Ex-communist Europe
Czech banks
A sector that is purring like a Skoda
Apr 27th 2011, 11:35 by by D.S. | PRAGUE
“I’M probably the happiest banker on the planet,” says Pavel Kavánek. Not the sort of remark you hear in London or New York these days. But Mr Kavánek’s perspective is from his eyrie outside Prague, whose hills are laden with spring blossom. He is chief executive of CSOB, the Czech Republic’s second biggest bank, which has been profitable for its parent, KBC of Belgium, for more than a decade and better still has few bad assets, is liquid and well-capitalised – core tier 1 capital above 15%. Roughly the same goes for the country’s two other big banks, both foreign-owned, Česká spořitelna owned by Erste Bank of Austria and Komerční banka owned by Société Générale of France. The robustness came at a price, however. Just over a decade ago Prague had its banking crisis which cost it around 15% of GDP. The banks were cleaned of bad loans and are now 95% in foreign hands.
Even in the dark days of 2009 liquidity was no problem. In fact the big Czech banks today have too much of it chasing too few loans - “our biggest problem,” says Mr Kavánek. Luckily, not too much of that excess found its way into complex collateralised debt obligations or the dodgier euro-zone government bonds.
How come these Czech banks are sitting so pretty? They are simple animals which make retail and commercial loans to Czech customers. Their regulator the Czech National Bank (CNB) made sure that even at the height of the global financial crisis their parents did not raid their deposit-base. The Czech economy is the closest of the central Europeans to Germany: 36% of its exports go there, mostly in the form of automotive and electronic components to be re-exported to China, the rest of Asia and Brazil. So demand never slackened much even during the crisis in Europe. And there was no local real-estate bubble to speak of: by good luck rather than judgment, aggressive property lending only began to get going in 2008.
By another stroke of luck the Czech Republic is outside the euro zone - President Václav Klaus is a renowned eurosceptic – and so not infected by the zone’s credit concerns. It funds itself more cheaply than Italy. The big banks can borrow in the market at less than one percentage point above the CNB’s base rate of 0.75%.
Surely there is a downside to this banking paradise. There are public murmurs that the banks are too profitable, with their 20% return on equity, at the expense of consumers, small companies and taxpayers. But a banking tax, such as those imposed in Hungary, Austria and Britain, is unlikely under the present government. Pavel Kysilka, chief executive of Česká spořitelna, who was a central banker during the last bank rescue, reckons a robust system is worth paying for.
What might knock the Czech banks off their perch and spoil Mr Kavánek’s bonhomie? A recession in the world’s car industry perhaps, or two consecutive years of negative GDP growth of around 6%, which the CNB’s stress test on banks indicates they would survive, but only by raising more capital.
Eastern approaches deals with the economic, political, security and cultural aspects of the eastern half of the European continent. It incorporates the long-running "Europe.view" weekly column. The blog is named after the wartime memoirs of the British soldier Sir Fitzroy Maclean.
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Aside from the foreign ownership issue, it sounds rather akin to the banking sector of my native land. Quite interesting.
The first sentence is a typical arrogance by a representative of a company that has made a dream deal due to incompetence (and maybe some personal connection) of Czech political representatives during 1990th.
Klaus pushed his non-sensible coupon privatization in 1990th which was funded by dodgy loans by major state-owned Czech banks. It was called banking socialism. At the end of 1990th, all the major banks were at verge of bankruptcy and so the only solution was to clean them and sell them to western owners that would not be liable to political pressures.
Unfortunately for the Czech tax payers, the state-funded bad loans cleaning have cost all of the privatization profits that have been accumulated during the large privatization in 1990th – if this money had been saved, they could have been used for the pension reform and the country would have had no sovereign debt today!!!
So let’s “thank” president Klaus for his "genial" economic visionary leading to this enormous impoverishment of the country that now needs to continually massively increase its indebtedness levels and taxes in order to keep account balance!
And the forced police-assisted takeover of one the largest Czech banks (IPB) by CSOB/KBC without any risk because all bad loans were guaranteed by the tax payers was the last big theft opportunity. And KBC has used it till maximum while transferring to state even loans that were not completely dodgy but only were not lucrative enough.
The model of cleaning banks from bad loans could have been similar to the recent American TARP with one major exception – unlike American banks using TARP, the Czech banks have never intended to return the money that received from Konsolidační agentura (state-created „bank“ for accumulating dodgy loans from commercial banks) back to the tax payers when they profit stabilize again and all the great profits that they have had in the recent decade have send to their foreign mothers.
If we add facts like that they have very high fees for their services, fully take advantage of high-priced international money transfers and FX fees due to the fact that the Czech Republic is not in Eurozone and the economy is Eurozone export-dependent (also “thanks” to “geniality” of Klaus), then the question is simple: Can anybody be surprised that the major Czech bank have very bad reputation among the Czech public ?!!!
Fortunately, there are smaller retail banking alternatives that cannot take advantage of large number of branches but do provide decent banking services with no or low fees – and one of them is even fully Czech founded and owned. So anyone who wants to have good feeling that (s)he has not been continually preyed by a foreign shark does have an alternative ;-) [Of course, most citizens and companies are still with the major banks and reflect the costly banking prices in prices of their products, so the previous sentence is only psychological relief].