The average Czech's financial conservatism is legendary - and this week's earnings results from Erste Group Bank and Societe Generale perfectly illustrate this.
Austrian bank Erste and France's SocGen both released financial results that showed declines in profits, yet their Czech subsidiaries both posted big increases in profits for the same periods.
Erste, which together with Raiffeisen Bank International and UniCredit Group, make up the triumvirate of Emerging Europe's largest lenders, reported first-half operating profit down 11% to €1.75bn as the bank was unable to cut costs at a fast enough rate to make up for the 6.7% decline in revenue.
Reflecting the deteriorating operating conditions in Europe as the crisis there shows little sign of abating, Erste cut its 2012 operating profit outlook for the second time in three months, saying: "the full-year operating result is expected to stay somewhat behind 2011."
Within Erste's results, though, its Czech subsidiary Ceska Sporitelna reported net profit up 14% in the first half to CZK8.22bn (€324m), helped by bad loan provisions falling by 38% as the amount of bad loans declined to CZK2.25bn in the first half of the year from CZK3.64bn a year ago.
Ceska Sporitelna is more efficiently run and profitable than the group as whole. The Czech bank's cost/income ratio is around 40%, compared with the group's cost/income ratio of 51.9% at the end of the first half.
Overall, Erste's non-performing loan (NPL) ratio increased to 9.2% as of June 30, compared with 8.5% at year-end 2011. That's still low by regional standards - at the end of the first quarter, for example, Romania's average NPL ratio was 16.3% and in Serbia was 20.4%. However, the banking sector of the Czech Republic as a whole reported an NPL ratio of just 5.9% at the end of May, according to central bank data.
While SocGen said August 1 its second-quarter profit fell 42% following write-downs on its Russian unit and US asset manager TCW Group, Komercni Banka's net income for the same period almost doubled to CZK4.12bn from CZK2.1bn a year earlier, helped by a one-off gain from the sale of a stake in a development bank and higher banking income from lending.
The conservatism of Czech borrowers can also be seen in the country's foreign-currency loan exposure, which is a mere 14.8% of total loans. The Polish, on the other hand, had a love affair with forex loans - largely those denominated in Swiss francs - because Swiss interest rates were much lower than those set by Poland's National Bank. Although new forex loans in Poland are now rare, they still make up almost 60% of outstanding mortgages.
Likewise, Czech banks made few forays into the kind of investments that so hurt banks elsewhere in Europe. "People ask me the difference between Czech banks and German banks - German banks invested everywhere, Czech banks only locally," says one regional fund manager.
He points out the general surprise among analysts when Komercni Banka, the third largest Czech bank by assets and the only publicly listed one, revealed that its dabbling in Greek bonds had forced it to take charges worth CZK5.36bn last year on its Greek bond holdings, writing them down to a quarter of their value.
Miroslav Singer, the governor of the Czech National Bank (CNB), told bne earlier this year that the Czech Republic is rather exceptional within Europe for having a sound, very liquid and profitable banking system. He puts this down to the traditional conservative approach to banking that Czech bankers have pursued - taking in deposits, using that money to lend wisely to businesses and households - the kind of banking "which everyone would now like to do."
"We have one of the lowest loan/deposit ratios in Europe at around 70%, so banks have ample sources to finance credit growth," he says. "The problem is the opposite: significant sections of the Czech public are too conservative to borrow from banks."
The back-drop to all this is a relatively stable economy. Though the shine may have come off the economy lately as it slips back into recession - Komercni Banka expects Czech GDP to decline by 0.5% this year - the fiscal position remain sound, with sovereign debt as a percentage of gross domestic product well within Maastrich criteria limits at just above 40%.
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