One measure of how far perceptions about Austrian banks have improved in recent months is that they have received only a cursory mention in the current media frenzy surrounding the stress testing of European financial institutions.

With comparatively little exposure to peripheral European economies such as Greece, and having never invested in toxic debt instruments as did their German rivals, Viennese banks are no longer a main focus of investor anxiety.

Nevertheless, some smaller institutions are having a difficult time and the entire sector is worried about higher capital requirements and bank levies that threaten profits.

It was a different story 18 months ago, when the economies of several central and eastern European (CEE) countries experienced a sharp decline and investors took fright at Austrian banks’ perceived exposure.

Tumbling domestic currency rates in the region endangered private and commercial loans denominated in euros or Swiss francs – low interest rates had made them wildly popular before the crisis.

But analysts’ worst-case scenarios were not realised. Following an injection of fresh capital last year from the government, most banks reported healthy profits even as they were forced to set aside large reserves to cover rising loan losses.

“The general outlook is positive,” says Stefan Maxian, a Vienna-based banking analyst. “The peak in non-performing loans is still ahead of us, but the necessary risk expenses are already on the decline.” In spite of the harsh recession, there were very few big corporate bankruptcies in Austria or the CEE region, he points out.

Aggregate stress tests published last month by the Austrian National Bank gave the credit sector a generally clean bill of health. Even a double-dip recession in the Eurozone and the CEE region would not force the government to conduct big rescue operations, the central bank predicted.

However, smaller institutions are still struggling. Hypo Group Alpe Adria, the regional bank once owned by Bayerische Landesbank of Germany and the state of Carinthia, had to be nationalised in December after assets accumulated during a period of rapid expansion in the Balkans turned sour.

Meanwhile, Österreichische Volksbanken AG (ÖVAG), the clearing house of a co-operative banking group, made a €1.1bn loss last year and has failed to find a strategic partner.

“There is still a bill waiting for taxpayers,” warns Stefan Pichler, banking expert at the Vienna Business School.

Analysts are much more optimistic about the three big organisations: Bank Austria, Raiffeisen International and Erste Group.

An economic recovery in CEE countries will lift profits at these institutions, says Josef Christl, a former director at the central bank and now a consultant. “The region is better equipped to handle crises than some western European countries because the population is more willing to accept austerity.”

But lending remains tepid and, although some central European countries such as Poland have shown resilience, others such as Romania remain in recession. In the short term, banks’ results will reflect the geographic spread of their exposure.

Moreover, Austrian institutions may be forced to boost their reserves when new Basel III rules on capital and liquidity come into force.

Raiffeisen and Erste have lobbied heavily against rules that would exclude the counting of so-called minority interests as tier-one capital. Average tier-one capital levels for the Austrian sector increased 2 percentage points last year to 9.3 per cent – well above current minimum standards but lower than some European countries.

“[Austrian banks] can get more capital, but the return on equity will suffer,” says Mr Christl.

Citing a need to improve access to capital markets, Raiffeisen, the publicly traded CEE-focused institution, is to merge with co-operatively owned RZB.

Another headache is the threat of banking taxes in emerging Europe. Hungary’s government plans to raise 200bn forints ($858.1m) from the sector to narrow its budget deficit. Austrian banks are among those trying to negotiate changes to the levy because of its impact on local subsidiaries.

Ewald Nowotny, central bank governor, is “nervous” about the introduction of bank levies in the region, warning that in Hungary it could lead to higher borrowing costs and set back economic growth.

Austria’s banker-in-chief describes the involvement of Austrian banks in CEE countries as a “success story”, but says their business model must change in areas such as issuing loans denominated in foreign currencies.

“One must be more cautious and one must differentiate between the different regions,” he says.

However, Austrian banks are well placed to profit as demand returns for banking services in the region and consumers battle to catch up with the living standards of the richer west.

“Eastern Europe is no longer a panacea,” says Mr Maxian. “But the convergence process is back on track and will allow the banks to grow.”

Get alerts on when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Comments have not been enabled for this article.