Banking System The Czech Republic 15 th BACEE Central and East European and Bank and Country...

Banking System The Czech Republic

15th BACEE Central and East European and Bank

and Country Conference 14-16 November 2006, Budapest

2

Banking System overview – Reforms & Privatisation

1990 - 1995, Period of Expansion: After transition to market economy several private financial institutions were established and foreign players entered the Czech market, by mid 90-ies the total amount of banks reached 55 out of which 34 were domestic.

1995 - 2000, Period of Consolidation: The second half of 90-ies is characteristic for consolidation of the banks and transition of ownership in to foreign hands. The total number of banks fall to 40 out of which only 14 remained domestic.

1998 - today: is marked by privatization of state owned banks: cleaning portfolios of Sporitelna, Komercni Banka IP Banka, etc. by transferring problem loans to Ceska Konsolidacna Banka and subsequent sale to foreign investors

State ownership in banking sector drops dramatically Concentration of banks is growing and it will be further fuelled by merger of

HVB CR and Zivnostenska Banka

15th BACEE Central and East European Bank and Country Conference

14 - 16 November 2006, Budapest

3

Structure of the banking sector



Source: CNB

Number of banks in 01/1990 - 06/2006

59

24

37

5255 55 53

5045

42 40 38

59

2026

34 34 32 30

2015 14 12 11

0 04

11

1821 23 23 25 27 26 26 26

35 36373735

9 9 9 9

2626 27 282624

0

10

20

30

40

50

60

Jan

-90

Jan

-91

Jan

-92

Jan

-93

Jan

-94

Jan

-95

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06 t

Nr.

Total number of banks Czech-controlled banks Foreign-controlled banks

4

Structure of the banking sector: Assets I.

Note: Calyon S.A. changed its subsidiary into a branch on 1.11.2005 Bank of Tokyo-Mitsubishi UFJ NV set up a branch in 2006



Source: CNB, Raiffeisen Research

5

Structure of the banking sector: Assets II.



Source: CNB

Shares of bank groups' Total Assets in % of Banking sector Total

12/31/03 12/31/04 12/31/05 03/31/06 06/30/06

Banking sector, total 100 100 100 100 100

large banks 62.11 59.77 61.23 62.24 61.87

medium-sized banks 15.59 15.75 15.11 15.37 15.65

small banks 1.45 1.55 1.98 2.19 2.17

foreign bank branches 10.35 10.94 9.52 7.93 8.52

building societies 10.51 11.99 12.17 12.27 11.79

6

Structure of the banking sector: Assets III.



Shares of bank groups' Gross credits in % of Banking sector Total

12/31/03 12/31/04 12/31/05 03/31/06 06/30/06

Banking sector, total 100.00 100.00 100.00 100.00 100.00

large banks 61.07 59.68 57.65 58.05 57.12


small banks 1.20 1.76 2.61 2.49 2.81



Source: CNB

7

Banking sector development: Assets I.



Source: CNB

12/31/03 (in

CZK'mln.)

12/31/04 (in

CZK'mln.)

2004 vs. 2003 change over

time in %

12/31/05 (in

CZK'mln.)


time in %

TotalAssets 2,527,707 2,635,554 4.3% 2,954,369 12.1%

Receivables from banks 756,953 825,455 9.0% 919,851 11.4%

Receivables from customers 996,200 1,073,858 7.8% 1,174,356 9.4%

Debt securities 210,726 208,650 -1.0% 276,919 32.7%

8

Banking sector development: Assets II.



Source: CNB

03/31/06 (in CZK'mln.)

03/31/06 vs. 2005 change

over time in %

06/30/06 (in

CZK'mln.)

06/30/06 vs. 2005 change

over time in %

TotalAssets 3,030,832 2.6% 3,117,253 5.5%

Receivables from banks 939,277 2.1% 910,869 -1.0%

Receivables from customers 1,222,787 4.1% 1,290,833 9.9%

Debt securities 281,568 1.7% 307,624 11.1%

9

TA & Market share



Source: CNB

Ranking (2005)

BANKAssets in

2005 (EUR'mln.)

Assets in Q3-2006

(EUR'mln.)

Market share (2005)

1.Ceskoslovenska Obchodni banka 26,387.5 *29,287.65 25.3%

2. Ceska Sporitelna 23,418.0 25,613.4 22.4%

3. Komercní banka 17,677.7 17,567.7 17.7%

4.HVB Bank Czech Republic 6,887.3 - 6.6%

5. Commerzbank 3,784.0 2,195.1 3.6%

TOP-3 67,483.2 43,181.1 65.4%

TOP-5 78,154.4 - 75.6%

*H1-2006 figure

10

CSOB - KBC, Belgium Ceska Sporitelna - Erste Group, Austria Komercni Banka - Societe Generale, France HVB Bank - Unicredito, Italy Commerzbank - Commerzbank, Germany Raiffeisenbank - Raiffeisen Group, Austria Citibank - Citi Group, USA GE Money Bank - General Electric, USA ING Bank - ING, Netherland Zivnostenska Banka - Unicredito, Italy

Ownership of Top-10 banks

Source: CNB, Raiffeisen research



11

Sector is focused on retail market which has by provided ground for solid growth as a result of the favourable demographic factors and historically low interest rates. Household and mortgage loans in 2005 stabilized somewhat after a boom in 2004.

Credit boom



Source: CNB, Raiffeisen Research

12

CZ and its Peers: Lending rates



Source: CNB

13

CZ and its Peers: Loans to the private sector



Source: BIS, National Central Banks

14

CZ is advanced in terms of legal and institutional reforms

boost 2nd highest GDP per capita in CE (see chart to right)

bank restructuring and privatization is largely completed and the sector is characterised by high market shares of foreign owned banks

the overall size of the banking sector is still below the Euro-zone level

similarly to the economy the banking sector is also approaching the EU level

CZ and its Peers: Household Loans I.



Credits to households vs. GDP/capita

CZ in 2004

Source: CNB, Raiffeisen research

15

CZ and its Peers: Household Loans II.



16

Loan quality



Source: CNB

(in CZK'mln.)

114,009

49,608

38,039

118,826

44,506

30,877

127,750

47,093

29,781

135,967

46,558

30,505

146,583

48,789

31,116

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

12/31/0312/31/04

12/31/0503/31/06

06/30/06

Classified credits Non-performing loans Reserves and provisions

17

CZ and its Peers: Loan quality



Source: CNB

Non-performing loans (2005)

Provisions (2005)

CZ 4.4% 2.8%

Hungary 3.6% 1.9%

Poland 6.0% 5.5%

Slovakia 6.3% 4.9%

18



Source: CNB

Structure of the banking sector: Liabilities

Shares of bank groups' Client deposits in % of Total in % of Banking sector Total

12/31/03 12/31/04 12/31/05 03/31/06 06/30/06

Banking sector, total 100.00 100.00 100.00 100.00 100.00

large banks 68.40 64.52 62.97 63.74 64.32


small banks 1.49 1.71 2.12 2.40 2.32



19

Banking sector development: Liabilities I.



Source: CNB

12/31/03 (in

CZK'mln.)

12/31/04 (in

CZK'mln.)


time in %

12/31/05 (in

CZK'mln.)


time in %

Total Liabilities 2,385,068 2,489,819 4.4% 2,787,227 11.9%

Liabilities to banks 285,320 361,134 26.6% 409,691 13.4%

Liabilities to customers 1,665,887 1,731,850 4.0% 1,919,559 10.8%

Liabilities from debt securities 201,680 214,619 6.4% 262,046 22.1%

20

Banking sector development: Liabilities II.



Source: CNB

03/31/06 (in CZK'mln.)

03/31/06 vs. 2005 change

over time in %

06/30/06 (in

CZK'mln.)

06/30/06 vs. 2005 change

over time in %

Total Liabilities 2,856,329 2.5% 2,938,665 5.4%

Liabilities to banks 309,262 -24.5% 336,515 -17.9%

Liabilities to customers 2,078,575 8.3% 2,143,529 11.7%

Liabilities from debt securities 255,948 -2.3% 259,950 -0.8%

21

Equity I.



Source: CNB

12/31/03 (in CZK'mln.)

12/31/04 (in CZK'mln.)


time in %

12/31/05 (in CZK'mln.)


time in %

Equity 142,639 145,735 2.2% 167,142 14.7%

03/31/06 (in CZK'mln.)

03/31/06 vs. 2005 change

over time in %

06/30/06 (in CZK'mln.)

06/30/06 vs. 2005 change

over time in %

Equity 174,503 4.4% 178,588 6.8%

22

Equity II.



Capital adequacy

12/31/03 (in CZK'mln.)

12/31/04 (in CZK'mln.)

12/31/05 (in CZK'mln.)

03/31/06 (in CZK'mln.)

06/30/06 (in CZK'mln.)

Capital in CZK millions 142 639 145 735 167 142 174 503 178 588

Capital requirements for banking portfolio 73 294 85 758 105 159 110 164 116 179

Capital requirements for trading portfolio 5 545 7 040 7 596 9 001 7 589

Capital adequacy in % 14.47 12.56 11.86 11.72 11.54

Source: CNB

23

CZ and its Peers: Capital Adequacy



Source: CNB

Capital adequacy (2005)

CR 11.9%

Hungary 11.4%

Poland 15.4%

Slovakia 17.0%

24

Ratings of selected Banks in 11/2006

Source: Website of Moody’s, Fitch and S&P



Moody's Fitch S&P

CSOB A1/P-1 A+/F1 -

Ceska Sporitelna A2/P-1 A-/F2 A-/A-2

Komercni Banka A1/P-1 AA-/F1+ A/A-1

Zivnostenska Banka A2/P-1 - -

25

Banking system profitability indicators



Source: CNB

Absolute indicators in CZK’millions

12/31/03 12/31/04 12/31/05 06/30/06

Income from banking activities: 90,252 103,486 108,918 57,476

interest profit 54,303 59,760 64,043 34,194

income from fees and commissions 26,343 31,326 31,831 16,566

income from shares and interests 824 1,369 2,189 844

income from other financial transactions 8,783 11,031 10,854 5,872

• securities transactions 751 3,115 2,213 (1,480)

• foreign exchange operations 5,818 8,889 4,700 4,418

• derivatives transactions (excluding hedging) 2,214 (975) 3,937 2,934

• transfer of receivables for trading 0 2 4 0

Net profit 30,193 32,852 39,139 21,060

26

Banking system profitability indicators



Source: CNB

12/31/03 12/31/04 12/31/05 03/31/06 06/30/06

Income from banking activities/average assets in % 3.62 3.96 3.88 3.78 3.79

Net profit/average assets in % 1.21 1.26 1.39 1.44 1.39

Net profit/capital (Tier 1) in % 23.80 23.34 25.16 26.18 25.23

Total interest income/interest earning assets in % 3.92 3.77 3.87 3.87 3.91

Total interest expenses/interest bearing liabilities in % 1.89 1.64 1.58 1.55 1.58

Interest rate spread in % 2.03 2.13 2.29 2.32 2.33

27

Recent developments I.



• moderate growth of commercial banking sector in H1-2006

• booming economy has fuelled consumer spending -> growth in loans

• loan/deposits, loans/assets and loan/GDP ratios continue to move upwards

<-> HOWEVER this growth remains low on an international comparison (e.g. loan/asset ratio of 40.9% is the second lowest in CEE)

• banking sector is entering a level of maturity

• the bond portfolio has recently declined

• Bank of Tokyo-Mitsubishi opened a branch in in April, this year

• Österreichischer Gewerkschaftsbund (OGB) is to sell its financial group BAWAG P.S.Ks -> Czech BAWAG to be sold

• Moody's announced on 1 November to increase the long-term foreign currency-denominated obligations rating of Czech Export Bank (CEB) from A1 to Aa1

28

Recent developments II.



• Raiffeisen International to focus on asset management and insurance in CE incl. CZ

• Antimonopoly Office and the Czech National Bank approved Komercni Banka aquiring 60% stake in construction savings bank Modra Pyramida on 13 October

• Raiffeisenbank acquires 100% in Czech eBanka, purchase price was set at EUR 130mn (CZK 3.7bn), merger will be legally and operationally completed by 2008

• Ceska Sporitelna (CS) implements a new strategy aiming at strengthening its position as the leader of the retail banking segment by e.g. reducing client liability in the event of a lost card and by increasing the number of investment consultants at its branches, Jack Stack, CEO said on 10 October

•CS has to cancel anonymous bank books within the fight against money laundering, however people have just withdrawn CZK 570 mln. in Q3-2006 and still have CZK 4.45bln. in these books

29

Outlook

• Strengths– Concentration of banks– 95 % of operations in

foreign hands -> improved risk management

• Opportunities– Retail/consumer lending

(still). – Mutual fund distribution – Asset management

• Weaknesses– Rapid expansion mainly

targeted households -> DOUBTS about resilience of banks’ credit portfolios to macroeconomic shocks

– Market is maturing

• Threats– Possible further

consolidation may put smaller banks at a disadvantage



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