In a report on the Austrian banking system, “Banking Industry Analysis: Austria (Republic of)”, published on March 17, 2003, Standard & Poor’s Ratings Services states that the Austrian banking system despite its structural weaknesses is strong enough to withstand the economic downturn, which has reduced economic growth rates to low levels since 2001.
“Due to the global economic downturn, GDP growth has declined sharply since 2001 and signs of a quick recovery have not yet emerged,” says Standard & Poor’s credit analyst Stefan Best. Historically, the Austrian economy has been one of the least volatile among rated sovereigns and is expected to be among the main beneficiaries of the EU enlargement, however. Overall, Standard & Poor’s expects the relative stability of the economic and social environment to continue to have a stabilising effect on the banking system.
Privatisation, consolidation, and refocused strategies on extended home markets have been the key characteristics of the Austrian banking sector over the past decade. At year-end 2002, the combined market share of the five largest institutions by total bank assets amounted to 46%.
Nevertheless, despite the consolidation process, with almost 900 banks and almost 5,400 outlets serving a population of about eight million, Austria remains one of the most competitive and overbanked markets in Europe.
“The Austrian banking industry’s unique structure has, in Standard & Poor’s view, contributed to a slow adaptation to change, low risk-adjusted margins, and unfavourable cost levels,” said Mr. Best. “Consequently, consolidation has not translated into higher profitability levels in the Austrian banking market and earnings have remained low by international standards,” adds Best.
The lack of growth potential, competitive pressures, and persistently low margins at home prompted Austrian banks early on to look at cross-border opportunities in neighbouring Central and Eastern Europe (CEE) countries based on strong historical, commercial, and cultural ties in the region. Although larger Austrian banks have been successful in coping with the additional credit, operational, and legal risks, and transforming their operations in CEE countries into profitable ventures, they will be challenged to avoid excessive exposure and reliance on these promising, but still more volatile markets and to improve the profitability of their domestic operations.