New Market Report: Czech Republic Commercial Banking Report Q3 2012

New Financial Services market report from Business Monitor International: "Czech Republic Commercial Banking Report Q3 2012"

by Bill Thompson

(WireNews+Co) - Boston, MA - 19 October 2012

We maintain a sanguine view on the Czech Republic's commercial banking sector and believe it will remain one of the most stable in the CEE region. Strong risk metric readings, subdued but recovering loan growth and a stable deposit base underpin this outlook.

The Czech banking system is likely to remain one of the most stable banking sectors in the central and eastern European (CEE) region owing to a stable deposit base and prudent lending practices. Indeed, across a range of risk metrics, the Czech banking system scores in the top tier for the region. The loansto- deposits ratio remains below most other CEE countries, falling slightly to 0.78 in January from 0.79 in December.

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We highlight that this is well below neighbouring Hungary where the ratio ended 2011 at 1.28. Domestic funding has been an important factor underpinning stability in the Czech banking sector. The banking sector also benefits from relatively good asset quality.

Total non-performing loans (NPL) in January represented only 6.0% of the total loan book. We highlight that the NPL ratio has fallen to well below pre-crisis levels - NPLs in January 2002 were 12.8% - where we expect them to remain as the economic situation improves. We expect the deposit base in the Czech banking system to remain strong going forward and forecast growth of 6.5% in 2012, up from 4.5% in 2011. Deposit growth has started the year strong with January's reading showing growth of 5.9% y-o-y, up from 4.5% in December.

The moderate recovery in loan growth combined with a steadily growing deposit base will see to it that loans-to-deposits remain well below the 100% level. In 2012 we forecast this metric to increase only slightly to 79.5% from 79.1% in 2011. Loan and asset growth outstripped our expectations in 2011 and we expect a moderate recovery to continue on both fronts. We forecast asset growth to increase by 7.0% in 2012 up from 6.5% in 2011 and loan growth to rise by 7.0%, following a 6.0% increase in 2011.

While household demand for credit is likely to be subdued this year given the challenging macroeconomic backdrop which is weighing down consumer confidence and the labour market, we believe that the recovery in credit growth to nonfinancial corporations will continue apace. Latest data released by the Czech National Bank show that loans to the sector increased by 5.8% y-o-y in January, up from just 0.5% year-on-year (y-o-y) in the same period of 2011.

Whereas loan growth to households has remained in a downward trend since November 2007, with January's reading holding steady at 6.5% y-o-y, this suggests that the downward trend may have stabilised Risks To Outlook The key risk to our sanguine view on the Czech banking system continues to emanate from the eurozone sovereign debt crisis.

While Czech banks are domestically funded and therefore not at risk of a seizure of funds from parent banks (now also highly unlikely following the Vienna Initiative 2.0 agreement adopted March 15), there r

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