In November the European Investment Bank published its latest Bank Lending Survey for Central Europe and Southeastern Europe.
It found that foreign bank funding to the region had risen for the first time since 2011. The reason? The rise in funding in both Poland and Czech Republic—but especially the Czech Republic, where volumes rose by more than 1% of GDP in the second quarter. Analysts were not surprised, noting there were few concerns the foreign banks that own most of the Czech banking system would deleverage anytime soon.
“This is perhaps the only country in emerging Europe that actually lends to the rest of the world on a net basis,” says William Jackson senior emerging markets economist at consultancy Capital Economics.
Indeed, the Czech banking system is one of the best-capitalized in emerging Europe and plays a reasonably proficient role in providing capital to local businesses. Despite the difficulties endured during the era of post-Lehman austerity, commercial and private-sector debt levels are low: Nonperforming loans are below 5% and the banking system, unlike those of Poland or Hungary, did not have to tackle the fallout from high levels of foreign currency loans, because low interest rates and a stable Czech koruna meant these weren’t taken up in large quantities. Total banking net profits last year were 63 billion Czech korunas ($69 billion), a slight increase on 2013, while the sector’s capital adequacy ratio is17.7%.
That said, the sector, which remains dominated by three banks, eská spoitelna, SOB and Komerní banka, remains a high-volume, small-margin business. Some financial institutions are deciding it isn’t worth staying: General Electric Money Bank, Citibank and Raiffeisen Bank International have all announced plans to sell or restructure their Czech banking units. Those here for the long haul admit things are quite tough.
“The main challenges are a continuous low-interest-rate environment, increased regulatory pressure and tougher competition in selected areas,” says Jan Lucan, senior executive director of corporate and institutional banking at SOB. “They all increase pressure on the income side, and we have to look more closely at costs,” he adds. He says SOB has opted to improve its client offering and boost new services like insurance, all the while stressing client loyalty and remaining on the lookout for new products. Active equally within Slovakia, SOB is also focusing on boosting market share. In September it unveiled a 12% increase in year-on-year loans to businesses (both small and medium-size enterprises and large corporates), well above the market average, without compromising its nonperforming loan ratio.
“Our focus remains on exploring all opportunities on how to make our operations more efficient without any negative impact on our clients,” says Lucan.
