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The OeNB as a Competent Partner in<br />
Ensuring Financial Stability<br />
Austrian banking<br />
sector stability has<br />
strengthened further<br />
Business in CEECs<br />
contributes<br />
significantly to banksÕ<br />
income<br />
The quality of loans granted by<br />
Austrian banks remained stable in<br />
<strong>2004</strong>. At end-<strong>2004</strong>, the ratio of specific<br />
loan loss provisions to claims<br />
on nonbanks for the entire banking<br />
sector stood at 3.3%, thus corresponding<br />
to the values recorded in<br />
the two previous years. The analysis<br />
of nonaccrual and nonearning assets<br />
and of nonperforming and irrevocable<br />
loans did not show any worrying<br />
developments, and market risk remained<br />
limited. Regulatory capital<br />
requirements for interest rate risk<br />
and equity price risk picked up somewhat<br />
but stayed well below the historical<br />
peak levels, whereas capital requirements<br />
for open foreign exchange<br />
positions declined slightly toward<br />
the end of <strong>2004</strong>. Austrian<br />
banksÕ interest rate risk exposure resulting<br />
from maturity transformation<br />
occurred mainly in euro and did not<br />
pose a major risk.<br />
The results of the stress tests (carried<br />
out by the OeNB on a regular basis)<br />
confirmed these data; they did<br />
not indicate any threats to financial<br />
stability in Austria. The effects of<br />
market risk shocks on the capital ratio<br />
remained constant, whereas those<br />
of credit risk shocks increased<br />
slightly; this rise was more than compensated<br />
by the higher capital ratio.<br />
At 14.7% by end-<strong>2004</strong>, the unconso-<br />
lidatedcapitalratioofAustrianbanks<br />
remained well above the 8% level required<br />
as a minimum by the Austrian<br />
Banking Act. The core capital ratio of<br />
10% was higher than the long-term<br />
average, too.<br />
In <strong>2004</strong>, Austrian banking groupsÕ<br />
business in the Central and Eastern<br />
European countries (CEECs) continued<br />
to boom, which resulted in substantial<br />
growth rates in total assets<br />
and profits. The dividends of their<br />
subsidiaries in this region sharply<br />
boosted income from equity shares<br />
in affiliated enterprises abroad and<br />
constituted a key factor in their improved<br />
profitability.<br />
The CEEC subsidiaries contributed<br />
approximately one eighth to<br />
Austrian banksÕ total assets and almost<br />
one quarter to total annual profits.<br />
As for banking services, market<br />
penetration in the CEECs is still low<br />
compared with that in the EU-15,<br />
which means that there is additional<br />
growth potential. Competition is expected<br />
to augment, however, which<br />
will reduce the margins in these markets.<br />
Profit growth in the Austrian<br />
banking sector continued to accelerate<br />
in <strong>2004</strong>, with operating profit expanding<br />
7.7% (year on year) in the<br />
fourth quarter of <strong>2004</strong> on the back<br />
of the stronger increase in income<br />
levels than in expenses. Operating income<br />
rose by 4.3%, whereas operating<br />
expenses went up by only 2.7%.<br />
The increase in operating income<br />
was primarily fueled by income from<br />
securities and participating interests<br />
as well as fee-based income from securities<br />
transactions. However, net interest<br />
income, which makes up half of<br />
operating income, also picked up<br />
again in <strong>2004</strong> after a longer period<br />
of decline. Operating expenses edged<br />
up after having decreased between<br />
the first quarters of 2003 and <strong>2004</strong>.<br />
38 ×<br />
<strong>Annual</strong> <strong>Report</strong> <strong>2004</strong>
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