Recent CESEE lending and NPL dynamics the experience of Austrian banks

Transcription

1 Recent CESEE lending and NPL dynamics the experience of Austrian banks Philip Reading Director Financial Stability and Bank Inspections Department Oesterreichische Nationalbank Regional Workshop Building Efficient Debt Resolution Systems Vienna, February 14, 2012

2 1. Recent dynamics in CESEE lending the Austrian perspective

3 Austrian banks remain committed to CESEE 2011Q02/2011Q03: +0,1% - 3 -

4 Loan portfolio of Austrian banks with a high share in foreign currency lending - 4 -

5 Extent of local refinancing varies widely, but local funding generally strengthened during the crisis Loan Deposit Ratio CESEE&CIS Subsidiaries % Q3 Regional Breakdown % NMS-2004 NMS-2007 SEE CIS Source: OeNB Q3-5 -

6 Strengths and challenges of Austrian banks are being addressed Strengths Challenges Response Retail-orientated business model Financing of real economy Liquidity position intrinsically solid Profits throughout the crisis Main markets in Austria and CESEE CESEE Unfavourable economic and political environment in some countries Capitalization at group level below peers Dependence on intra-group funding Sustainability package Limited exposure to euro area countries with high risk premiums Limited exposure to Greece, Ireland, Portugal as well as to Italy, Spain and France Foreign currency loans High stock of foreign currency loans in Austria and CESEE Underperformance of repayment vehicles OeNB/FMA guiding principles ESRB recommendation - 6 -

7 2. Recent dynamics in CESEE NPLs

8 NPLs now a legacy of credit booms in the past? NPL rat ios 2011 vs. Dom est ic credit growt h 2007 in CESEE & CIS 20 NPL ratio (2011 latest available) Source: EBRD Domestic credit growth (2007) - 8 -

9 Real downturn in CESEE resulted in a hike of loan loss provision and NPL ratios - 9 -

10 Restructuring as a distinct feature of NPL resolution in CESEE

11 Loan-to-Deposit Ratio as an early warning indicator Maximum loan loss provisioning rate (since end 2008) 24,0% 22,0% 20,0% LDR = 110% 18,0% 16,0% 14,0% 12,0% 10,0% 8,0% average LLPR = 7.7% 6,0% 4,0% 2,0% 0,0% 0% 50% 100% 150% 200% 250% 300% 350% Loan-to-Deposit Ratio (end 2008) Source: OeNB. Note: Subsidiaries with a loan portfolio smaller than EUR 500 mio and/or an LDR above 300% were excluded from this representation

12 3. AT measures to prevent future NPL crisis

13 Strengthening the sustainability of banks business models Maintaining financial stability in Austria and CESEE Avoiding excessive credit growth (boom-bust-cycles) Increasing risk bearing capacity of TOP 3 banks Preparing for possible crisis times Higher capitalisation Stable, local funding base of subsidiaries Group recoveryand resolution plans As of : Implementation of Basel III common equity tier 1 ratio (CET1) of 7% Participation capital issued in the course of Austria s banks support package will be eligible As of : Additional capital surcharge of up to 3% CET1 Strengthening local deposits, local issuances as well as funding from supranational institutions (incl. EIB, EBRD, ) Aligning net credit growth to stable, local funding Monitoring the loan-to-localstable-funding-ratio of 110% as an indicator Recovery plans: Enabling firms to plan how they would try to recover from severely adverse conditions Resolution plan: Providing a roadmap to resolve a failed firm in a manner that minimises the impact on financial stability Submission in

14 Anti-cyclicality: Monitoring the funding situation does not lead to deleveraging, but would send warning signals in times of excess Avoiding excessive credit growth (Q1-Q4 2008) No deleveraging during the crisis (Q Q4 2009) Share of total assets of the Top3-subsidiaries that would have been affected. Share of total assets of the Top3-subsidiaries that would have been affected. Source: OeNB. Note: These representations use the stricter LDR

15 Positive effects outweigh potential drawbacks Improved risk-bearing capacity at group level The Austrian initiative Expedites the implementation of Basel III capital requirements Therefore improves quantitative and qualitative aspects of capitalisation on a permanent basis beyond the EBA June 2012 targets Stability is not costless, yet higher capital further increases the resilience of banks to adverse shocks and thus further facilitates the pursuit of a low volatility retail banking model Strengthening of the local, stable funding base of subsidiaries Sustainable growth instead of boom-bust cycles Monitoring of the linkage between lending and local, stable funding Improved stability of home and host economies and their banking systems Continuation of the Vienna Initiative spirit (no deleveraging in crisis times)

16 4. Some concluding remarks on the general outlook of NPL resolution

17 Lending forbearance/evergreening: NPL management tool or gamble for resurrection? The Good Loan restructuring / lending forbearance is a viable tool to manage underperforming loans at the micro-level the Bad Empirical evidence (most prominently from Japan) shows that insolvent zombie banks are stuck in lending to insolvent zombie borrowers in a gamble for resurrection no new lending Inefficient firms might anticipate forbearance (creating moral hazard) and the Ugly When this behaviour becomes systemic (e.g. after a boom-bust-cycle) it poses a risk for the economic recovery Misallocation of credit to zombie instead of healthy borrowers In this environment restructuring creates hidden credit risks due to migration from NPL to performing loan class Stagnation of Japan s economy in the 1990ies was inter alia attributable to lending forbearance (Kobayashi et al., 2002, Caballero et al., 2008)

18 Viability of NPL resolution depends on macroeconomic performance N PL r at ios vs. GDP growth in CESEE & CIS countries 8 GDP growth (2012 forecast) 6 High growth/low NPLR easing High growth/high NPLR opportunity GE TJ 4 RU AZ KY MD 2 0 TR EE BY SK PL MK HR BA BG RO AL UA LT LV RS ME -2 Low growth/low NPLR deterioration SI HU Low growth/high NPLR: challenge Source: EBRD NPL ratio (2011 latest available)

19 APPENDIX

20 Some ideas on key ingredients for creating incentives to foreclose NPLs Create/ensure legal environment that enables processing of NPLs Specifically provide for the access to collateral (mortgages) by lenders Create incentives for banks to reveal fundamental value of loan books Close scrutiny by regulators For example by designing the pricing in asset buyback schemes accordingly (e.g. proposal by Bruche/Llobet, 2010) Ensure proper bankruptcy procedures That allow for insolvent firms to exit the market and provide for private bankruptcy Provide for efficient credit information reporting systems (credit bureaus) That create access for lenders to information on borrowers characteristics (EBRD Transition Report 2011) Create right tax incentives for NPL management

21 Further harmonization of national NPL definitions has to remain on the agenda Source: Barisitz (2011)

22 Exposure to CESEE represents lion s share of total Austrian BIS exposure Source: BIS data 2011Q2, Eurostat (GDP Data 2010)

23 Supervisory initiative to reduce credit risk associated with foreign currency lending in the CESEE region is on track Foreign currency loan exposure of AT banks CESEE Subsidiaries CESEE Direct Lending CESEE Leasing Source: OeNB (growth rates FX adjusted) bn EUR (+1.0% in 2011Q2) 39.0 bn EUR (+1.8% in 2011Q2) 3.8 bn EUR (-11.5% in 2011Q2) Guiding Principles on FX lending by OeNB and FMA: Unilateral commitment of AT banks operating in the CESEE to discontinue the riskiest forms of FX lending: CHF/JPY consumption and mortgage loans to unhedged private households and CHF/JPY loans to SMEs (expect for trade finance). Consumption loans in EUR are restricted to borrowers with best creditworthiness. According to OeNB surveys AT banks commit to the Guiding Principles as of 2011Q2 despite the slight increase in the stock of FX loans Newly issued FX loans almost entirely denominated in EUR and USD (in CIS) ESRB Recommendations on lending in foreign currencies: Important step to find common cross-border strategies to deal with risks of FX lending

24 FX loan share of Austrian subsidiaries in CESEE therefore on a steady decline Share of FX loans relative to total loans of AT subsidiaries in CESEE (FX adj.) since Dec % 50% 45% 40% 35% Dez.06 Jun.07 Dez.07 Jun.08 Dez.08 Jun.09 Dez.09 Jun.10 Dez.10 Jun.11 Total FX adjusted Private Households FX adjusted Nonfinancial corporations FX adjusted Source: OeNB

25 Strengthening the local stable funding base of subsidiaries A general guideline for achieving a sensible balance Guideline only applicable to subsidiaries with an LLSFR above 110% Flexibility and proportionality concerns are given due consideration 1. Large subsidiaries: Net new lending limits with a degree of flexibility Net new lending should not exceed 110% of the increase in local stable funding, but Flow ratio may be exceeded in extraordinary circumstances (clear limits) Any over-shooting should be (over-)compensated at the respective subsidiaries over the following three years. 2. Smaller subsidiaries Proportionality principle* Net new lending limits do not apply Reduction of the (stock) LLSFR over the medium term * This exemption will only be applicable to a limited amount of banks