VIENNA, March 8 (Reuters) - Moody's kept its negative outlook for Austria's banking system on Friday, citing a weakening operating environment, rising bad debt charges and a limited capacity of many banks to absorb losses.
The credit ratings agency said these negative factors were only partly counter-balanced by what it saw as the modest funding risks of most Austrian banks.
Moody's, which has had a negative outlook on the Austrian banking system since 2009, said it did not expect to see any major shifts in the environment for the sector over the coming 12 to 18 months which its report covered.
In addition to the economic crisis in the euro zone, of which Austria is a member, ratings agencies are concerned about the high exposure of Austrian banks to central, eastern and southeast Europe, as well as tough domestic competition.
Unicredit's Bank Austria, Raiffeisen Bank International (RBI) and Erste Group Bank are the three biggest lenders in the region.
"Risk charges have continued to be higher than what was originally expected. The result is that the problem loans have continued to rise," Moody's senior analyst Swen Metzler told Reuters.
"They make very decent earnings before risk provisions, but this is to a large extent consumed by loan losses and goodwill impairments," Metzler added.
The exposure of Austrian banks to Hungary in particular, as well as to weaker euro zone debtor countries and wider euro zone troubles, was a major factor in rival agency S&P's decision to strip Austria of its cherished triple-A rating in January 2012.
This January, S&P raised its outlook on Austria's debt to stable from negative, in an acknowledgement of the fact that the country's export-led economy had weathered the storm better than most European countries.
Austria also has a host of domestic banks, including the retail-focused Raiffeisenbanken and Volksbanken cooperatives, which operate in an environment of intense competition and low interest rates.
"You could look at it as two outlooks in one. The domestic environment ... by itself is enough to attribute a negative outlook to the banking system, as are the challenges coming from CEE and CIS," said Moody's managing director banking Carola Schuler, referring to central and eastern Europe and former Soviet countries.
Moody's rates Bank Austria and Erste Group A3 with a negative outlook, and RBI A2 with a stable outlook. (Editing by David Holmes)