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Czech Republic’s banking sector: Facts & Figures

Updated December 2020 – For earlier editions of Facts & Figures click here

The Czech economy slowed during 2019 but despite that, its GDP growth pace of 2.4% could still be seen as satisfactory. For most of the year, the external uncertainties (Brexit, the US-China trade conflict, or the anaemic performance of the major trading partner´s economy), were reflected in the little willingness of entrepreneurs to invest. Household consumption thus became the key driver of growth (as a result of increases in wages and pensions and of the persisting low unemployment rate at 2.1%), followed by government consumption.

Household consumption contributed 1.2 percentage points to GDP growth and general government consumption by 0.6 percentage points, while the contribution of gross fixed capital was only 0.4 percentage points (approximately one third compared to 2018). The contribution of the balance of trade in goods and services to growth remained in principle at “black zero” (0.1 percentage points), however, net exports were significantly negative (-0.9 percentage points year-on-year) in the last quarter due to a strong growth of demand-driven imports in parallel with a decline in exports, which was related to developments in the countries of our main trading partners.

The gradually decreasing rate of economic growth was also reflected in the development of public finances, which after three years of moderate surplus, fell into a balanced mode, while the state budget closed the fiscal year with a modest deficit of 0.3% GDP, which, nevertheless, was offset by the  economic performance of cities and municipalities, similarly as in the past. As a result of the balanced financial management of the state, public debt decreased to 30.9% GDP.

In the labour market, however, a shortage of labour force continued to widen during 2019 and inflationary pressures intensified. Contrary to the several previous years, a gradual increase in inflation not only above the central bank’s target, but also slightly above the upper boundary of the tolerance band was a new feature of economic development during 2019. The average annual inflation rate rose to 2.8%, while the inflation rate rose to 3.2% year-on-year in December, with a trend towards further growth. Czech koruna floated between 25.4–25.9 CZK / EUR. Thus, for most of the year, monetary policy could not rely on the assumption of a steadily strengthening exchange rate in the converging economy. However, due to increasing external risks, the monetary policy rate (two-week repo) increased only once in 2019, in early May from 1.75% to 2%.

By the end of 2019, there were 49 licensed banks operating in the Czech Republic, the same as a year ago, consisting of four large banks, five medium-sized banks, 10 small banks, 25 branches of foreign banks and five building societies. A total of 39 entities are under the control of foreign owners, of which 14 are banks and 25 are branches. Domestic owners control 10 banks of which two are banks with state participation. In addition, 457 foreign banks operating in the EU single internal market could provide cross-border services in the Czech Republic.

By the end of 2019, the total value of the banking sector’s assets rose by approximately 4%, to almost CZK 7,622 billion and the volume of assets relative to GDP was approximately 135%.

Compared to the previous year, net profit for 2019 grew by 11%, to almost CZK 91 billion. Corporate income tax paid by banks reached CZK 18,1 billion, i.e. almost 10% of total receipts of state from this tax (at the same time, banking had a share on Gross Value Added around 3%).  In accordance with comparable EBA data, the return on equity stood at 16% (i.e. approximately 1.5 percentage points. more than a year ago) and the return on assets reached 1.3%.

At the end of 2019, the total volume of bank loans in the Czech Republic increased by 4.4% year-on-year (when its growth rate was almost double), reaching CZK 3,450.3 billion. Banks provided loans to households totalling CZK 1,649.8 billion, which was almost 6.4% more than in the previous year, corporate loans reached CZK 1,120 billion, up by 3.7 %.

However, as regards new businesses, the picture of 2019 looks different. During the year, households drew new housing loans from banks and building societies to the amount of CZK 306.1 billion, i.e. 14.4% less than in 2018. Two factors were reflected in this development – the decrease in the availability of apartments on the supply side, accompanied by growth in property prices, on the one hand, and on the other hand, on the demand side, constraints imposed since the end of 2018 by an effective tightening of the regulation (DTI must not exceed nine times net annual income and DSTI max. 45%). However, if we adjust the figure mentioned above for refinanced mortgages and those with a new interest rate fixation, then the volume of newly granted mortgages fell by 13.6% compared to 2018.

The resulting year-on-year decline in the volume of mortgage loans to households was mitigated by the relatively fast 8.8% year-on-year increase in bank loans for consumption, which was a surprise compared to a slight decline in 2018; on the other hand, however, it could indicate use of their part to complement the missing funds of households to finance the acquisition of their own housing, or to improve it.

In the area of ​​corporate financing, after two lean years, when loans grew only slightly, there was a relatively strong growth of 12.8% year-on-year, reaching CZK 520.7 billion at the end of 2019, exceeding the volume of new loans to households after a long time. Nevertheless, the total balance of outstanding loans to households still exceeds the outstanding receivables from the corporate sector by approximately 47% and thus remains consistent with the long-term trend.

The volume of customers’ deposits totalled CZK 4,739.3 billion by the end of 2019 and exceeded the volume of consumer credits by 37%. Traditionally, the excess of deposits over loans is generated by the household sector, where there is 65% more deposits than loans. In the corporate sector, the volume of deposits and loans is approximately equal.

At the end of 2019, households had CZK 2,725.5 billion deposited with banks, i.e. by 6.5% more than last year. More than 88% of the savings were deposited on demand. Nevertheless, the annual growth rate of fixed term deposits in 2019 (4.6%) more than doubled in comparison with the previous year. This increase can be attributed to the gradual increase in the deposit rates on fixed term deposits, especially at the end of the year.

Contributor: Petr Procházka prochazka@czech-ba.cz