The outlook for the Austrian banking system remains negative, Moody's Investors Service said, adding this is unchanged from 2009 and reflects a weakening operating environment in Austria, amidst recessionary trends in Europe and pressurised operating environments in several Central and Eastern European countries (CEE); rising risk charges and deteriorating asset quality; and the limited loss-absorption capacity of many banks in a stressed environment. These negative drivers are partly counter-balanced by the only-modest funding risk of most Austrian banks, which is a relative strength of this system.
Domestic macro-economic conditions will likely remain relatively benign for the next 12-18 months given Austria's diversified economy and close ties to Germany. The CEE region has long-term growth potential; however, current economic weaknesses in several CEE countries poses challenges for the leading Austrian banks that have significant operations there.
Aggregate system problem loans reached 10.2% of total loans at year-end 2011 reflecting many banks large CEE activities as well as a high stock of problem loans from domestic corporates, especially from the SME and micro segment. For 2013, the rating agency expects a persistently high, though only moderately rising problem loan ratio for the banking system. Despite some improvement in capital positions since 2008, Moody's considers that most Austrian banks' loss-absorption capacity would be limited in a stressed economic environment.
Most domestically-focused Austrian banks, including the retail-oriented Austrian local cooperative and savings banks, are under less pressure than the three largest Austrian banks that are exposed to a possible renewed downturn in several CEE countries. However, they also face low growth prospects in a highly competitive domestic market and related weak earnings, limiting their capital generation ability.
In common with many of its European peers, Austria's government has demonstrated its willingness to support banks in pursuit of financial stability on several occasions over the course of the crisis, and in none of these cases were senior creditors required to take any losses. However, the objective of protecting taxpayers from future bank failures is commonly-held amongst European policy-makers and consistent with that objective, the Austrian government recently published a draft bank intervention and restructuring law which is to be introduced in compliance with the evolving EU resolution framework. This indicates that the longer-term support environment is less certain.
