National Bank: loan defaults depress profitability, think about injecting equity
OeNB Governor Robert Holzmann
The banks must prepare for government and supervisory support measures – including the credit moratoria enforced in the corona crisis – to expire. Then the pressure on loan customers increases. The National Bank also expects increasing insolvencies in 2021, which will noticeably worsen the credit quality in the bank balance sheets. The financial institutions have already started to put more money aside for risk loans, which caused profits to collapse in the first half of 2020.
“The Austrian banks are very well prepared. They entered the corona crisis with a lower proportion of non-performing loans and twice as much equity as before the financial crisis in 2008,” said OeNB Governor Robert Holzmann on Wednesday at the presentation of the financial market stability report.
In contrast to the financial crisis, this time the banks are “not part of the problem, but part of the solution,” emphasized Vice Governor Gottfried Haber.
The measures to contain the Covid 19 pandemic led to a massive decline in economic activity in the country in the first half of 2020. After a strong recovery in the third quarter, the economic catch-up process came to a standstill. The second lockdown in November – according to the Oesterreichische Nationalbank (OeNB) – is expected to result in another, albeit smaller, economic slump than in spring 2020.
Company bankruptcies
The extensive support measures cushioned the effects of the pandemic on the real economy. Company insolvencies even declined in the second and third quarters, although this was also the case due to the suspension of the obligation to file for insolvency in the event of overindebtedness.
In the long term, corporate debt will rise, while at the same time falling corporate profits as a result of the economic downturn would reduce the funds available for debt servicing and also put a strain on capital growth. A model developed by the OeNB for estimating expected corporate insolvencies shows that the extensive aid measures reduced the number of insolvencies by around two thirds this year.
Vice Governor Gottfried Haber
In the next two years, however, the crisis will increase the number of corporate bankruptcies. In a worst-case scenario scenario, assuming further aid measures, the OeNB expects an insolvency rate of 7.1 percent and 9.7 percent for 2022. For comparison: In the years 2017 to 2019, almost one percent of all companies had to file for bankruptcy, that is almost 56,000 companies.
From today's perspective, the negative scenario is not realistic because it is too püessimit table. It was the basis for a stress test of the banks “to find out whether they could survive such a dramatic development. The answer was yes,” explains Doris Ritzberger-Grünwald, head of the economics department.
From today's perspective, the basic scenario is realistic. With aid measures, an insolvency rate of 2 percent is calculated for 2020, which should add up to 6.7 percent by the end of 2022.
Credit deferrals
As of October, the domestic banks with Krwediten medlated 20,000 deferrals with a state guarantee with a total volume of 6.4 billion euros. In addition there are 72,000 deferrals based on statutory moratoriums and 27,600 voluntary moratoriums. In total, a credit volume of almost 16 billion euros is affected.
For companies, loan guarantees are the most effective aid in the long term, followed by fixed cost subsidies and short-time work, state the noenbankers. Hours of social security contributions that expire in early January 2021 could only help temporarily.
In addition to the massive challenges that have existed for a long time due to the low interest rate environment, higher value adjustments are now also putting a strain on the profitability of the Austrian banking sector. In this environment, the central bank recommended that the domestic banking industry, in view of the further increase in credit risks and increased uncertainty, focus on a solid capital base, which means, in accordance with European recommendations, to refrain from share buybacks and to carefully weigh profit distributions, and to focus on the expiry of Prepare payment moratoriums and government guarantees for loans and further increase operational efficiency.
Austria's banks more profitable
Despite the slump in profits in the first half of 2020, domestic banks are more profitable in an EU comparison. The reasons for this are efficiency increases and digitization, explains Ritzbergher-Grünwald. Since January 2020, the number of branches across Austria has been reduced from 5115 to 409 branch offices; the number of municipalities without a bank has doubled to 550 municipalities in this period. Nevertheless, the supply for the majority of the population is good.
