Fitch Ratings expects major Austrian banks to continue benefiting from their exposure to Central and Eastern Europe ("CEE"), where demand for credit remains substantial on the back of accelerated growth in most CEE economies. However, rapid retail loan growth in CEE could - if not properly controlled - lead in the medium-term to asset quality problems if CEE economies turn down.

"With an improving economic environment at home, the credit quality of Austrian corporates has improved. In Austria, the outlook has become more promising given the strengthened consumer confidence," says Michael Steinbarth, Director in Fitch's Financial Institutions group. "Nevertheless, competition remains fierce so that it may be too early to call it a structural change in the domestic retail banking sector."

Strong domestic competition and moderate economic growth have driven the major Austrian banks into CEE. Since the early 1990s, the major Austrian banks have spent several billions of euros on acquisitions in their neighbouring CEE region in addition to pursuing organic growth strategies. Although their market franchises in the various countries differ, operations in most CEE countries have underpinned growth and profitability at the major Austrian banks.

During 2006 and Q107, operations in CEE contributed at least 50% to operating profit. Banks have been benefiting from economic growth rates in excess of the average growth rates noted in the EU. The growth is in part driven by convergence at new EU member states with the more mature EU economies. So far, the integration of foreign acquisitions has worked well.

However, management at the major Austrian banks need to continue to address integration and execution risks following acquisitions and re-organisations. As banks are moving further eastwards and acquiring targets at higher price multiples, business plans for the acquired entities are also becoming more ambitious. While the overall positive trend in the CEE region should last for the foreseeable future, this does not hold true for all countries. Fitch is concerned about sustained high credit growth in an increasing number of CEE countries, as these markets have yet to be tested in an economic downswing.

Since 2004, the Austrian economy has outgrown that of the EU-25 (in terms of real GDP growth). However, spreads for banks remain under pressure given a highly competitive market. The domestic retail banking market remains challenging due to the existing market structures, but the economic prospects now appear more promising amid strengthened consumer confidence. Real income of private households has grown moderately with increasing investment into shares, securities and retail certificates. At the same time, the major Austrian banks, with the exception of RZB which has virtually no retail operations in Austria, have undergone or are in the process of restructuring and repositioning their retail operations.

The major Austrian banks covered in the report are Bank Austria Creditanstalt AG ('A'/'F1'/Positive Outlook), Erste Bank der oesterreichischen Sparkassen AG ('A'/'F1'/Stable Outlook), Raiffeisen Zentralbank Oesterreich AG (Support '1'), and Oesterreichische Volksbanken-AG ('A'/'F1'/Stable Outlook).