The dream of the financial capital of Vienna is getting closer to reality

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Updates from Vienna

Austria’s economy has been one of the hardest hit in Europe by the coronavirus pandemic. But its financial sector – and, in particular, its banks – are better positioned than most in Europe while social and economic life is temporarily returning to normal.

We are a long way from 2008 and the aftershocks of the global financial crisis, when Austrian lenders were among the most affected, leaving Vienna’s status as a financial center badly damaged.

At the time, talk of Vienna becoming the financial capital of Central and Eastern Europe – a London or a Frankfurt on the Danube – was quickly denounced as pride. The Austrian government was forced to mount a 100 billion euro bailout. Three of the country’s largest banks – Hypo Alpe Adria, Kommunalkredit and Österreichische Volksbanken – had to be nationalized and liquidated. Others have needed significant liquidity support for years.

But the pandemic could mark a turning point. Analysts and bankers now say Vienna’s aspirations as a financial center match reality, as growth in Eastern Europe is expected to exceed the EU average and demand for credit from major Austrian banks increases.

This is growth that Austrian banks can also afford to finance without overburdening their balance sheets. Most of Vienna’s major lenders spent the day after 2008 building up large capital reserves. At the end of last year, the rating agency Moody’s declared Austria to be one of six European national banking systems, out of a total of 19, with a stable outlook.

The Common Equity Tier 1 ratio of an average Austrian bank – a key measure of balance sheet strength – stood at 16.1% at the end of 2020. The EU average was 15. 2%.

“Today, Austrian banks are in a fairly enviable state,” said Máté Nemes, analyst at UBS in Zurich. “In terms of credit losses [from the pandemic], we are only talking about a few dozen basis points, or close to zero.

The demand for consumer credit has returned, mortgages are increasing and businesses are taking on more debt. “The [banking] the industry is benefiting from it almost on all fronts, which I think nobody would have expected, ”says Nemes. “It’s the same all over Central and Eastern Europe.

In 2019, the combined assets of Austrian banks exceeded € 1 billion for the first time since 2016. This figure continued to grow despite the Covid crisis, reaching € 1.14 billion at the end of 2020.

Almost a quarter of this sum is loaned to central Europe, according to the Österreichische Nationalbank, the central bank. The contribution of the Central and Eastern European region to bank results is even more notable. In 2019, just over 40% of profits came from loans in Central and Eastern European economies outside of Austria. In 2020, when the pandemic struck, the proportion rose to more than 50%.

However, there are structural problems.

Österreichische Nationalbank, the central bank
© Alexander Klein / AFP via Getty Images

Capital markets are still underdeveloped in the region. Bankers and financiers in Vienna – many of whom have banking experience in London or New York – lament weak markets in Austria and the wider region of Central and Eastern Europe.

Most businesses, even the largest, take on debt in the form of direct loans from lenders – usually banks and credit institutions with which they have deep and historical relationships. This makes them less agile. And this means that banks and financiers in Austria have fewer opportunities to earn commissions through advice on accessing capital markets or helping to structure fundraising.

The other side of the coin is household financial conservatism. Austria has household debt equivalent to just over 50 percent of gross domestic product, compared to an EU average of 65 percent. Savings rates are extremely high. But consumers still prefer to sit on cash, rather than investing in funds or markets, which they still view with skepticism.

A senior Viennese banker laments the financial illiteracy of many of his fellow Austrians. Across the region, there is a tendency to see any type of investment in the market – even a relatively basic investment in blue chip stocks – as engaging in “speculation or turbocharged Anglo-Saxon capitalism”.

Many banks are trying to change these mindsets. Thanks to digitization, they facilitate financial transactions and investment in funds.

Another challenge for Vienna’s financial development is the push of the Western banking sector towards sustainable finance. Bigger banks such as Erste Group, Raiffeisen Banking Group and UniCredit Bank Austria have all pledged to green their balance sheets – Erste, for example, said it exit all coal investments by 2030. But it’s a big concern for institutions with significant business relationships in Eastern Europe, where dirty energy and heavy manufacturing are still prevalent – and very profitable.

Political risks also remain important for the sector. Well-capitalized banks have been an attractive potential source of funding for cash-strapped governments in recent years. Even before the pandemic hit, Czech Prime Minister Andrej Babis, for example, suggested a new levy on bank dividends to bolster state coffers. Erste Group’s resentful relationship with the government of Hungarian Prime Minister Viktor Orban has been a long-standing financial drag.

Even more worrying, the political crisis in Belarus and the imposition of European sanctions represent a risk that is difficult to quantify but serious for the Austrian financial sector. Raiffeisen is one of the largest foreign lenders in the country. As such, the bank is vulnerable to decisions from Minsk and Brussels, as both sides seek ways to push each other to back down. Such risks are echoed in Ukraine and Russia, where Austrian financiers are also very present.

Vienna’s prospects as a financial center are the best they have been in nearly two decades. But the world, facing pressing challenges ranging from climate catastrophe to growing geopolitical instability, is also a much more uncertain place.


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