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

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.