Moody’s Investors Service said on June 19 the outlook on the Czech banking system remains negative mainly reflecting the recent adoption of the EU bank resolution framework and the explicit burden-sharing policies that seek to reduce the public cost of bank resolutions.

The outlook has remained unchanged since December 2011 but since the previous Banking System Outlook report published in September 2013 conditions in the domestic economy have improved contributing to a more stable operating environment for local banks over the next 12-18 months, Moody’s said. The low interest rate environment, however, will continue to weigh on lenders' profitability metrics.

Moody's forecasts the Czech economy to expand by 1.9% in 2014 and further gain speed to 2.5% in 2015. The improving economic outlook should support the banks’ financial fundamentals and lead to slight improvements in the asset quality of the manufacturing and trade segments of the loan book, backed by rising export volumes. Yet, the slower recovery of domestic demand exerts a downward pressure on the asset quality of the commercial real-estate and construction segments.

Czech banks have robust capital buffers with the aggregate Tier 1 ratio at 16.8% at end-2013. The banks' funding and liquidity profiles are strong and will likely remain stable over the 12-18 month outlook period. “The sector's loan-to-deposit ratio of 76.8% at year-end 2013 and the relatively low incidence of parent funding will help Czech banks limit the possible impact of any pressure arising from foreign parents, in the relatively unlikely event of worsening economic prospects in Western Europe”, Moody’s said.

Moody’s rates the Czech Republic at A1.