Moody's Retains Negative Outlook on Austrian Banks

VIENNA--The outlook for Austria's banking industry will remain negative over the next 12 to 18 months, Moody's Investors Service said Friday, as subdued domestic growth and economic weakness in Central and Eastern Europe weigh on the sector.

In its Austrian Banking System Outlook report, Moody's said some of the Alpine country's largest banks faced a number of challenges in its Central and Eastern Europe operations.

"Over the outlook period, challenges are greatest for the three largest Austrian banks [Erste Group Bank AG (EBS.VI), Raiffeisen Bank International AG (RBI.VI) and UniCredit Bank Austria AG]--comprising 48% of system consolidated assets--because of their exposure to a possible renewed downturn in several CEE countries' said Moody's.

Economic weakness in Hungary, Bulgaria, Romania and Slovenia could lead to continued asset quality deterioration, Moody's said, although "credit performance has been much more stable in countries like the Czech Republic, Russia, Slovak Republic, and Turkey whose economies have been less pressured to date."

A further risk is the ability of Austrian banks to overcome any negative shocks should the financial crisis spread to the CEE region. While many Austrian bank's meet the European Banking Authority's capitalization requirements, Moody's said Austrian banks are under-capitalised relative to their risk profiles and that the banks' capital buffers provide limited potential to absorb losses in a stressed economic environment.

It added that historical loan performance has been better than their loss estimates assume, but Moody's believes there is an elevated risk of loan losses due to deteriorating asset quality. Several Austrian banks have sustained sizeable losses in markets like Hungary.

Moody's also pointed to the risks Austrian banks face due to the high percentage of Austrian borrowers who have taken out variable rate and foreign currency-denominated loans, with the latter accounting for around 25% of domestic household loans at the end of September 2012.

"Credit risk in these loans not only arises from currency movements but also from asset-price fluctuations, as repayment of around 70% of these loans is facilitated through lump-sum payments at loan maturity," Moody's said.

Moody's did point to several mitigating factors such as Austria's relatively benign domestic economic environment and the perception that the banks are a safe haven during times of economic stress. In addition, it pointed to low loan-to-deposit ratios compared with other European banking systems.

Moody's has rated the Austrian banking outlook as negative since 2009.

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