addition to cash and private means of payment. This makes it a cost-effective choice for all citizens in the euro area and worldwide. The digital euro strengthens Europe’s payment autonomy. In other words, in times of crisis, Europe is not dependent on payment systems from third countries, but is self-sufficient.”
The starting signal for the preparatory phase for the digital euro was given in mid-October 2023. At the beginning of 2024, the ECB published the first tenders in connection with the issuance of a digital euro. The OeNB participates in the development of the technical components that are developed by the Eurosystem itself. “The ECB Council could decide on the further course of the digital euro project at the end of 2025,” said Governor Holzmann.
OeNB focuses on sustainable corporate management
Sustainability plays a high priority in the OeNB’s corporate strategy. Environmental orientation and ensuring sustainable and economically positive development are essential prerequisites for future-oriented and successful corporate management for the OeNB and its subsidiaries. The OeNB takes into account the impact on society and the environment as much as possible in all aspects of its business activities with the aim of promoting sustainable and future-proof development within and beyond national borders. As OeNB Governor Robert Holzmann stated, “The OeNB has already committed itself in 2021 to becoming CO2-neutral as a company by 2040 and to adjust its assessment accordingly by 2050. We are currently developing concrete measures for complex measurement and goal achievement in close collaboration with international committees.”
Governor Robert Holzmann thanked the Presidium and the members of the General Council for their committed work in the General Council. At the end of the press conference, he also thanked all employees for their performance in the 2023 financial year, also on behalf of the General Council and the Board of Directors.
The OeNB’s annual report is available online:
https://bit.ly/4922uEt
Also listen to the OeNB podcast on the topic “Why central banks are allowed to write losses” with Governor Robert Holzmann and Director Thomas Steiner:
Questions & Contact:
National Bank of Austria
Mag. Maria-Elisabeth Faulmann
Press spokesperson
(+43-1) 404 20-6900
maria-elisabeth.faulmann@oenb.at
www.oenb.at
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