In the final quarter of 2008, the global slowdown hit the Czech Republic hard. Industrial production, which had risen by 4.2% year on year in the previous quarter, plummeted by 13.2%. The registered unemployment rate jumped to 6.8% in January 2009, from 5.1% in September 2008. Car manufacturers, whose exports to the rest of the EU are likely to fall heavily as European consumer demand contracts, have led the job losses but the sharp rise in unemployment suggests that other sectors are following.
"The Czech Republic is an open economy that is quite export dependent. We once calculated that a slowdown of one percentage point in the GDP [gross domestic product] growth rate in Germany translates into a slowdown of between 0.3 and 0.4 percentage points in the Czech Republic," says Gernot Mittendorfer, CEO of Ceska sporitelna. This is a troubling correlation at a time when the European Commission is forecasting a GDP contraction of 1.9% in Germany in 2009.
However, Mr Mittendorfer says that the Czech economy is at least starting from a position of exceptional strength, after several years of high economic growth and low unemployment. That economic growth should continue into 2009 – more subdued but still comparing favourably with most of western Europe. And household debt is concentrated among high earners – a recent study by BankAustria found that almost all highly indebted individuals (defined as those spending at least 30% of their monthly earnings on interest payments) were in the country's top 30% earnings bracket. In contrast, 47% of highly indebted individuals in Hungary are on very low incomes.
Competitive market
Sporitelna has the largest share of the Czech retail market but its activity in the large corporate market is more limited. The bank should therefore be well positioned in the more resilient parts of the Czech market, away from the heavy industrial sectors that are suffering from the EU slowdown. But Mr Mittendorfer has kept an eye on the sometimes feverish developments in an increasingly competitive Czech retail bank market.
"The mortgage market was showing extremely high growth rates in the past couple of years, we saw a lot of competition, loosening of underwriting standards, extending durations and shrinking margins, together with a lot of co-operation with external sales partners. We changed that from the beginning of 2008, we introduced stricter rules, and now things are moving in a more normal way," he says. As a result, the bank is no longer the largest originator of new mortgages in the country, although it retains the largest total market share.
As the bank's tighter mortgage standards lowered the growth of retail interest income, management focused on introducing products to increase non-interest revenues. Foremost among these was the Chytra karta (smartcard) package that allows retail customers to choose from among 32 current account features, with different associated fee levels.
Between its launch in August 2007 and November 2008, the Chytra karta account picked up its first million customers. However, Mr Mittendorfer is not planning to follow the zero-fee model used by M-bank, a Polish-owned internet bank that caused a commotion by launching a fee-free current account in the Czech Republic in 2007. "This is not our concept, we believe that a service-oriented bank with a fair price and value for money has a bigger potential market than a niche low-cost player just focused on certain channels," he says.
Strong funding position
In practice, Ceska sporitelna has a balance sheet that looks strong enough to absorb increased risks without undue stresses. As the country's largest bank by both Tier 1 capital and assets, it recorded net profits of Kcs15.8bn (€628m) in 2008. Assets grew by 5.9% to Kcs862bn and capital rose 16.6% to Kcs64.8bn, bolstered by retained profits and the sale of insurance unit Pojistovna Ceske sporitelny to the Vienna Insurance Company. The bank's Tier 1 capital ratio is more than 10.3% by Basel II definitions.
The global liquidity crisis is not a source of direct concern for Ceska sporitelna, where the loan-to-deposit ratio stood at 71.4% at the end of 2008. "This is a very comfortable level and the whole country is basically self-funded, which is why there is nothing needed in terms of government support initiatives," says Mr Mittendorfer.
He laments the absence of differentiation among financial market participants or regulators, both of whom are demanding universally high levels of bank capitalisation regardless of whether each institution has a high or low risk profile. However, retail savers have perhaps been more discerning about the differences between banks' business models. "In times of negative news, certain banks like ours were increasing their deposits and saw inflows as nervous customers were looking for safety. This is an area where you see the proof of a certain concept at this time," he says.
Ceske sporitelna's liquidity position is the best in its parent group, Austria's Erste Bank, but local regulations restrict Erste's freedom to shift that Czech liquidity to other countries. In contrast, the bank could theoretically remit Ceske sporitelna's profits to other markets where bank balance sheets are under greater pressure, such as its subsidiaries in Hungary or Ukraine. Such a decision would be taken at headquarters in Vienna, but Mr Mittendorfer's opinion is clear: "Ceska sporitelna has had a very consistent dividend policy, we were in a position to build up the capital that is necessary for future growth from our own profits, and that is how it should be."
