According to the Austrian National Bank (OeNB), the slight recession expected this year coupled with the rapid rise in interest rates in recent months is increasing the risks for the banking sector.
The first half of 2023 still brought significant profits due to strong interest margins, but the higher interest rate level is slowing loan growth. In addition, a deterioration in credit quality is to be expected with a delay, according to the National Bank.
“The earnings situation of the banking sector in the first half of 2023 must be viewed against the background of a gloomy economic situation,” said Deputy Governor Gottfried Haber in the broadcast. “Loan defaults usually only occur at a later point in time, while the positive effects of the interest rate turnaround immediately increase earnings.”
In the first half of 2023, business for the banking sector was positive thanks to increased interest margins. At 7.3 billion euros, the industry’s total profit was more than twice as high as in the same period last year. The common equity Tier 1 capital ratio of 16.6 percent also proved to be resilient in this year’s stress test. This earnings situation is the “basis for building up capital that further strengthens the stability of the banking sector and creates space for future lending even in economically difficult times,” continued Haber.
However, the higher loan interest rates are also putting pressure on demand. In the corporate sector, loan growth in September 2023 was 4.4 percent, more than half lower than at the end of 2022. The volume of loans granted to private households fell by 1.4 percent due to negative developments in the residential construction sector. However, the banks’ lending standards for residential property loans have improved overall. Nevertheless, variable loans are still in high demand among consumers. The central bank wants to keep a close eye on the development of variable loans.
High inflation, tight monetary policy and the wars in Ukraine and the Middle East are major challenges. “In this environment, it is to be expected that the interest margin of the banking sector will fall again and credit risks will increase,” writes the National Bank. In order to be prepared for these increased risks, the OeNB advises banks to exercise restraint when distributing profits and to ensure sustainable lending standards for residential and commercial real estate loans. In addition, banks should make forward-looking risk provisions “in conjunction with conservative security assessments for commercial real estate loans.”
In Vienna, Raiffeisen shares temporarily lost 0.25 percent to 15.79 euros, while Erste Group stocks temporarily rose 0.08 percent to 36.03 euros.
bel/can
APA
Image source: Erste Group/fischka.com,Dennis Linine / Shutterstock.com,Christian Wind