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Czech Republic’s banking sector: Facts & Figures

Updated December 2021 – For earlier editions of Facts & Figures click here

At the beginning of 2020 analysts broadly believed that the economy would move along the bottom of the cycle and that in H2 it would rebound to a new expansion with 2% of annual GDP growth. Nevertheless, by March it was clear that the economy had been hit by an external shock of unprecedented proportions caused by the pandemic. Turbulent development during the year together with the lock downs and re-openings suggested the economy will sink deep into red figures. Despite potentially more catastrophic scenarios, the result was the year-to-year decline of 5.6%.

Brighter moments came in connection with a strong increase in foreign demand, especially in H2, while domestic demand was significantly subdued apart from Q3. Compared with the previous year, both household final consumption (-5.2%) and gross fixed investment (-8.5%) declined sharply. General government expenditures were the only steadily growing “domestic” component of GDP with 2.9%. Total exports of goods and services decreased in real terms by 6.0% and imports by 6.1%, because of what foreign trade balance ended the year in CZK 390.5 billion surplus at current prices.

Monetary policy reacted to the escalating crisis the fastest – despite inflationary pressures that forced the central bank to increase the 2-week repo rate to 2.25% in early February, starting by March it decreased the rate several times to 0.25%, where it had remained from mid-May until the end of the year. The CNB Bank Board was equally resolute in reducing the capital requirements and easing regulation of mortgage loans. Due to a wealth of supportive measures, and a drop in tax income, public finances recorded the deficit of 6.2 % of GDP. Government debt increased to 38.1% of GDP (i.e., by 7.8 percentage points), and in the context of the anticipated worsening of the deficit in the election year 2021, it moved towards a relatively soft debt brake set by the Fiscal Responsibility Law at 55% of GDP.

At the still rigid labor market, the gap between job vacancies and the number of unemployed has been gradually closing since its highest level in March (roughly 124,000 more vacancies than applicants) to December surplus of vacancies of “only” 27 thousand. Even so, the share of unemployed persons reached only 4% in December (1 percetange points higher than a year ago).

The effects of government restrictions in 2020 aimed at managing the coronavirus pandemic did not spare the Czech banking sector either. Despite that, Czech banks continued to be a pillar of financial stability of the distressed economy. Not only did their performance remain “in the black”, although profitability decreased sharply, but the share of non-performing loans remained at relatively reasonable levels, although it increased by the end of the year. In addition, banks maintained a consistently comfortable level of capital in accordance with the Czech National Bank’s recommendations, strengthened by unpaid dividends in 2020.

As in the previous two years, there were 49 licensed banks operating in the Czech Republic at the end of 2020. The structure of the banking sector consists of four large banks, five medium-sized banks, 10 small banks, 25 branches of foreign banks and five building societies. 37 entities are falling under the control of foreign owners, of which 12 are banks and 25 are branches. Domestic owners control 12 banks, two of which are co-owned by the state. Cross-border services in the Czech Republic can also be provided by 471 foreign banks operating in the EU’s single internal market.

At the end of 2020, the total value of the banking sector’s assets increased by about 5.5%, to CZK 7,965 billion representing about 141% of GDP; compared to the previous period, it increased by approximately six percentage points, also reflecting the decline in the Czech Republic’s economic performance caused by the crisis.

Compared to the previous year, net profit for 2020 dropped by 48%, to less than CZK 47.5 billion. According to comparable EBA data, return on equity decreased by more than half to 7.4% (compared to 2% average in the EU) and return on assets also dropped by half to 0.6% (compared with EU average of 0.1%).

At the end of 2020, the total volume of bank loans in the Czech Republic increased by 4.2% compared to the previous year when its growth rate was essentially the same as in 2019, reaching CZK 3,595.7 billion. Banks provided CZK 1,763.1 billion loans to households, which was almost 6.9% more than in the previous year; corporate loans reached CZK 1,123.0 billion at the end of 2020, thus practically stagnating year-on-year. As in the previous period, households borrowed mainly to purchase housing – the outstanding balance of mortgage loans increased year-on-year by 7.8% to CZK 1,509.4 billion (i.e., it accounted for almost 86% of the outstanding loan balance of Czech households). Consumer loans increased at a rate of 2.6% and their outstanding balance reached CZK 244.6 billion at the end of the year.

During the year, the impacts of the introduction and easing of restrictive measures were relatively dramatically reflected in the new credit transactions, especially on the mortgage market. Not only the spring lockdown, which limited the supply of newly completed housing, but also the persistently low interest rates and the temporary elimination of the CNB’s recommended mortgage limits played a significant role in this. During the year, households drew CZK 548.5 billion of new housing loans from banks and building societies worth, which was 79% more than in 2019, when on the contrary, new mortgages declined year-on-year reflecting the introduction of the central bank’s mortgage limits recommendation.

In the area of corporate financing, the increase in new loans was about 13%, which was a rate similar to the previous year. However, due to the stagnation of the total volume of corporate loans, entrepreneurs rather repaid previous liabilities, or banks refinanced some of them.

At the end of 2020, the total volume of client deposits reached CZK 5,162.0 billion and exceeded the volume of client loans by 43.5% (a year-on-year-increase of 6.5 percentage points). The excess of deposits over loans is traditionally generated by the household sector, where households had 60% more funds deposited in domestic banks than they drew on loans. However, this excess decreased by 5 percentage points in the pandemic year. In the corporate sector, the volume of deposits and loans has been traditionally rather balanced. Nevertheless, due to increased uncertainty, corporations held at bank accounts deposits amounting to CZK 1,218 billion i.e., about 8% more funds than was their CZK 1,123 billion debt to banks. Excess of companies deposits over their debt incurred for the first time in 30 years.

At the end of 2020, households had CZK 2,822.8 billion deposited with banks, i.e., 12% more than a year earlier. Around 80% of the savings were placed on demand deposits, while a year earlier this ratio was 10 percentage points higher. Households were thus not only increasing their safety reserves because of the uncertain future, but they also tried to deposit part of it on deposit products with slightly more favourable interest rates.

Contributor: Petr Procházka prochazka@czech-ba.cz