OREANDA-NEWS.  Fitch Ratings says in a new report that large Austrian banks' flexibility to deal with evolving challenges in Central and Eastern Europe (CEE) remains adequate but not strong. Developments in CEE are the dominant rating sensitivity affecting the banks' standalone financial strength, as expressed by their Viability Ratings (VRs). The banks' VRs have driven their Issuer Default Ratings since Fitch's sovereign support review in 2Q15, which resulted in a revision of the Austrian banks' Support Rating Floors to 'No Floor'.

Russia is the main immediate risk for Raiffeisen Bank International AG (RBI, BBB/Negative/ bbb) and, to a lesser extent, UniCredit Bank Austria AG (BBB+/Stable/bbb+). Their VRs are constrained by rising asset quality and earning pressure in Russia, driven by the deteriorating economy, which is only partly mitigated by the progressive recovery of smaller CEE markets. RBI benefits less than its peers from Austria's stable and low-risk environment and relies most on profits from its weakening but still robust Russian operations. It also faces execution risk from its ongoing deleveraging plan.

Bank Austria's regionally more diversified profits reduce its vulnerability to Russia's problems. Its large Turkish operations are a major mitigating factor, although their strong organic growth could eventually weaken their solid risk profile. If successful, Bank Austria's pending exit from Ukraine would end the significant capital drain triggered by the country's deepening recession. Erste Group Bank AG (BBB+/Stable/bbb+), which has no significant Russian or Ukrainian exposures, should further benefit from its recovering Hungarian and Romanian units after years of losses and balance sheet clean-up. We expect Erste's strong Czech and Slovakian units to remain key sources of capital generation.

Unlike its peers, the smaller cooperative Volksbanken-Verbund (VB-Verbund, BB+/Positive/bb+) is no longer materially exposed to CEE since the spin-off of its riskiest legacy assets earlier this year. The Positive Outlook reflects our expectation of further restructuring progress and materially improving earnings while the group's now dominant domestic retail focus should contain credit risks.

Low margins, overcapacity and high fixed costs in their home market constrain the banks' flexibility to deal with depressed earnings and low growth in CEE.
The banks' necessary capital build-up is also constrained by high regulatory costs, in particular bank levies and repeated legislation aimed at shifting wealth to households from the banking sector in CEE. The banks' presence in a number of jurisdictions with different regulatory requirements complicates capital management as regulatory convergence is a distant prospect.