Profitability of Austrian banks ’ domestic business from 1995 to 2016: driving forces, current challenges and future opportunities

Gernot Ebner (), Eleonora Endlich (), Andreas Greiner, Manuel Gruber, Stefan Kavan (), Marie Theres Kraihammer, Martin Ohms, Vanessa Redak (), Alexandra Schober-Rhomberg () and Daniela Widhalm ()
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Gernot Ebner: Oesterreichische Nationalbank, Financial Markets Analysis and Surveillance Division
Eleonora Endlich: Oesterreichische Nationalbank
Stefan Kavan: Oesterreichische Nationalbank
Vanessa Redak: Oesterreichische Nationalbank
Alexandra Schober-Rhomberg: Oesterreichische Nationalbank, http://www.oenb.at

Financial Stability Report, 2017, issue 34, 52-67

Abstract: This study analyzes how Austrian banks generated profits in their domestic business over the last two decades, i.e. from 1995 to 2016, while paying close attention to the heterogeneity in business models. We focus on the period after the global financial crisis (GFC) and the challenges it entails, in order to highlight the most important trends and their potential repercussions on the medium-term sustainability of banks’ profits and consequently Austria’s financial stability. We find that banks and their income grew strongly before the GFC at the expense of their margins, whereas this trend went into reverse after the crisis hit. Operating expenses increased steadily until recently, when cuts in staff-related expenses started to show effects. Higher credit risk costs were another consequence of the GFC, but the sector-wide ratio of nonperforming loans never surpassed 5%. All of these developments resulted in strong volatility in the return on (average) assets (ROA) after the onset of the GFC and – supported by historically low loan loss provisioning – a recent return to pre-crisis levels. Overall, smaller local banks generated above-average ROAs. Large banks underperformed, while large regional banks performed in line with the banking sector average. In the near future, improvements in operating profitability in a highly competitive market are likely to depend on banks’ pricing power and their ability to use the currently calmer environment to address structural cost issues, to tap new sources of income whose pricing adequately reflects risks and to ready themselves for the digitalization of their business.

Keywords: banking; financial crisis; Austrian banks; bank profitability; net interest income; net interest margin; investment income; fees and commissions income; operating expenses; cost-income ratio; credit risk; nonperforming loans (search for similar items in EconPapers)
JEL-codes: G01 G21 (search for similar items in EconPapers)
Date: 2017
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