Banks in the Czech Republic now provide fewer mortgages than before the global financial crisis, but their profits and liquidity remain largely unaffected. Most of them avoided sub-prime lending and investments in financial derivatives that triggered the crunch in the US and parts of western Europe. Also, unlike people in more developed countries, Czechs save more than they borrow, leaving their banks with enough cash at hand so that they do not need to borrow money on the now starved international markets.
The only major bank temporarily hit by the credit squeeze was ČSOB. In 2008 its net profit shrank by 90% to just CZK 1 billion, after the bank wrote off EUR 430 million in toxic assets. These were structured securities called collateralised debt obligations (CDOs), and their prices – linked to European and US corporate bonds – crashed in the global financial crunch. ČSOB revalued these CDOs to zero to eliminate damage to its financial results in the following years. Other local banks have reported no such losses.
Local bankers take much pride in having stayed away from the toxic assets that have paralysed many of their counterparts abroad. But analysts say Czech financial institutions owe their good health mainly to the fact that the market in post-communist countries is young and not yet fully developed: Banks make most of their money from traditional services such as savings and loans. More complex and riskier activities – mutual funds and particularly sub-prime mortgages and financial derivatives – are not yet as common.
“It’s not that our banks were smarter than those in the west,” said Marek Hatlapatka, head of research at the Brno-based brokerage and consultancy Cyrrus. “In the past years, the banking market in central and eastern Europe grew at a breathtaking pace, with loan volumes soaring by 20% to 30% a year.” As a result, Hatlapatka says, Czech banks needed no additional sources of income. Western banks enjoyed no such growth and hence sought innovations, including risky investments in structured debt, the value of which imploded last year at the beginning of the credit squeeze.
Despite a boom in mortgages and consumer loans in the pre-crunch years, Czechs still borrow much less than Germans, Brits or Americans. “Banks here lend about 15% less than what savers keep in accounts,” said Milan Lávička, an analyst with the Prague brokerage Atlantik FT. “In western Europe it’s the other way around, forcing banks to borrow money on the interbank market. Czech financial institutions have enough of their own capital and hence are not dependent on external financing.”
Hatlapatka says this is largely because Czech households are more conservative borrowers and less experienced investors: “The savings-to-loans ratio is extremely high. Plus the share of savings families hold in stocks is only around 1% to 2%, while in the US it is tens of percent.”
In addition, Czech banks and their regulators have learned a lesson in lending conservatism from a local credit crunch in the 1990s. Back then, the government had to bail out or close down financial institutions plagued by toxic assets, all at high taxpayer expense. (See box: The Ghosts of the 1990s.) “The banks have certainly learned from this past experience,” said Lávička, “and now thoroughly review [borrowers’] business plans and guarantees.”
Why do I pay for this?
The success story of the Czech financial sector has a downside: Banks sustain their solid profits partly by charging clients some of the highest and most opaque fees in the European Union.
A recent report by the European Commission shows that the average Czech current account user pays EUR 95 per year in fees, the ninth-highest figure among the EU’s 27 member states. When the survey took into account how often banking services are used in different countries, the Czech Republic ranked the seventh most expensive. Brits pay a bit more on average (EUR 103) but carry out several times more transactions, making each way cheaper than the Czech and EU averages. Bulgarians pay the least of all (EUR 27), while the Dutch enjoy the cheapest transactions, paying only EUR 46 per year.
Exasperated Czech customers may find some consolation in learning that Italians, Spaniards, French and Austrians pay still more than they do. (See table.) “But if you were to adjust these figures to reflect the different countries’ average salaries, Czech banks would seem even more expensive,” says Patrik Nacher, who runs the Bankovnípoplatky.com website, which surveys fees. He points out that Latvia is the only post-communist country in the EU with higher current account costs.
Czech banks charge particularly high fees for account maintenance, cash withdrawals (including from their own ATMs), incoming payments, account statements, issuance of debit cards, etc. All analysts interviewed for this story said that the reason why these basic services are often free or cheaper in western countries is that banks there instead levy fees on more sophisticated products that are still less common in the Czech Republic. These include credit cards, stock portfolios, bonds and pension or mutual funds.
Nacher is most annoyed by the fees for cash machine withdrawals and incoming payments. “These are basic services where the customer has no alternative,” he says. “Why do I have to pay for something without which there’s no point in having an account? I don’t mind paying hundreds of crowns per month for stock trading because that brings me profit.” Nacher believes that if banks made basic services cheaper or free, it would encourage more clients to venture into more advanced banking and investment products and hence the banks’ revenues would not suffer.
Clients left in the dark
So why don’t customers simply switch to cheaper banks, the way they do with other products and services? The report confirms a complaint made by Nacher and others that free market competition does not work well in financial services: The research shows that in most EU countries – particularly those with high account costs – the structure of fees and the pricing information provided by banks are so complicated and “opaque” that customers find it extremely difficult to compare account costs in different institutions.
The researchers had to contact 66% of the financial institutions they surveyed because they found the pricing information on their websites incomplete or incomprehensible. In the Czech Republic, they had to ring 80% of banks; only Maltese, Spanish, Italian, Greek and Austrian financial institutions had more confusing price lists. “Collecting the data was extremely time consuming,” reads the report. “A consumer who wanted to compare all these charges would have to invest a great deal of time.”
Bankovnípoplatky.com has been doing similar surveys in the Czech Republic for four years to help customers find the cheapest bank for their specific needs. “The EU shouldn’t regulate the charges themselves,” Nacher said. “That would only hamper competition and force banks to invent new and more obscure fees and hide them deeper in the small print. Instead, the EU should enforce a standardisation and simplification of terminology and pricing information so that they become predictable and comparable for the consumer.” Nacher quotes the holiday industry as an example as travel agents and airlines are being pushed to advertise final prices, including all third-party fees and surcharges.
But, even if fees become more transparent, Nacher fears that switching banks would still be logistically difficult. The top item on his wishlist is that the EU find a way to make account numbers transferable between financial institutions. Nacher says this would particularly benefit businesses, which otherwise have to modify all invoices and contracts, notify all trade partners and keep the old account for some time after the switch in case a party fails to register the change. “Czech mobile phone operators also cried that it’s technically impossible for users to keep their numbers when changing providers,” Nacher said. “Now Czechs can do that easily and for free.”
Lávička and Hatlapatka believe that the situation may improve even without major regulatory intervention. They say that Czechs will gradually become more aware as consumers and more confident as investors. This will in turn motivate banks to fight for clients with lower or zero fees for basic services, in the hopes that the happy customer will later take out a mortgage or credit card, or ask them to invest his or her savings in stocks or bonds.
Read The ghosts of the 1990s for an overview of Czech banking history.
Czech Banks in Figures
In the first half of this year, Czech banks and building societies made a combined net profit of CZK 26.6 billion, the same amount as between January and June of last year, when the financial crisis was not yet affecting the country. This is seen as a very good result, given that the Czech economy as a whole contracted by almost 5% in the same period and the volume of mortgage lending dropped by 34.2%, to CZK 40.1 billion.
Of the three largest banks, ČSOB increased its midyear net earnings by 7.3% year-on-year to CZK 5.9 billion, while profits at Česká spořitelna and Komerční banka dropped 4.4% to CZK 6.3 billion and 10% to CZK 5.8 billion, respectively. Some smaller banks took a larger blow but stayed afloat: UniCredit saw its bottom line shrink by almost one-half, to CZK 1.2 billion.
Czech borrowers failed to pay back 4.3% of loans, a marked increase from 2.7% a year earlier, but still way below the default rates now common in the UK and the US. Bad loans cost lenders over CZK 13 billion, almost triple the amount lost in the first half of 2008. The sector fully offset these losses with an 11% increase in trading revenue and a 5% staff reduction.
Source: Czech National Bank