Moody's: Austrian banking system outlook lifted to positive on loan quality, capital levels

Moody's Investors Service has raised its outlook on the Austrian banking system to positive from stable as it expects loan quality to improve throughout the sector and capital levels to rise.

Moody's expects problem loans in the sector to fall to around 5.0% of gross loans by the end of the year, down from 5.6% in 2016 and 8.0% in 2015. This improvement is due mainly to a pick-up in economic activity in Austria, as well as Central and Eastern Europe. The Austrian economy will continue to perform well, and after a prolonged period of moderate growth, Moody's forecasts growth to strengthen this year and next as private consumption and investment pick up.

Apart from overall strengthening asset quality in the CEE region, the significant improvement in problem loan levels last year also reflects sizeable disposals of NPL portfolios by Austrian banks and a positive effect from the restructuring of a large European banking group.

"Our benign view on asset quality is a key driver for our positive outlook on the banking system," said Swen Metzler, a Vice President - Senior Credit Officer at Moody's. "It will allow banks to retain ample earnings and further build up capital, strengthening their solvency."

The report, "Banking System Outlook -- Austria: Improving Loan Quality and Capital Drives Outlook Change to Positive," is now available on www.moodys.com. Moody's subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

Over recent years, Austrian banks have been gradually closing the gap with other European banks in terms of capital. At the end of last year, they posted an aggregate Tier 1 capital ratio of 14.5%, compared to a European average of 14.7%.

Moody's expects this trend to continue, with Austrian banks' capital rising to an aggregate Tier 1 ratio of around 15%, helped by good earnings retention. However, this will be offset by the likely resumption of moderate dividend payments.

Profitability in the sector will remain stable overall, and a reduced bank levy and low provisioning needs will support earnings through 2018, despite challenges from persistent low-to-negative interest rates and weak efficiency.

While rising house prices pose a tail risk, there are currently no indications of overvaluation in the nationwide housing market. In Austria, the relatively low level of household debt provides an important buffer against economic shocks and a fall in house prices.