Austrian banks will have to curb new loans in central and eastern Europe, where they are among the biggest lenders, under rules imposed by Austrian authorities seeking to protect the country’s AAA credit rating.
Erste Group Bank AG, Raiffeisen Bank International AG and UniCredit SpA’s Bank Austria AG will be prevented from loaning significantly more than they raise in local deposits in countries such as Hungary, Romania and Ukraine starting next year, the Austrian central bank said in a statement today. That would limit their ability to fund credit growth with loans from the parent company.
“This is certainly going to affect the availability of credit,” said Christian Keller, head of emerging EMEA research at Barclays Capital in London. “There’s also going to be more differentiation, which will put pressure on countries like Hungary, Romania, Ukraine or Bulgaria.”
Austrian banks have lent $266 billion to borrowers in the formerly communist parts of Europe, the most of all countries reporting to the Bank for International Settlements and equivalent to about 70 percent of Austria’s gross domestic product. Those numbers don’t include the investments of Vienna-based Bank Austria, which are attributed to Italy.
Concern the Austrian government may have to bail out lenders because of eastern European losses have weighed on the country’s triple-A sovereign-credit rating and raised its refinancing costs last week. The extra interest the country has to pay investors to hold its 10-year bonds instead of Germany’s dropped to 148 basis points today, from a euro-era high of 191 basis points last week.
Austria’s central bank and financial regulator FMA are restricting new loan business to 1.1 times the deposits and wholesale funding that banks’ local units are able to raise on their own. They are also requiring the three banks to hold as much as 10 percent of capital from 2016, 3 percentage points more than required under rules from the Basel Committee on Banking Supervision.
The capital surcharge will be tied to “the risk inherent in the respective business model,” the central bank and the FMA said in a statement distributed at a conference in Vienna. The introduction of Basel rules will also be brought forward to 2013, they said, with the exception of some forms of non-voting capital that will be phased in as required by Basel.
“This set of measures will provide a sustainable growth model” that will help avoid “pronounced boom-bust cycles,” said Ewald Nowotny, the central bank’s governor. The measures will “benefit the stability of the local financial markets, but Austria’s exposure to this region will also become more sustainable.”
Western European banks, which own about three quarters of the banking assets in the former communist nations in Europe, have funded loans in many countries with money from their home bases. This allowed banks to lend more than they raise in local deposits in central and eastern Europe, boosting credit growth.
Erste lent almost double its deposits in Hungary, 1.4 times in Romania and 1.5 times in Croatia, according to its quarterly results released on Oct. 28. Raiffeisen’s loan-to-deposit ratio is 1.5 in Ukraine, 1.3 in Romania and 1.2 in Hungary. While the cap of 1.1 would only apply to new business, it may add to other pressure on lending.
Western banks’ subsidiaries “could be forced to cut credit provision and shrink their balance sheets further, with an adverse effect on GDP growth,” Fitch Ratings analyst Michele Napolitano said in a report published today.
Erste fell 9.5 percent to 11.815 euros at the 5:30 close of trading in Vienna and Raiffeisen fell 5.8 percent to 15.335 euros. Both underperformed the 46-member Bloomberg Europe Banks and Financial Services Index, which fell 3.9 percent.
“This adds in to the wider fear we have had that Austria will be less willing to bail out banks,” said Peter Attard Montalto, emerging markets economist at Nomura International.
National regulators in Italy, France and Belgium may follow the Austrian authorities in imposing additional rules, said Jonathan Tyce, a Bloomberg Industries analyst.