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Czech Republic’s banking sector: Facts & Figures

Updated September 2018 – For earlier editions of Facts & Figures click here

The GDP growth, following a temporary slowdown in the previous year reached 4.6%, without posing any greater threat to macroeconomic or financial stability. The general government’s economic management in the election year – despite the planned budget deficit – ended with a surplus of about 0.06 % of GDP, the balance of payments current account also ended with a modest surplus at the year end, and unemployment in December 2017 fell to 2.4%, making it increasingly difficult for entrepreneurs to find workforce in the tight labour market.

The Czech banking sector has continued to deliver a high degree of stability despite all the challenges as has been repeatedly confirmed by the results of the demanding stress tests carried out by the Central Bank. Its aggregate capitalisation exceeds by almost 3 percentage points the regulatory capital requirements, and although the total capital ratio of banks slightly increased to 19.25% and is slightly below the EU average, almost 97% of the capital is made up of the highest quality Tier 1 capital – in that the Czech banks are above the EU average. The Czech Republic has a comparatively low share of non-performing loans (NPLs). According to the European Banking Authority (EBA), compared to the previous year the NPL ratio has dropped further to 1.6% and was thus the fifth lowest among EU Member States, while the coverage ratio of NPLs by allowances was 62%, the third highest.

By the end of 2017, there were 46 licensed banks. The structure of the banking sector consists of four large banks, five medium-sized banks, nine small banks, 23 branches of foreign banks and five building societies; 38 entities are under the control of foreign owners including 14 banks and 23 branches. Domestic owners control nine banks, two of which are banks with state participation.

Towards the end of 2017, the total value of the banking sector’s assets amounted to CZK 7,009.6 billion, which is a year-on-year increase of 17.6 %. To match up the situation mechanically with the previous period, when the 2016/2015 year-on-year increase reached already a high 9%, would be misleading. A substantial part of the growth of banks’ assets occurred during the first quarter of 2017 in a period of increasing expectations that the Central Bank of Czech Republic (CNB) would end its exchange rate commitment which had lasted for four years. The banking sector’s assets thus represented almost 140% of GDP at the end of the year.

Compared to the previous year, net profit for the year 2017 slightly increased to approximately CZK 75.9 billion. Return on equity reached 15.6% and return on assets amounted to 1.09%.

The healthy banking sector managed to boost economic growth through the supply of loans also in 2017, under the tightening regulation and the increasing competition not only among banks, but also, to an increasing extent, of fintech companies.

By the end of 2017, the value of bank loans in the Czech economy grew by 4.6%, amounting to CZK 3,085.5 billion. At the end of the year, households had CZK 1,437 billion in loans, 8% more than a year earlier, and loans to the corporate sector amounted to CZK 1,022 billion, with a year-on-year increase of 4.7%.

2017 was a boom year for household lending. Households drew down new housing loans from banks and building societies worth CZK 346.4 billion in 2017, only 2% more than in 2016. Bank consumer loans grew even faster – households borrowed CZK 118.1 billion in 2017, 12.8% more than in 2016. The central bank’s stricter macroprudential recommendations for mortgages began to apply during 2017, requesting that the average value of LTV in a lender’s portfolio should not exceed 80% and in individual cases it should not exceed 90%. The share of new mortgages with an LTV between 80% and 90% should not be higher than 15% of newly granted mortgages in a given quarter.

Enterprises drew down CZK 457.9 billion in new loans during 2017, 10.3% less than in 2016, which had already been a weak year. 2017 showed not only the tendency of enterprises to invest primarily from retained profits of the previous period, but also a tendency to wait for new EU grant calls to be made.

By the end of 2017, the value of deposits stood at CZK 4,169.1 billion and exceeded loans by approximately 35%. The excess of deposits compared to loans has been traditionally generated by the household sector, where households have deposited 65% more funds on deposits with domestic banks than they had drawn in loans. In the corporate sector, the value of deposits and loans is approximately balanced.

Although the excess of deposits, compared to loans, implies a relatively low dependency of banks on inter-bank financing, it also limits the efficiency of monetary policy. At the same time, it is also a challenge, so far ignored, for the synergic use of cohesion financial instruments in the form of guarantee schemes, which would be able to unlock up to CZK 10 in private loans per CZK 1 of public funds, thus contributing to at least a partial absorption of this excess.

By the end of 2017, households had deposited CZK 2,370.2 billion in banks, 7.3% more than last year. More than 75% of the total was in demand deposits. By contrast, the volume of fixed term deposits at the end of the year fell by 8%, to CZK 550.4 billion. With interest rates being still low, people preferred the immediate availability of deposited funds, among other things, for partial financing of investments into their own housing.

Contributor: Petr Procházka prochazka@czech-ba.cz

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