January 22, 2015 / 3:26 PM / 3 years ago

Fitch: CHF Rise Adds to Austrian Banks' Earnings Pressure

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Austrian Banks' Exposure to Swiss Franc Assets here LONDON, January 22 (Fitch) Swiss-franc appreciation adds to earning pressures on Austrian banks through gradual asset quality deterioration in their sizeable franc-denominated portfolios, Fitch Ratings says. The more immediate impact on liquidity and capital ratios is likely to be manageable given the banks' liquidity buffers and strategies to largely hedge open FX positions. Asset quality deterioration is likely to be more pronounced in the Swiss-franc lending of the banks' subsidiaries in central and Eastern Europe (CEE) than in Austria. Banks in some countries, such as Poland and Hungary, are more exposed to the exchange rate because large volumes of cheap Swiss-franc loans were granted to domestic borrowers. But the effect on Hungarian banks should be limited as foreign-currency risk related to Swiss franc-denominated mortgage loans was hedged in November 2014 and the loans will be converted into local currency. Domestic Swiss-franc mortgages should be less affected because the number of outstanding loans is moderate, and house price growth in Austria has been strong and steady. The loans typically have long maturities and borrowers use investments, often in insurance contracts, to build up funds for the bullet repayment. With two-thirds of Swiss franc mortgages held domestically, we expect asset quality deterioration to be moderate, despite the significant exposure. Raiffeisen Bank International (RBI) is likely to be most vulnerable since it has the highest proportion of Swiss-franc loans in CEE, predominantly in Poland, and no domestic loans. We expect loan impairment costs to rise gradually as asset quality problems emerge. However, policy moves by CEE governments to support retail borrowers, similar to the measures being taken in Hungary where banks were forced to convert loans into local currency, could accelerate the crystallisation of Swiss franc-related costs for Austrian banks exposed to those countries. Higher loan impairment charges would put further pressure on the sector's already poor profitability. Geopolitics in Russia and Ukraine and little signs of a major turnaround in the CEE economies already underpinned the negative outlook for the Austrian bank sector. We expect profits to remain modest in 2015 and well below historical standards. The increase in risk-weighted assets of Swiss-franc exposures will reduce regulatory capital ratios, but we think the impact will be mild since open FX positions are typically low. Margin calls on banks' Swiss franc/euro currency swaps are easily manageable to date in light of banks' good liquidity. Austrian banks have liquid asset buffers ranging from 15% to 25% of total assets. Austrian banks have significant Swiss-franc assets, with the largest four firms - Erste, RBI, Unicredit Bank Austria and Volksbanken-Verbund - holding EUR30bn on their balance sheets. This is equivalent to between 60% and 100% of their Fitch Core Capital. They are largely mortgages originated before the 2008 financial crisis. For more details, see "Austrian Banks' Exposure to Swiss Franc Assets", published today at www.fitchratings.com. Contact: Patrick Rioual Director Financial Institutions +49 69 768076 123 Fitch Deutschland GmbH Taunusanlage 17 60325 Frankfurt am Main Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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