Austrian banks were early movers into central, eastern and south-eastern Europe. But the traditional Austrian-based parent companies with regional subsidiaries have transformed into modern, integrated entities that bring together staff and technology from across the region, to the benefit of all, says Österreichische Nationalbank governor Ewald Nowotny.

Ewald Nowotay

With the fall of the Iron Curtain in 1989, Austria’s strategic position in Europe shifted from the ‘dead end of the West’ right into the centre of the ‘new’ Europe. Given Austria’s central location but also its strong historical and cultural ties with central, eastern and south-eastern Europe (CESEE), Austrian businesses were among the first to identify the economic potential of the CESEE region and to expand their activities into these new markets.

Austrian banks were primarily motivated by the wish to provide financial services to their domestic customers that had expanded their businesses to CESEE. In addition, Austrian banks chose to be among the ‘first movers’ into these new and profitable markets, establishing themselves as major players in many CESEE countries.

But it was not only Austria’s businesses and banks that benefited from the opening up of the CESEE region. At the same time, economic transition and the prospect of EU membership triggered an unprecedented process of modernisation and catching up in CESEE economies and their banking sectors.

The Vienna Initiative

However, with the onset of the global financial crisis in 2008, the conditions for the banking industry in the CESEE region became difficult. According to some observers, Austria’s links to CESEE economies – and especially those of the Austrian banking industry – were even seen as a potential source of vulnerability for the Austrian economy at that time. In retrospect, these problems did not materialise.

In this context, the launch of the so-called ‘Vienna Initiative’ in early 2009 played an important role in safeguarding the financial stability in the region. The ‘Vienna Initiative’ served as a forum for major international financial institutions, among them the International Monetary Fund (IMF) and the World Bank, the most important European institutions, home and host country regulatory and fiscal authorities and the largest banking groups operating in the region.

Under the initiative, parent banks publicly committed to keeping their overall exposure stable and recapitalising their subsidiaries if necessary, so that the initiative went hand in hand with the balance of payments support programmes extended by the IMF, jointly with the EU, to five CESEE countries at that time (Bosnia-Herzegovina, Hungary, Latvia, Romania and Serbia). Parent banks signed the first of the relevant commitments in March 2009 (for Romania and Serbia), and commitments for other countries were signed in the subsequent months.

In my view, this unprecedented co-operation of international financial and European institutions in concert with international commercial banks active in the region was a stabilising factor for both the financial markets and the real economies of these countries, and contributed to the responsible behaviour of all parties involved. Due to this joint effort, a large-scale and uncoordinated withdrawal of cross-border banking groups from the region could be prevented. (A withdrawal could have triggered systemic bank crises not only in individual countries but in the region as a whole.)

However, the euro area sovereign debt crisis of 2011 and 2012 brought about new threats to the CESEE region. The ‘Vienna Initiative 2.0’ was launched in January 2012, again with the aim of avoiding disorderly deleveraging through an ongoing dialogue between home and host country regulators and supervisors and the banks themselves, thus taking into account both home and host perspectives. This initiative was also successful and the Austrian banking system remained committed to the CESEE region.

Major players

After the crisis years, Western banking groups, among them major Austrian banks, still hold substantial market shares in the CESEE region, while they have adjusted their business models to the changing economic environment.

At the end of June 2017, the consolidated foreign claims of Austrian banks in majority domestic ownership totalled about €300bn, with claims on CESEE accounting for some two-thirds thereof. The most substantial foreign claims on individual CESEE countries were held on the Czech Republic (€66.2bn), followed by Slovakia (€29.8bn), Romania (€24.2bn), Croatia (€17.2bn), Poland (€16.3bn), Hungary (€15.5bn) and Russia (€10bn), according to figures from the Österreichische Nationalbank. Thus, Austrian banks still are major players in the region, with their share being at one-quarter of total claims on CESEE held by banks in the EU-15, as of the end of 2016.

Austrian banking subsidiaries in CESEE generate sizeable profits, contributing significantly to the overall profitability of the Austrian banking system. The improvement in the economic environment in CESEE had a positive impact on Austrian banks’ subsidiaries, with their aggregate profit increasing by 8% year on year to €1.5bn in the first half of 2017, mostly owing to a further reduction in loan loss provisioning. The CESEE business helps Austrian banks compensate for the comparatively lower profitability in the domestic market.

The NPL burden

In recent years, European policy-makers and banking supervisors increasingly focused their work on reducing the high stock of non-performing loans (NPLs). Since their peak levels, European banks (among them banks active in CESEE) made progress in alleviating the burden of NPLs from their balance sheets. The formation of new problem loans has slowed down as the economy has started to recover, write-offs have picked up and NPL sales have increased.

The NPL ratio of Austrian banks’ subsidiaries in CESEE has steadily declined since 2014, but was still elevated, standing at 8.6% by the end of 2016 (compared with 11.5% at the end of 2015). From a single country perspective, NPL ratios continue to be highly heterogeneous, reflecting different economic developments.

In the Czech Republic and Slovakia, the NPL ratios of Austrian banks’ subsidiaries are close to Austrian levels, at 3.5% and 4.4%, respectively, while in other host markets, such as Romania, Hungary and Croatia, NPL ratios range from 11% to 17% – albeit exhibiting a downward trend over the past three years.

For the CESEE region as a whole, 2016 was the most active year to date for NPL transactions, with completed or ongoing deals exceeding €10bn. The surge in loan sale transactions across the region largely came down to a narrowing of the gap between book values and market prices. While sellers are becoming more realistic in their price expectations, driven by a mix of increased regulatory pressure and the acceptance of market pricing, investors have lowered their return requirements, reflecting their ongoing hunt for yield and higher willingness to conclude deals.

CESEE has seen the highest activity in corporate secured loans – with some deals also in corporate unsecured and retail loans, where debt recovery specialists tend to buy relatively small portfolios. Most transactions took place in Hungary, Romania, Bulgaria and Slovenia.

Looking ahead

Nowadays, Austrian banking groups active in the CESEE region follow a strategy, often labelled as an ‘extended home market’ strategy. While their local subsidiaries and branches are located in many different CESEE countries, business operations are designed and conducted across the entire region, under the umbrella of a single, increasingly integrated banking group.

The previous, rather one-directional approach, with the parent company being headquartered in Vienna and managing its subsidiaries from there, has developed into a mutually beneficial system, with an ongoing exchange of technology, knowledge and personnel between CESEE countries and Austria, across the entire banking group.

In fact, the composition of management boards of some Austrian banking groups reflects this tendency, comprising Austrians as well as nationals from CESEE countries. The growing integration of business processes within banking groups across the whole CESEE region can also be observed for the insurance sector.

In my view, banking groups active in CESEE markets have transformed themselves from Austrian-based parent companies into highly integrated central European banking groups, bringing together human resources and technology from different countries and optimising their technical processes. This approach will be key to jointly addressing in future challenges of the financial sector, such as increasing digitalisation, changes in banking regulation or geopolitical developments.

Ewald Nowotny is governor of Österreichische Nationalbank, the central bank of Austria, and member of the European Central Bank’s governing council.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter