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Czech Republic’s banking sector: Facts & Figures

In 2016, the banking sector operated in an environment of solid macroeconomic performance, however under stricter regulation and increasing competitiveness. When the extraordinary impulse produced by a delayed uptake from EU funds died out, the Czech economy slightly slowed down in 2016 as expected. Growth of the gross domestic product reached 2.3% in 2016. The strong result of 2015 has set a high benchmark for 2016 and the developments can therefore be assessed favourably.

The solid condition of the economy was demonstrated by strong indicators of business and consumer confidence. Consumer confidence in particular reached historic highs at the end of the year.  In December 2016, the year-on-year increase in consumer prices stood at 2%, the inflation target of the central bank has thus been achieved and the moment of exit from the exchange rate commitment has approached. Basic interest rates remained technically at zero during the whole year. Monetary policy has been supportive for loan creation. On the other hand, regulatory tightening, as well as macroprudential regulation, works in the opposite direction.

Towards the end of 2016, a total of 45 entities held banking licences. The structure of the banking sector comprised four large banks, five medium-sized banks, eight small banks, 23 branches of foreign banks and five building societies; 37 entities were controlled by foreign owners including 14 banks and 23 branches. Domestic owners controlled eight banks, two of which were banks co-owned by the state.

At the end of 2016, the total value of the banking sector’s assets amounted to CZK 5,961 billion (€220.8 billion), which was a year-on-year increase of 9%. The increase in assets was evenly spread across the banking sector. Therefore, four large banks (i.e. banks with assets exceeding €9.3 billion) accounted for 59% of the total volume of assets, which was exactly the same share as a year before. The banking sector’s assets represented 122% of GDP.

The total volume of loans provided by banks grew by 6%, year-on-year, to €109 billion at the end of 2016. By the end of 2016, households’ loans amounted to €49 billion, a 7.7% growth more than a year ago.

In 2016, housing loans boomed and consumer loans recovered. During 2016, households drew down new housing loans totalling €12.5 billion which was a year-on-year increase of 15%. New consumer loans amounted to €4 billion which represented year-on-year growth of 29%.

Since October 2016, new recommendations have come into force for housing loans. First, banks have been recommended not to exceed the 95% level of the loan-to-value (LTV) indicator of new retail loans secured by residential property, and second, the percentage of new retail loans secured by residential property with an LTV of 85–95% should not exceed 10% of the total respective loans newly provided. In spite of this, in the last quarter of 2016, the growth of new mortgage loans did not weaken.

The loans granted to companies amounted to €36.1 billion which was by 6% more than a year before.  The volume of loans denominated in CZK slightly declined, while the volume denominated in foreign currencies rose by almost 30%, year-on-year. In particular, exporting companies preferred loans denominated in euros as the exit from exchange rate commitment was expected.

Towards the end of 2016, households had deposited €72.6 billion with banks, i.e. 8.6% more than the year before. Deposits of households thus exceeded their loans by almost one half. More than 70% of household deposits were non-term deposits. On the other hand, the volume of term deposits fell at the end of the year by 6.2% to CZK 21.2 billion. With low interest rates, people prefer the immediate availability of deposited funds.

One of the major advantages of the domestic banking sector has been low ratio of non-performing loans (NPL). In the framework of the EU, the internationally comparable level of 2.5% represented, at the end of 2016, one of the lowest NPL ratios in the EU. At the same time, the coverage ratio amounting to 63% belongs to the highest among European peers.

The good quality of domestic loans is thus the main reason for profitability of the Czech banking sector even with its many challenges. Net profit for 2016 amounted to €2.7 billion thus increasing by 12.7%, year-on-year, partly due to one-off factors. Return on assets reached 1.27%.

The Czech banking sector has long been well capitalised. Year-end capital adequacy ratio reached 18.45%. Furthermore, most of the capital consists of a high-quality Tier 1 capital (Tier 1 capital adequacy ratio stood at 17.91%).