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The profitability of Austrian banking subsidiaries in CESEE: driving forces, current challenges and opportunities

Author

Listed:
  • Gernot Ebner

    (Oesterreichische Nationalbank, Financial Markets Analysis and Surveillance Division)

  • Eleonora Endlich

    (Oesterreichische Nationalbank)

  • Andreas Greiner
  • Manuel Gruber
  • Günther Hobl
  • Stefan Kavan

    (Oesterreichische Nationalbank)

  • Martin Ohms
  • Vanessa Redak

    (Oesterreichische Nationalbank)

  • Alexandra Schober-Rhomberg

    (Oesterreichische Nationalbank)

  • Paul Stockert
  • Daniela Widhalm
  • Tina Wittenberger

    (Oesterreichische Nationalbank)

Abstract

This study analyzes the driving forces behind the profitability of Austrian banking subsidiaries in Central, Eastern and Southeastern Europe (CESEE) from 2003 to 2015, with a particular focus on the aftermath of the global financial crisis, which marked a turning point for their risk-return characteristics. We start off with an analysis of operating income and expense trends and delve into an analysis of credit risk costs. Then we look at large extraordinary one-off cost items before summing up with a long-term revenue bridge and an analysis of the most recent risk-return metrics. Overall, we find that the subsidiaries generated substantial profits, which have to be seen in the light of significant writedowns of their book values at the parent level. Regarding current challenges, operating profits are under pressure from falling net interest margins and fading organic growth, while remaining foreign currency loans might lead to further one-off costs, which in the past offset efficiency improvements. Credit risk also remains high in some countries, but a positive trend has emerged over the past years and provisioning levels have improved. One lesson learned in this respect is that rapid credit growth before the crisis typically led to high nonperforming loan (NPL) ratios, which now weigh on some subsidiaries’ ability to lend. Looking forward, banks continue to face a challenging environment in the CESEE region with little low-hanging fruit, as the speed of macroeconomic catching-up has slowed and low interest rates have taken hold. Therefore, Austrian banks’ subsidiaries should diversify their income base, maintain their operating cost discipline and continue to strive for risk-adequately priced products in order to keep their profitability on a sustainable footing.

Suggested Citation

  • Gernot Ebner & Eleonora Endlich & Andreas Greiner & Manuel Gruber & Günther Hobl & Stefan Kavan & Martin Ohms & Vanessa Redak & Alexandra Schober-Rhomberg & Paul Stockert & Daniela Widhalm & Tina Witt, 2016. "The profitability of Austrian banking subsidiaries in CESEE: driving forces, current challenges and opportunities," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 32, pages 64-79.
  • Handle: RePEc:onb:oenbfs:y:2016:i:32:b:1
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    File URL: https://www.oenb.at/dam/jcr:86e74325-311c-4ef9-ba79-b04d6bca9c18/fsr_32_special%20topics_01.pdf
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    References listed on IDEAS

    as
    1. Stefan Kavan & Daniela Widhalm, 2014. "Austrian Subsidiaries’ Profitability in the Czech Republic and Slovakia – CESEE Margins with an Austrian Risk Profile," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 28, pages 59-68.
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    Cited by:

    1. Katharina Allinger & Julia Wörz, 2020. "The sensitivity of banks’ net interest margins to interest rate conditions in CESEE," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue Q1/20, pages 51-70.
    2. Gernot Ebner & Eleonora Endlich & Andreas Greiner & Manuel Gruber & Stefan Kavan & Marie Theres Kraihammer & Martin Ohms & Vanessa Redak & Alexandra Schober-Rhomberg & Daniela Widhalm, 2017. "Profitability of Austrian banks ’ domestic business from 1995 to 2016: driving forces, current challenges and future opportunities," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 34, pages 52-67.
    3. Martin Feldkircher & Michael Sigmund, 2017. "Comparing market power at home and abroad: evidence from Austrian banks and their subsidiaries in CESEE," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue Q3/17, pages 59-77.
    4. Stefan Kavan & Tina Wittenberger, 2020. "Die Expansion der österreichischen Banken nach Zentral-, Ost- und Südosteuropa," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue Q1-Q2/20, pages 122-134.

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    More about this item

    Keywords

    banking; financial crisis; Austrian banks; bank profitability; net interest income; net interest margin; operating expenses; credit risk; NPL; writedowns; foreign currency loans; Texas ratio; CESEE;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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