Austria’s central bank told the nation’s biggest lenders they should raise more capital to repay state aid, satisfy new banking rules and catch up with their better-capitalized rivals in eastern Europe.
Other risks include Swiss franc-denominated loans and a high level of bad debt in the region, the central bank said in its biannual Financial Stability Report released today. Austrian banks must tackle coming challenges, including new rules by the Basel Committee on Banking Supervision, from an “unsatisfactory” starting point, it said.
“Banks should build up further capital because of Basel III, because of the repayment of state participation capital, as well as because peers are still better capitalized,” central bank director Andreas Ittner told reporters in Vienna.
Erste Group Bank AG, Raiffeisen Bank International AG and UniCredit SpA’s Bank Austria unit are among the biggest lenders to eastern Europe, a market that witnessed rapid growth before the collapse of Lehman Brothers Holdings Inc. Increasing bad debt subsequently crimped earnings in the region and exposed capital shortfalls at Austrian banks.
Austrian banks are falling behind on raising capital compared with a peer group of 12 other banks active in the former communist part of Europe, the central bank said. The difference in capital ratios between the Austrian banks and the benchmark group including Societe Generale SA, KBC Groep NV and OTP Bank Nyrt, rose to 1.4 percentage points by the end of last year, from 0.9 percentage points at the end of 2009, because they were were slower in raising capital, it said.
In addition, Austrian taxpayers contributed 47 percent, or 8.1 billion euros ($10 billion), to the banks’ capital increases since 2008, according to the report. Erste and Raiffeisen both requested state aid in 2009 and will eventually have to payback capital as it becomes more expensive from 2014. Austria nationalized, funded and wrote off bad debt at Hypo Alpe-Adria-Bank International AG, Kommunalkredit Austria AG and Oesterreichische Volksbanken AG.
Austrian banks’ direct support of subsidiaries in eastern Europe, where deposits don’t cover loans in countries other than the Czech and Slovak republics and Russia, declined 5 percent last year to 42 billion euros, the central bank said. Lowering the level of liquidity infusions is a main goal of new rules introduced by the central bank this year.
The 216 billion euros lent by Austrian banks in eastern Europe by the end of last year was the most by any national banking system, according to the report. Higher risk on loans in eastern Europe makes the business more profitable than credit given at home.
About 84 billion euros of loans in eastern European countries such as Croatia, Hungary and Romania, along with an additional 50.9 billion euros in Austria, are denominated in foreign currencies, mostly Swiss francs, the bank said.
Austrian banks’ performance was nevertheless “solid” in a central bank simulation of adverse economic developments in eastern Europe, Ittner said. The five biggest banks’ core Tier 1 capital ratio would decline to 7.7 percent by 2014 in an adverse economic stress scenario, from 9.5 percent now, the central bank said. The ratio, calculated according to European Banking Authority rules, assumes an economic contraction in Austria and eastern Europe.
In the test’s baseline scenario, which assumes Austria and eastern Europe will grow in line with average forecasts, the ratio would rise to 10.3 percent for the top five banks. The capital ratio of the entire banking system would decline to 8.5 percent from 9.9 percent under stress, compared with an increase to 10.5 percent in the baseline scenario.