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Czech Republic’s banking sector: Facts & Figures

Updated September 2019 – For earlier editions of Facts & Figures click here

Although the Czech economy slowed down in 2018, the robust 2.9% GDP growth was still above the potential. Domestic demand, in particular, investment activity, was its main driving factor. This reflects, on the one hand, the tightening of the labour market and increased corporate investment in automation and, on the other, growth in government investment.

Growth was accompanied by a small general government surplus, slightly declining government debt and balance of current payments equilibrium, labour market disequilibria significantly increased during the year. The unemployment rate of 2.1% was the lowest in the history of the Czech Republic but the gap between number of vacancies and that of job seekers increased.

In the long term, the sustainability of Czech public finances in terms of an aging population and the need for fundamental reforms of pension system and health-care financing will be crucial.

Price stability has still been the distinct feature of the economic development during 2018 – the average annual inflation rate was 2.1%, and the rate ​​stayed close to the central bank’s target during the year. Growing inflationary pressures, coming particularly from the labour market, were absorbed by interest rate policy. Since February 2018, the Czech National Bank (CNB) has raised monetary policy rates five times, thereby gradually increasing the main two-week (2T) repo rate, from 0.50% to 1.75%.

By the end of 2018, the number of licensed banks operating in the Czech Republic increased by two to 49. The banking sector consists of four large banks, five medium-sized banks, nine small banks, 26 branches of foreign banks and five building societies. A total of 40 entities – 14 banks and 26 branches – were under the control of foreign owners. Domestic owners controlled nine banks, of which two are banks with state participation.

By the end of 2018, the total value of the banking sector’s assets rose by 3.8% to CZK7,332 billion. At the end of the year, the volume of assets relative to GDP decreased only slightly to 138%.

The aggregate capitalisation of the Czech banking sector consistently exceeds regulatory capital requirements and the total capital ratio of banks reached 18.6%, while 97.8% of the capital was formed by Tier 1 capital. One of the main advantages is the still comparatively low ratio of non-performing loans (NPLs), whose value decreased further to 1.4% compared to the previous year, thus remaining one of the lowest in EU, while the coverage ratio of NPLs by allowances of 57.7% was among the highest. The net profit for 2018 grew by 8.9% year-on-year, to CZK82 billion. The return on equity stood at 14.6% and the return on assets reached 1.2%.

The total volume of bank loans rose by 7.2% at the end of 2018 compared to the previous year, reaching CZK3,306.5 billion. Banks provided CZK1,550.5 billion in loans to households, almost 8% more than in the previous year, corporate loans reached CZK 1,080.3 billion at the year end, up by 5.7% y-o-y (the growth rate by one percentage point higher than in 2017).

During 2018, households drew new housing loans from banks and building societies worth CZK357.5 billion, 3.2% more than in 2017. Since October 2018, the central bank’s recommendations began to apply, limiting the maximum allowable level of the debt to income ratio (DTI) to nine times the annual net income and the debt service to the net monthly income ratio (DSTI) to 45%. The number of new mortgage transactions fell in the last quarter. The trend of rapid increases in bank consumer lending seems to have ended after several years – households borrowed CZK116.4 billion during the year 2018, i.e. 1.5% less than in 2017.

The trend has apparently changed in the area of ​​corporate financing, too, because after a double-digit decline in 2017, the volume of corporate loans finally increased, albeit by less than 1%. In the course of the year, businesses drew new loans totalling CZK461.8 billion. The demand for credit most likely reflected the reaction of manufacturing companies to the lack of qualified job applicants in the form of investments in robotics and automation of production.

At the end of 2018, customers’ deposits totalled CZK4,445.6 billion and exceeded consumer credit by almost 34%. With only very slowly rising deposit interest rates, households preferred immediate availability of deposited funds. Households held CZK2,558.5 billion of deposits in banks, i.e. 8% more than in 2017; over three-quarters of them on-demand deposits. The value of time deposits grew by almost 2% at the end of the year, amounting to CZK560.8 billion.

Traditionally, the overhang of deposits over loans has been generated by the household sector, where households have placed savings with domestic banks exceeding by 61% the value of loans. In the corporate sector, the volume of deposits and loans is broadly equal. The excess of deposits over loans means, on the one hand, a relatively low dependence of banks on interbank funding, on the other hand, it limits the transmission of monetary policy.

Internet and mobile banking became the standard among the Czech population. Its active use by 62% of individuals aged 16 to 74 was in 2018 above the EU average (54%). Following the testing phase of the central bank application to ensure the interbank settlement of immediate payments (transfer within ten seconds, in the 365/7/24 mode, of up to CZK 400,000), that ran from September 2018, banks started to prepare for its routine use in practice.

Contributor: Petr Procházka prochazka@czech-ba.cz