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Austrian central bank warns lenders of taking risks in real estate


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Austrian central bank warns lenders of taking risks in real estate

Austrian banks should avoid taking on too much risk and stay away especially from real estate lending as some developments in the residential mortgage market have raised red flags, the country's central bank said in its latest financial stability report released Dec. 11.

The central bank advised caution because of the increasing share of housing loans to households with relatively high loan-to-value, debt service-to-income and debt-to-income ratios. This warrants closer supervisory monitoring although real estate-related risks in Austria remain subdued, the central bank said.

Housing loans were the main driver for lending growth in Austria, alongside the economic recovery in Central, Eastern and Southeastern Europe, or CESEE, where many Austrian lenders have large operations. The good economy and low risk costs contributed to a rise in profitability for Austrian banks over the first half of the year; the CESEE markets making the highest contribution to lenders' profits in the period were the Czech Republic, Russia and Hungary.

"Given that their profitability has been on an upward trend in recent years, Austrian banks improved their capitalization further in the first six months of 2017. This, in turn, strengthened financial stability in Austria," central bank Vice Governor Andreas Ittner said at the presentation of the financial stability report. Stress tests run by the central bank also showed an improvement in banks' risk-bearing capacity, which was also helped by a reduction of international exposure and a lower number of foreign-currency loans.

Despite the encouraging results, the central bank advised caution. "Individual banks could still face idiosyncratic risks," the authority warned. "Political uncertainties are on the rise in several regions in the world, and legacy issues such as nonperforming loans and foreign currency loans require continued attention from the banks."

The benign market environment offers lenders a "window of opportunity" and it is crucial that they use it to ensure future sustainable profitability given the continuing low interest rate environment, the central bank said. Austrian banks should also use this time to clean up nonperforming loans in the CESEE region, the central bank said, noting that Austrian banks improved their loan quality in the first half but that the heterogeneity in NPL ratios at some of their CESEE subsidiaries remains high.