Austria is dealing with the same digitalisation and profitability issues as the rest of the eurozone, but insiders are confident the enforced upheaval in the country’s banking sector will have positive long-term benefits.

Austrian national bank

Banking in Austria is going through a revolution. The country’s traditional branch-focused business model is facing challenges from a digitalisation of banking services, and the need to cut costs is ever more evident as profitability comes under pressure and banks’ capital bases remain lower than the average across the EU's Single Supervisory Mechanism (SSM).

The global financial crisis in 2008 posed significant problems for Austria’s banks. Some institutions required financial assistance from the state while others fell short of regulations introduced to avert another crisis, but domestic regulator the Financial Markets Authority (FMA) now sees the banks on a path to recovery.

“We are seeing a recovery from the lows after the financial crisis but the banks are still in a re-orientation phase,” says Helmut Ettl, a member of the executive board at FMA. “We are witnessing changes to the business model of the banks in Austria, a refocusing on core markets and the realisation that there is a need for cost cutting to achieve stable profitability.”

Risk buffers

Across the eurozone, low profitability is a buzzword as slower economic growth and ultra-low interest rates continue to challenge banks’ margins and increasingly tougher regulatory requirements put pressure on returns. Banks must build up funds for the European resolution fund and deposit insurance, and Austria was one of the first countries to implement so-called systemic risk buffers for financial institutions from the start of 2016.

Andreas Ittner, deputy governor of Austria’s National Bank (OeNB) – the country's central banks – supported this because while it adds drag to banks’ profitability, it improves their capital position.

“Overall our banking assets are relatively high compared with  Austrian gross domestic product, but that is exactly why we have been promoting an additional systemic risk buffer,” he says. “The issue is more what kinds of shocks or stresses can be digestible and I think we are on a good path provided the banks do not stop concentrating on targeting higher profitability.”

The Austrian Financial Stability Board will introduce a 200-basis-point (bps) buffer for the three biggest banks, phased in over four years until 2019, and 100bps for several others, including the Landeshypos, which are majority public owned. For 2016, the buffer amounts to 25bps for the largest banks, which will increase to 50bps, 100bps and 200bps in the following years.

Mr Ittner says that while the Austrian banking sector today is “solid and robust” and has increased its risk-bearing capacity, core equity Tier 1 ratios are “still below the SSM average” despite having grown to about 12% across the sector from 2008’s lows of about 7%. 

Banking levy

But banks in Austria also have to shoulder a comparably high tax calculated on bank assets and volumes of speculative derivative transactions, which also lowers profits. Introduced to temporarily fund payments to ailing financial institutions in 2011, the levy is still in place in 2016, wiping some €640m off the balance sheet of banks with assets of more than €1bn.

Mr Ittner says that he would like to see banks being able to use most of their profits to build up additional capital. “That is the reason why I am critical of the bank levy,” he adds. “It might have been reasonable for a certain time but now the most important thing is to improve the banks’ capital situation to make sure that the buffer is big enough to deal with another shock, should another one come.”

Banks, naturally, are equally critical of the levy. But despite all expressions of discontent, a spokesperson from the finance ministry has confirmed to The Banker that a review of the tax is not on the agenda, because while finance minister Hans Jörg Schelling of the ӦVP party agrees with calls for reform, its coalition partner, the SPӦ, does not see the need to act.

Therefore, all banks can do is lower their cost and raise their income base. Mr Ittner is calling for banks to “strive for a cost-to-income ratio of 50%”.

“This is not something that banks will be able to reach immediately,” he says, but adds that a cost-to-income ratio at this level would help banks’ business models significantly.

The bulk of Austria’s banks historically ventured into countries in central and eastern Europe (CEE), where higher profit margins can be achieved. Yet the financial crisis resulted in high levels of non-performing loans and losses in some banks’ CEE operations, which has seen several institutions pull out of the region.

“The very clear target for the banks is to increase earnings through cost-cutting, reduction of staff and branches and alternative sources of income,” says Mr Ittner. “There is a need for streamlining business models and simpler products, but also improvements to the digital transformation process.”

Bank Austria's rethink

Austria’s large financial sector of some 800 individual banks serving a population of about 8.7 million is waking up to the need for greater efficiency and consolidation.

In 2015, UniCredit-owned Bank Austria, the country's largest bank by Tier 1 capital and second largest by assets, was rumoured to be considering a sale of its retail banking business to the fifth largest bank by assets, Bawag PSK, but in December made a conscious decision to remain in the retail business but revamp its direction, according to chief executive Robert Zadrazil.

“We want to be the most attractive bank for customers of the 21st century,” he says. “We want to get faster and better, for example [by cutting] approval times for mortgages from weeks to days. We want to have a compelling online offering, but also provide quality advice and be available for our customers for more hours of the day.”

The bank is optimising its branch network by investing in larger, more social branches which offer free wifi and tablet usage as well as specialists across product areas. To provide customers with customised advice also in smaller branches, while keeping an eye on costs, Bank Austria employs 270 specialists at its headquarters to provide advisory services via video link to any branch or offer services online at home or on the move.

Mr Zadrazil sees the new concept as a competitive advantage and plans to introduce it across Austria.

Bank Austria also benefits from doing business with corporates and multi-nationals, while the bank is market leader in Austria across services including capital markets. It specialises in accompanying clients into CEE and wants to further strengthen its position in this area.

Due to its experience in the CEE region, Bank Austria has incorporated UniCredit’s CEE business since being taken over by the Italian bank in 2007. Yet, by the end of 2016, UniCredit will remove the CEE business from Bank Austria  operations, allowing the Austrian bank to reduce complexity but also losing some profits from its balance sheet.

“Obviously our profits of €1.3bn from 2015 included earnings from our CEE business, but some €500m came from Austria – just one country rather than 13,” says Mr Zadrazil. “We are now the largest bank in the country and that will stay the same after the CEE transfer.”

Bawag the consolidator?

There is comparable stability for Bawag PSK, a group comprising the former post office bank and Austria’s bank for labour and business, which pulled out of CEE after the financial crisis and was nursed back to profit by its owners, US investment firm Cerberus Capital Management and GoldenTree Asset Management.

“We recognised early that we needed to transform ourselves into a multi-channel bank, as a mere branch-dominated business model is not sustainable to maintain the cost base,” says Bawag PSK chief executive Byron Haynes.

Bawag is one of the few banks to have already reached Mr Ittner’s cost-to-income ratio target in 2015 at 46.7%. It also posted 26% higher year-on-year net profits of €418m.

“Overall, 2015 is by far the biggest success in our history – from a strategic aspect, from a financial aspect, from a performance aspect,” says Mr Haynes. “We set some pretty ambitious targets at the beginning of 2015, and we not only met all our targets but exceeded them.”

The bank, which already acquired the leasing business from Volksbanken group in 2015, is looking to expand its retail banking business organically and inorganically, and not just in Austria but also in Germany and the UK, making it a likely consolidator for the Austrian banking system.

Bawag is going onto the offensive with its internet offering, which allows customers to access and apply for all of its banking services, while also taking on board OeNB’s suggestion to simplify products: to be as transparent as possible, Bawag now offers the current account box, which indeed comes in a physical box, including all information the customers need with regards to the account.

“We like retail banking,” says Mr Haynes. “A number of banks have taken the view that retail is not profitable. As a matter of fact, in our 2015 results some 60% of our income came from retail. We are happy to be a retail and commercial bank.”

Erste's strong relationship 

Erste Group, Austria’s largest bank by assets, reported net profits of €968m and a cost-to-income ratio of 57% for full-year 2015. Some 10% to 15% of the profits come from its Austrian business, according to chief executive Andreas Treichl, while the bank’s balance sheet also includes results from Erste’s CEE operations.

Erste operates Austria’s Sparkassen (savings banks) and through those also has the bulk of its operations in retail banking and services for small and medium-sized enterprises (SMEs), giving it a large share of about 20% of assets within the market. But there is no room complacency.

“We have to be fully aware of the fact that the relationship between banks and customers has changed dramatically,” says Mr Treichl. “We are no longer in a world where people need banks. Instead we have to prove that we can provide value.

“You have to be perceived as an attractive institution by your customers,” he says, adding that when considering switching banks, customers look at a bank’s consistency, security, the quality of products and channels, as well as the staff.

“We have been pretty good at offering an experience customers find enjoyable, and our digital banking platform ‘George’ seems to be one of the most attractive solutions around,” he says.

George offers internet banking with personalised features, such as options to add further information to bank transfers. Since its launch in January 2015, it has reached some 500,000 users.

Erste also invested in new branch models and initiatives such as its new headquarters, Erste Campus. The idea behind the new offices is to create a communal space with cafes and other areas open to the public, to connect with customers.

Local strengths

Austria’s traditional sector banks could benefit in an age when brand visibility and relevance are as important as cost cutting, and the FMA’s Mr Ettl notes that Austria’s co-operative banks have an important role to play. With most businesses in Austria falling into the SME category, local banks with local knowledge are vital.

“We have more than 400 small co-operative and mutual savings banks in Austria and our aim as supervisor is to keep the regulatory costs for them at a maintainable level,” says Mr Ettl. “These banks are complementary to the Austrian economy. Austria’s SMEs are profiting from the small banks and we see that many other countries have significant issues with providing banking services for SMEs.”

Moves to cut costs and revamp the business models are evident within the co-operative banking sector: Austria’s Volksbanken consortium, which once consisted of some 50 regional yet individual institutions, is in the process of merging into just 10, and the Raiffeisen banks, which have a similar regional set-up, are in the process of moving to fewer, larger entities. 

The digital challenge

As Austria’s bank customers are weaned from relying on branches and onto making more use of internet- and phone-based banking services, the digital world is opening up new areas for competition – and not just from within the banking industry.

“I see big challenges arising from digitalisation,” says Mr Ittner. “It is up to the banks to think about where they can deliver the extra solutions to customers, and I would say trust and safety are unique selling propositions banks should make use of.”

Digitalisation is everywhere, and no bank dares to dismiss the challenges it brings. The co-operative banks of the Volksbanken consortium are “a bit behind” in adapting to the digital challenge because they were “fighting for survival only last year”, according to Volksbanken-Verbund chief executive Gerald Fleischmann. However, he sees digitalisation as an important area for the group and believes its underdevelopment in this area could bring advantages.

“The speed of innovation in digitalisation could mean that we can benefit by leapfrogging some ideas peers previously had to invest money and resources in,” says Mr Fleischmann, adding that he is keen for Volksbanken to work with and learn from financial technology companies to develop the banking network’s digital future.

The question of how the digital revolution will play out and how banks will fare has yet to be answered. Similarly, the impact of the cost-cutting drives and branch optimisation across Austria’s banks is unknown.

“There is a lot to deliver,” says Mr Ittner. “Banking is not an easy business these days, but there are lots of opportunities for banks which concentrate on their strengths.”


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

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter