Austrian bank assets in eastern Europe, the former communist bloc where they are the biggest lenders, may be in worse shape than reported because of shortcomings in data, the International Monetary Fund said.
Figures show that about a sixth of the loans of Austrian banks in central, eastern and south-eastern Europe are officially 90 days overdue. The ratio is worsening, and even that number may gloss over the true level of impaired debt, the IMF said in a report published today. The three biggest banks in Austria and eastern Europe are Erste Group Bank AG, Raiffeisen Bank International AG and UniCredit Bank Austria AG.
“Bank asset quality on a consolidated basis is deteriorating and is difficult to assess with full confidence owing to shortcomings in data,” the Fund said in the Financial Sector Stability Assessment, an exam it gives member states every five years. “Loan provisioning may be inadequate in some countries” such as Romania, Hungary, Croatia and Slovenia, it said.
While Austria accounts for just 3 percent of the euro area’s economy, it is significant beyond its size for the economies to its east. Its banks that set up operations there have piled up lending to the tune of 326 billion euros ($432 billion). The risk that the expansion may trigger large bank rescues has weighed on Austrian debt costs in some periods, while tighter rules imposed by Austrian authorities have caused concerns that the region may face a credit crunch.
While their capital ratios have improved over the last five years, Austrian banks continue to lag their euro area peers and are bolstered by state aid that will eventually have to be repaid, the IMF said, echoing warnings from the Austrian central bank. Regulators should consider imposing dividend restrictions, the IMF said.
“There is no room for complacency in the current environment, and Austrian banks will need to build stronger capital buffers above regulatory requirements,” the Fund said.
Erste sold new shares in July to help repay support it got from Austria in 2009. Raiffeisen still relies on 1.75 billion euros of state funding to prop up its capital reserves and is resisting pressure to sell new shares and scale down dividends.
The economic crisis triggered a series of downturns and burst real-estate bubbles across emerging Europe starting in 2008, giving rise to concerns at the IMF and other international lenders about asset quality and data accuracy.
Published figures may understate bad loans because they don’t classify all debt as distressed if a borrower defaults on one liability. Banks may also report loans as performing even if they have been restructured, the IMF said, adding that bringing together bank regulation under the auspices of the European Central Bank may yield better data.
“Upcoming bank asset quality reviews by the ECB should provide a more robust basis for assessing the strength of the balance sheets of Austrian banks and the policy responses that may be needed,” the IMF said.
Nationalized banks Hypo Alpe-Adria-Bank International AG, Kommunalkredit Austria AG, KA Finanz AG and Oesterreichische Volksbanken AG will cause further “significant, though manageable” cost for Austrian taxpayers, the IMF said. Setting up a bad bank for Hypo Alpe and allowing KA Finanz to operate without a banking license could speed up wind-down.
Austria should speed up the creation of a bank resolution authority and it should be funded by the bank levy, the IMF said. Its existing deposit insurance plan, a fragmented and unfunded program that has failed to prevent bailouts, should be replaced by a single pre-funded option, the Fund said.