OREANDA-NEWS. The Austrian government's plan to reduce its bank levy and link it to profits should improve the sector's competitiveness against European rivals and accelerate recovering but still fairly modest internal capital generation, Fitch Ratings says. But a one-off payment included in the plan will effectively postpone the impact by two years and shareholders are likely to expect an increase in recent modest profit distributions, which would reduce the benefit to capitalisation.

The lower levy will ease profitability pressure on Austrian banks, especially as the sector is becoming more focused on domestic business, where margins are generally low. The change is particularly significant for UniCredit Bank Austria, as the planned transfer of its central and eastern Europe (CEE) business to UniCredit will considerably reduce its revenue base, but would not affect the calculation of its bank levy under the existing system.

A lower levy is unlikely to have any direct impact on ratings. We already viewed a significant relief as likely in the medium term due to the growing political consensus in Austria about the necessity to achieve a level playing field with other European countries.

It is unclear how much of the savings will go on strengthening capital, as advocated by the Austrian regulator, and how much will be passed on to shareholders. But improving pricing discipline in banks' domestic business, where asset margins are structurally low, could be a way to reconcile the demands of shareholders and the regulator.

Erste Group Bank and Raiffeisen Bank International also remain exposed to the risk of CEE countries imposing high levies. The Hungarian government is cutting its initially very high levy, but the Polish government has introduced a levy totalling 44bp of total adjusted assets and other CEE countries may follow suit.

Under the new plan, which still needs parliamentary approval, the Austrian levy will be reduced from EUR640m in 2016 to around EUR100m a year from 2017 and will be directly linked to profits, reducing the burden on poorly performing or loss-making banks. Banks will still have to contribute around EUR350m a year to the European single resolution fund and the deposit guarantee scheme. The sector will also have to make a one-off payment of EUR1bn in return for the lower levies, equivalent to around two years of the expected savings under the new system.

The Austrian levy is one of the highest in Europe and has reduced the sector's net profits in 2011-2015 by around a quarter, roughly EUR3bn. The country's three large banks, Erste, UniCredit Bank Austria and RBI, have contributed half the total.

We estimate that this, together with levies in CEE, has slowed capital build-up at the major Austrian banks by about 20bp a year in recent years. The levy does not take account of banks' performance, so the cost has been particularly high in weak years (2011, 2013 and 2014), which has damaged competitiveness relative to other European banks.