Austrian banks maintain their durability

Austria’s lenders were among the worst affected by the 2008 financial crisis, with the Austrian government forced to step in and either nationalise or liquidate three of the country’s biggest banks — Hypo Alpe Adria, Kommunalkredit and Österreichische Volksbanken. For years afterwards, Austrian banks required financial assistance from the state.

Unlike during the global financial crisis and its aftermath, the country’s banking sector has proved resilient during the pandemic, and has been one of the key pillars supporting the economy. “This time, banks were not part of the problem, but instead were part of the solution,” says Helmut Ettl, executive director of the Austrian Financial Market Authority (FMA).

Building up strength

“Austria’s banking system entered the Covid-19 crisis from a strong position,” says Mr Ettl, pointing out that capital ratios had more than doubled in the proceeding decade, with Tier 1 capital increasing from below 7% in 2007 to more than 15% in 2019. In addition, non-performing loans (NPLs) dropped from nearly 8% at their peak in 2012/13 to around 2% in 2019.

Despite the pandemic, the consolidated capital ratio of Austrian banks grew from 18.7% at the end of 2019 to 19.6% at the end of 2020, with NPLs — aided by government support programmes — dropping slightly, from 2.2% to 2% over the same period.

Even so, there was a sharp decrease in sector-wide return on assets, down to 0.3% in 2020, due to high levels of precautionary provisioning, with dividend restrictions put in place across the banking sector adding to the capital cushions.

Profitability is improving, aided by NPLs remaining at a low level, but banks remain cautious, especially as they wait to see the impact of the gradual fading out of government fiscal support measures.

Lending a hand

According to Patrick Rioual, senior director of financial institutions at Fitch Ratings, the comprehensive state support to the Austrian economy, which was put in place in March 2020, has enabled its banks to strongly contain credit losses and loan impairment charges, similar to their peers in other European countries.

As a result, the Austrian banking sector has remained more profitable than most other EU banking sectors so far through the crisis. “The NPL ratios of large Austrian banks have continued to improve, despite the pandemic, and are significantly better that what we were expecting 18 months ago when we placed the banks’ ratings on rating watch negative. We have reacted by stabilising the ratings in the meantime,” he says.

At the same time, lending has continued to grow throughout the pandemic, especially on the corporate side.

“From the very beginning, Austrian banks have been able to meet the strong liquidity needs of companies — the volume of corporate loans is now around 8% higher than at the end of 2019,” says Robert Zadrazil, CEO of UniCredit Bank Austria.

Gerda Holzinger-Burgstaller, Erste Bank

Gerda Holzinger-Burgstaller, chief executive and chief financial officer (CFO) at Erste Bank, one of Austria’s largest lenders, says that banks have been instrumental in paying out state guaranteed loans and, in case of liquidity shortages, bridging loans were made available by the Austrian government.

“Therefore, the impact of the crisis on asset quality was muted in 2020; the ratio of NPLs remained low at year-end. On the savings side, customer deposits grew by 8.6%, driven mainly by the corporate sector,” she says, adding that the banking sector’s loan-to-deposit ratio stood at 91% at the end of 2020.

In 2008, the Austrian government was required to step in and take a €2.7bn stake in Erste, to help the lender stabilise its balance sheet. This time around, the bank saw operating income grow by more than 9% year-on-year in the first half of 2021, with risk costs down by almost 90% and net profits more than doubling to €918m.

Ms Holzinger-Burgstaller took over as CEO of Erste Bank earlier this year, making her one of the few female executives in Austria. “The lack of female executives in Austria is striking, and I am convinced that it is not due to the quality of the women,” she says. “Out of a total of 88 board members of major listed companies, only six are female; there are no women at all on 15 boards.”

To rectify this, Erste has put in place a quota system to fill at least 40% of its management positions with women. “Diverse teams are simply more successful, and it won’t work without a quota in a transitional phase,” says Ms Holzinger-Burgstaller.

CEE strengths

Following the 2008 financial crisis, many Austrian banks retrenched, pulling back from some of the riskier central and eastern European (CEE) markets. That did not last, however, and banking operations in those countries are now some of the strongest assets of Austrian lenders.

“Until the middle of the past decade, the Austrian banking sector was dealing with some legacy asset quality issues and costly political interferences in some CEE countries,” says Mr Rioual. “Most of those problems have been resolved since then. On top of that, the profitability of the Austrian banking sector before the pandemic was one of the highest within the EU, whether you’re looking at net interest margins, return on equity or return on risk-weighted assets, thanks largely to the favourable risk/return profile of their CEE operations.”

Mr Rioual describes Austrian banks’ involvement in CEE as a question of striking the right balance between the higher risks and returns. “My opinion about this has evolved positively over the past decade. Just after 2008, I would have said the risk Austrian banks were taking in CEE was not always justified by the return potential. That has clearly changed for the better, as banks have learned their lessons to a large extent, with some help from the regulators, and the CEE economies continue to converge toward western European standards.”

Gunter Deuber, head of research at Raiffeisen Bank International (RBI), says that the international business has been a key strength of Austrian banks in recent years. “It’s profitable — we have a cost-to-income ratio there at the 50% level. Overall, in the home market, we are still hovering around close to 70%. The domestic market remains a challenge and that’s why the international footprint is so important,” he says.

Unattractive retail

The domestic retail business remains a challenge for Austrian lenders, in part due to the ongoing low interest rate environment.

“I think everyone is hoping that the negative interest rate policy by the European Central Bank stops soon, so that business comes back in terms of interest rate spreads. This is the business that has seen almost no dynamics in recent years,” says Thomas Url, senior economist at the Austrian Institute of Economic Research.

In July, ING announced that it was transferring its retail banking operations in Austria to bank99, a bank launched in 2020 belonging to the Austrian postal services. ING is discontinuing its savings-only offering and passing over its 150,000 retail customers to bank99.

“I don’t see the retail segment as very attractive,” says Mr Deuber. However, he says that the corporate business in the country is still fairly attractive, aided in part by Austria’s role as one of the largest investors in CEE. “It’s not just the banks that are active in the region — a lot of our corporations are active there and this creates natural synergies,” he says.

At the same time, there has been a rise in Austrian savers moving their money from deposits into fund-based offerings; in the first half of 2021, revenues from fees related to fund buying and selling activities were up 10%, according to Mr Url. “The banks are seeing opportunity in the fund-related business at the moment because savers are fed up with zero interest rates and negative real rates,” he says.

Mortgage concerns

There are other areas of concern. Over the course of the pandemic, households’ debt-to-income ratio registered their highest growth rate in 15 years, according to the central bank, Oesterreichische Nationalbank, (OeNB). This is linked to increased borrowing and reduced incomes.

OeNB says that current lending standards for housing loans are increasingly exceeding the threshold for sustainable residential real estate lending, as set out by the Austrian Financial Market Stability Board, with down-payments of less than 20% for more than half of new loans and debt service levels exceeding 40% of net income in one-fifth of loan cases.

Few in the banking sector see this as an immediate cause for concern, however. “We closely monitor this development and see that supply and demand are well balanced, and the low level of indebtedness across our markets create a healthy and stable market with reasonable home price levels,” says Enver Sirucic, CFO and deputy chief executive at Bawag Group, Austria’s fifth-largest lender by Tier 1 capital.

Bawag was among the most profitable banks in Austria in 2020, with a return on equity of more than 8.5% and net profits of €284m. In the first half of 2021, the bank saw net profits of €193m, with a cost-to-income ratio of 40.3%.

Greater consolidation

One area which could see movement is a further consolidation of Austria’s overcrowded financial services sector.

Since 2008, the number of independent banks in Austria has declined by almost 40%, yet the number of bank branches has fallen by less than a quarter, with Austria remaining one of the countries with the most banks in the eurozone, according to UniCredit’s Mr Zadrazil, with more than 500 independent banks and around 4000 branches.

He says that while UniCredit Bank Austria has larger branches and offers more comprehensive services in fewer locations, allowing it to serve an average of 13,000 clients per branch, Austrian bank branches generally serve only around 2500 inhabitants, compared to 3500 in Germany, 7000 in Sweden and more than 18,000 in the Netherlands.

Despite this, “We do not expect major consolidation steps in Austria, with consolidation primarily taking place within the co-operative banking sector,” he says, adding that the pandemic will likely lead to a significant push towards digitalisation in the retail business and probably a further reduction in the number of branches in the medium-to-long-term.

Others agree that wholesale change is likely to come slowly. “There is no doubt among most people in the banking sector that consolidation is not a question of if, but when and how. However, I think the crisis was not sufficiently deep, or the hit on the banking sector was so moderate that I don’t see a change,” says Mr Deuber.

Digital revolution

Meanwhile, the Austrian banking sector is being subjected to increasing competition from challenger banks and fintech offerings, with the pandemic accelerating the trend towards digitalisation across the whole banking sector. Increasingly, the boundaries between new market entrants and incumbents are becoming blurred, with some traditional banks acquiring fintechs and challenger banks, and some of the more mature fintechs gaining banking licenses.

Even so, Mr Url does not see a strong role for challenger banks in Austria in the short term — at least not at the expense of traditional lenders.

“The reason is that we have such a high degree of competition in the retail banking sector between brick-and-mortar banks that there is not much room for fintechs to add some additional service to their products that is not already included in conventional bank accounts, which are now teaming up with fintechs, buying them and propping up their own [digital] products,” he says.

Reputation building

Questions still remain over how well the country is doing in combating money laundering. In early 2021, Peter Weinzierl, the former chief executive of Bank Meinl, one of Austria’s better known private banks (which was rebranded as Anglo-Austrian Bank in 2019 and filed for insolvency last year) was arrested on money-laundering charges.

Enver Sirucic, Bawag Group

Bank Winter, one of Austria’s oldest lenders, has also been accused of being involved in a money-laundering scandal — something it denies — while Raiffeisen was fined €2.7m for poor money-laundering prevention methods in 2018, though the fine was later overturned by Austria’s supreme court.

Even so, FMA’s Mr Ettl dismisses accusations against Austria as historic and, in some cases, false.

“Most of the criticism of Austria originates from data leaks involving transactions dating back 10–20 years,” he says. “Today, any such concerns are unfounded and not supported by facts. Especially in light of the fact that, in the meantime, the regulatory and supervisory framework in Austria to fight money laundering has changed fundamentally, and is fully in line with the highest international standards.”

In recent years, Austrian banks have also introduced artificial intelligence and machine learning to help them identify and stem flows of dirty money, he adds.

Looking ahead

With the pandemic still ongoing, and potential new waves of the virus, Austrian banks are not resting on their laurels.

“Some borrowers will inevitably default, and we will probably see a moderate increase in credit losses as a result, but we’re not expecting a large increase,” notes Mr Rioual. “The large Austrian banks have been really conservative with loan-loss provisioning since March 2020. They are well capitalised, firmly profitable, asset quality is surprisingly good and risk is under control, so we do not expect the banks’ financial profiles to deteriorate as a result of the pandemic.”

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