OREANDA-NEWS. The 2016 outlook for Austria's banking sector overall is stable, but there are contrasting dynamics among individual banks, says Fitch Ratings. We expect positive momentum at Erste Group Bank, which is recovering in some of its core central and eastern European (CEE) markets, and Volksbanken-Verbund (VB-Verbund) as it rationalises its structure. But restructuring costs and asset quality concerns in Russia and Ukraine add uncertainty to UniCredit Bank Austria and Raiffeisen Bank International's earnings.

We forecast 2016 GDP growth of 1.6% in Austria and 2.6% across emerging Europe, which should support modest loan growth at the Austrian banks. VB-Verbund and Bank Austria will focus exclusively on the competitive Austrian market by end-2016. Until banks are able to price credit more effectively and address their generally high cost bases, performance in the core domestic business lines, especially in retail banking, will be under pressure. A substantial shrinkage of Bank Austria's retail franchise might lead to a small improvement in margins but this is unlikely in the short term. Asset quality volatility in CEE is a major sensitivity for Raiffeisen, Erste and, at least until strategic changes are made, for Bank Austria.

Restructuring has weighed on the performance of Raiffeisen and VB-Verbund and the tail-end of these measures is likely to remain a drag on 2016 (and to a lesser extent 2017) results. The restructuring plan for Bank Austria announced by its parent UniCredit in November 2015 implies a thorough business overhaul. The target is that Bank Austria will, by end-2016, become a medium-sized domestic lender focusing on corporates. Its CEE subsidiaries will be transferred to the parent and the domestic retail business will be considerably cut back or divested. The need for Erste to improve efficiency at home is less pressing as its asset quality is better and prospects at some of its CEE subsidiaries look more favourable.

Internal capital generation from domestic business lines is generally weak, but the large banks are able to offset this with higher CEE profitability. Since 2010, the sector has built up a negligible annual average EUR400m of capital. If we exclude capital injections, notably at Erste and Raiffeisen, internal capital generation was slightly negative across the sector.