9.2. Retail Banking in the Czech Republic and Slovakia

 

Key macroeconomic parameters

2014

Banking sector indicators

2014

Real GDP growth rate (forecast)

2.3%

Base interest rate

0.05%

Nominal GDP per capita (EUR)

14,200*

Loan to Deposit ratio

76.7%

GDP per capita in PPS (EU-28=100)

80%*

Non-performing loans ratio

6.0%

Average annual inflation rate

0.4%

Capital Adequacy Ratio (CAR)

18.0%*

Unemployment rate

6.1%

Return on Assets (ROA)

1.3%*

Employment rate

69.8%*

Return on Equity (ROE)

14.0%*

Population

10.5 M

Number of banks

45

Source: Eurostat, Česká národní banka (ČNB), Český statistický úřad (ČSÚ).

* Cumulative 9 month data (as of September 30, 2014), latest available

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GDP, inflation, interest and FX rates

The Czech National Bank (CNB) expects real GDP in the Czech Republic to pick up in 2014, after a 0.9% contraction in 2013. It forecasts a GDP growth of 2.3% for the entire 2014, accelerating to 2.6% in 2015 and 3.0% in 2016. An ongoing economic recovery has been driven by domestic demand factors, including fixed capital investment, household consumption, and a build-up of inventories. Investment activity grew strongly in 2014, as the domestic environment improved, foreign industrial orders picked up and the government increased its efforts to make use of EU funds.

On November 7, 2013, the CNB committed to sell the Czech crowns and buy euros as needed in order to prevent the crown from appreciating beyond the historically low rate of CZK 27 per euro, while the currency floats freely on the weaker side of this threshold. In February 2015, the CNB repeated that it was ready to take steps for the crown's further weakening in case of prolonged strengthening of pressures for a price fall able to cause a drop in domestic demand and if inflation expectations decrease and risks of deflationary development in the domestic economy are renewed. The CNB also informed that it will not end the forex intervention regime earlier than in the second half of 2016.

Throughout 2013 and 2014 the interest rates remained unchanged and the repo rate was maintained at 0.05%.

The year on year growth of consumer prices decelerated to 0.1% in December 2014, compared to 1.4% at the end of 2013. The average inflation rate reached 0.4% for 2014, dropping by 1.0 percentage point from the preceding year level of 1.4%, and was the lowest since 2003. The substantial decline in oil prices in recent months is forecast to put further downward pressure on inflation over the next quarters.

The strengthening of the Czech economy is reflected in improving labour market conditions. The country’s unemployment rate has stabilised at the lowest level in the Central and Eastern Europe (CEE) region. The seasonally adjusted unemployment rate reached 5.8% in December 2014 and decreased by 1.0 percentage point year on year. The employment rate of 69.8% recorded at the end of 2014 was the highest in the history, increasing by 1.5 percentage point compared to December 2013.

Banking sector

The developments recorded in the Czech financial sector in 2014 were mostly positive. Banks strengthened its capital adequacy. Funding and liquidity profiles continued to be solid with the sector’s loan to deposit ratio of 76.7%. The asset quality remained resilient as demonstrated by the stable levels of non-performing loans ratio in both 2013 and 2014 (a slight decrease to 6.0% at the end of 2014). The relatively contained levels of NPL ratios in the Czech Republic reflect the country’s relatively strong industrial base, and limited foreign-currency lending (predominantly to corporate customers and almost non-existent in retail segment) compared to some other countries in the CEE region.

System-wide net interest margins has been shrinking over recent years, as loan yields have continued to decline at a rapid pace. The average interest rate on outstanding mortgage loans, as measured by local real estate company Hypoindex, has declined every month since October 2013, reaching the historical low of 2.4% in December 2014.

Overall, in spite of lower net interest margins, the profitability of the Czech banking sector is among the highest in the CEE region, as measured by a return on assets close to 1.3%. It is expected to stabilise at the current levels, as net interest income, which constitutes more than 60% of the sector’s operating revenues, will continue to be impacted by the low interest-rate environment, in turn, affecting new lending and re-pricing. However, banks’ weaker interest income is seen to be partially offset by reduced competition for deposits and by the anticipated economic recovery, translating into the expansion of loan books. In particular, robust capital buffers of Czech banks will enable them to take advantage of the growth in mortgage lending and those corporate sectors which will be more favourably affected by the rebound in economic activity and external demand.

A growth in corporate loan volume remained subdued in 2014 with the year on year dynamics not exceeding 3%. The share of non-performing loans in the total volume of loans to non-financial corporations has been declining since 2011, amounting to 6.6% in December 2014. After only moderate growth of corporate deposits observed in H1 2013, the volume started to show cyclical improvement following better business perspectives. An annual deposit expansion oscillated on average around 7-8% in 2014.

 

The growth in total retail lending was predominantly driven by mortgage loans, which expanded by 6.7% in 2014, while the volume of consumer loans showed a minor contraction of 0.7% during the same period. The share of non-performing loans in the total volume of loans to households was 4.7% in December 2014, declining from 5.0% at the end of 2013. Household deposits have accelerated significantly since Q1 2014, showing the annual growth pace of 6.1% at the end of 2014 compared to 2.4% in 2013.

9.2.2.   Economy and banking sector in Slovakia

 

 

Key macroeconomic parameters

2014

Banking sector indicators

2014

Real GDP growth rate

2.4%

Base interest rate

0.05%

Nominal GDP per capita (EUR)

13,300*

Loan to Deposit ratio

95.5%

GDP per capita in PPS (EU-28=100)

76%*

Non-performing loans ratio

4.8%

Average annual inflation rate

-0.1%

Capital Adequacy Ratio (CAR)

17.0%*

Unemployment rate

13.4%

Return on Assets (ROA)

0.9%

Employment rate

61.3%*

Return on Equity (ROE)

7.7%

Population

5.4 m

Number of banks

27

Source: Eurostat, Národná banka Slovenska (NBS).

* Cumulative 9 month data (as of September 30, 2014), latest available

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GDP, inflation and interest rates

The Slovak National Bank (NBS) forecasts real GDP growth to accelerate to 2.4% in 2014 and then to 2.9% in 2015 and 3.6% in 2016, up from the level of 1.4% in 2013. The key driver behind this rebound is the continuing recovery of domestic demand. Following three consecutive years of decline, private consumption is projected to have increased by 2.1% in 2014, supported by growing disposable income, low inflation, improving labour market conditions, and an increase in consumer confidence. Going forward, private consumption will also be bolstered by a series of labour market reforms that take effect in 2015, including a rise in the minimum wage and a reduction in the social contributions paid by low-income workers.

As a small and open economy, Slovakia is dependent on the general macroeconomic situation in Europe, especially in Germany, Czech Republic and Poland which together accounted for more than 40% of its exports in the recent years. Slovak exports dropped sharply in Q2 and Q3 of 2014, mainly due to weak demand from its main trading partners. Export growth is projected to have slowed down to 4.4% in 2014 and is expected to decline further in 2015, before rebounding the year after. Imports are likely to have grown faster than exports in 2014 due to the recovery in domestic consumption and investment, which would mean that net exports were a drag on GDP growth in 2014. The government’s tight fiscal policy has allowed the country to keep its fiscal indicators at healthy levels, which maintain its appeals to foreign investors and capital inflows.

In Slovakia, as a member of euro zone, the key interest rate, set by the European Central Bank (ECB), was lowered by 0.1 percentage point to 0.05% on September 10, 2014. This reduction followed the earlier ECB decision about the cut by also 0.1 percentage point from 0.25% taken on June 11, 2014.

In December 2014, an annual inflation stood at -0.1%, compared to a growth of consumer prices at 0.4% recorded at the end of 2013. The drop was mainly driven by the prices of transport, energy, food and non-alcoholic beverages as well as postal and telecommunication services. The average annual inflation rate for 2014 also reached -0.1%, dropping from 1.4% in 2013.

Throughout 2014 the unemployment in Slovakia was gradually decreasing in line with the improvement in economic activity. The seasonally adjusted unemployment rate reached 12.5% in December 2014 and decreased by 1.5 percentage point year on year. The positive employ­ment trend, resulting from a series of measures supporting the labour market, is expected to have a further downward effect on the unemployment rate in 2015.

Banking sector

Slovak banks have seen a stronger operating environment as economic growth rebounds. Even with slightly stronger loan growth, the overall loan to deposit ratio in the sector is expected to be kept close to its current level of 95%, as banks remain keen to use deposits to fund their lending activity and the reliance on wholesale funding sources is very low. The Slovak banking sector’s capital adequacy is among the highest in the CEE region, after the Czech Republic. The banks have strengthened their capital buffers in recent years through some profit retention and optimisation of risk-weighted assets, thereby providing adequate loss-absorption capacity.

The overall stability of the NPL ratio was mainly the result of the high growth in mortgage loans, thus compensating for the mild increase in the stock of non-performing loans. The NPL ratio for Slovakia is the lowest in the CEE region at 4.8% at the end of December 2014. The asset quality can potentially improve further mainly due to strengthening business activities and raising household income.

The profitability of Slovak banking sector has faced some challenges and an upside potential for the current level of return on assets at around 1.0% is limited. While the latest ECB rate cut in September 2014 has led to further pressure on net interest margin, a sound credit growth, especially in the higher-margin retail business, accompanied by lower credit costs position the banks to maintain decent profitability. On the other hand, a factor that limits the banks’ earnings is the government’s bank levy introduced in January 2012. This levy continued to weigh negatively on the profits of banking sector in both 2013 and 2014. However, after the targeted National Resolution Fund reaches EUR 500 million, the levy rate is assumed to decrease from 0.4% to 0.2% of banks’ liabilities.

Accelerating economic recovery and low interest rates provide banks with good credit opportunities. Total loans grew at a high single-digit level in 2014, compared with 5.1% in 2013. After negative trends in corporate lending observed in H2 2012 and 2013, a moderate expansion of banks’ commercial books was recorded in 2014, supported by higher borrowing needs from SME segment. The share of non-performing loans in the total volume of loans to non-financial corporations amounted to 7.9% at the end of 2014, compared to 7.5% in 2013. The corporate deposit base showed rapid increase in Q4 2013 and the annual growth pace remained high at around 10% until August 2014. During the last three months of 2014, the negative trends in corporate deposits were observed, partially due to the high base effect.

The improving economy and low credit costs have promoted strong development of household loans in Slovakia. Retail lending has continued to grow rapidly over the recent years, mainly due to housing loan acceleration, with the year on year pace exceeding 10% in 2014. The increase in mortgage lending has not been accompanied by a house price bubble so far, with house prices remaining relatively stable after the 18% decrease experienced between 2008 and 2011. The share of non-performing loans in the total volume of loans to households was 4.3% in December 2014, worsening marginally from 4.2% at the end of 2013. Retail deposits grew at a low single-digit pace during 2014, but started to speed up in the second half of the year to 4.1% recorded in December, compared to 2.7% at the end of 2013. Since the mid-2013 the clear opposite trends within the structure of household deposits have been observed. The volume of term deposits has been decreasing over the past quarters, what is more than compensated by accelerating retail demand deposits, which expanded by 12.7% in 2014.

9.2.3.   Summary of foreign operations of mBank

mBank in both the Czech Republic and Slovakia provides retail banking services to individuals. The Bank offers products such as current accounts, savings accounts, payment and credit cards, overdrafts or housing loans. Additionally, clients of mBank in the Czech Republic are provided with financial advisory services.

The activity of mBank in the Czech Republic and Slovakia in 2014 was focused on implementing the assumptions of the “One Bank” strategy. In February 2014, the platform of the New mBank was launched and rebranding was carried out. The process of migration of clients to the New mBank platform was completed in November 2014. The Bank has not identified any negative factors (churn, lower client activity) related to this process. 

Foreign branches broadened also the offer of investment products – in May the innovative mSaver was added to it. mSaver not only supports the inflow of clients’ deposits, but also encourages them to use payment cards more frequently. In December 2014 mBank launched the new mobile application 2.0, and started positioning itself as the Mobility Icon also on the Czech and Slovak markets.

2014 was very favourable for foreign operations of mBank, with regard to acquisition, optimisation as well as in the innovation area. Compared to 2013, income of foreign branches increased by 25.8%, sales of non-mortgage loans (NML) doubled, and the year on year acquisition of clients amounted to 89 thousand which strengthened the position of mBank as the fifth largest bank on the Czech market in terms of the number of clients.

The Project mILKY WAY consisting in new pricing, repositioning and aiming at increasing clients’ trust in mBank also turned out to be an successful. Moreover, the Tariff of Fees and Commissions was significantly shortened. Additionally, in mid-December 2014, mBank made the new mobile application available to the clients of foreign branches in the Czech Republic and Slovakia (available for major operating systems - Android, iOS, Windows Phone and Windows 8.1).

mBank received a number of awards for its activity in the Czech Republic and Slovakia in 2014, e.g. for the best mortgage loan in Slovakia by the financial service Finparada, the Silver crown for mKonto for companies in the Czech Republic by the financial service Zlata koruna, as well as the first award for a mortgage loan in an independent review mystery shopping, carried out in the Czech Republic by the financial service bankovnipoplatky.com and the advisory firm Mindbridge. 

Moreover, the new mBank transaction platform in the Czech Republic and in Slovakia, implemented in Q1 2014, was recognised in the "Bank Innovator 2014" competition organised by Hospodářské noviny, an economic daily. mBank was ranked second in the "Banking Innovator" category. In December 2014, mBank in Slovakia was recognised in the competition for the best banking product of 2014 and received: Golden Minca for mKonto, Golden Minca for mSaver, Silver Minca for the VISA debit card with mKonto, Silver Minca for the VISA credit card, Bronze Minca for its new online banking, Bronze Minca for mKonto Biznes.