Austrian Banks Rated Negative by Moody’s on Bad-Debt Charges

Austrian banks’ creditworthiness is still deteriorating because the cost of rising bad debt in eastern Europe is slowing their efforts to raise capital buffers, Moody’s Investors Service said.

Moody’s kept its “negative” grade on the Austrian banking system’s outlook for the next 12 to 18 months, it said in a report released today. The nation’s three top banks -- Erste Group Bank AG, Raiffeisen Bank International AG and UniCredit Bank Austria AG -- face the biggest challenges because they are most exposed to a renewed downturn in countries including Hungary, Romania, Croatia and Slovenia, Moody’s said.

“Underpinning our negative outlook for the banking system are the limited capital buffers to absorb potential losses in a stressed economic environment,” Moody’s analysts Swen Metzler and Carola Schuler wrote. “Our stress test shows that most Austrian banks have limited resources to cope with substantial potential losses on their high exposures to central and eastern European regions as well as to domestic corporate borrowers.”

UniCredit, Raiffeisen and Erste are the three biggest Western-owned lenders in the former communist part of Europe, where they invested to profit from increased usage of consumer banking products such as current accounts, credit cards, consumer lending and mortgages. The downturn in the region since 2009 has caused loan losses to jump in many of those countries, eating up more of the profits.

Eastern Risk

While their eastern European risk is elevated, Austrian banks’ capital ratios are below the European average, Moody’s said, echoing comments made repeatedly by the central bank. The average Tier 1 capital ratio, a measure of financial strength, of the 20 Austrian lenders rated by Moody’s stood at 9.6 percent at the end of 2011, below that of banks in Germany, France, Italy and Spain, Moody’s said.

That means banks would struggle to stay above regulatory limits in a “highly adverse” stress test, Moody’s said. “Most rated banks’ capital would be severely impaired by loan losses under our highly adverse scenario and would only just meet the minimum regulatory capital requirement,” it said.

Persistently high bad-debt charges are limiting the banks’ ability to raise those capital buffers through retained earnings, Moody’s said. The company expects problem loans to grow this year, especially driven by Austrian companies, and by loans in Hungary, Romania and Slovenia.

The “negative” grade on the Austrian banking industry’s outlook means that on average, negative rating actions on the 20 lenders rated by Moody’s are more likely than positive ones, according to Moody’s definition.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE