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Czech & Slovak Republics

Dynamics of Banking Sector. Czech & Slovak Republics. Prague April 19, 2004. Jaromír Sladkovský Director of Group Retail Marketing. Czech Republic Slovakia International Comparison. Banking Sector in CR. Bank Deposits & Retail Savings Bank Loans & Retail Lending Sector Profitability.

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Czech & Slovak Republics

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  1. Dynamics of BankingSector Czech & Slovak Republics Prague April 19, 2004 Jaromír Sladkovský Director of Group Retail Marketing

  2. Czech Republic • Slovakia • International Comparison

  3. Banking Sector in CR • Bank Deposits & Retail Savings • Bank Loans & Retail Lending • Sector Profitability

  4. SHIFT FROM BANK DEPOSITS TO MUTUAL FUNDS WILL CONTINUE DUE TO LOW INTEREST RATE ENVIRONMENT EUR billion (CAS) • In the medium term: • Total bank deposits are expected to grow at 4-6% • Corporations should be major contributor to total deposit growth • Household deposits should show stable growth at 2-4% despite low interest rate environment BANK DEPOSITS 58,8 56,6 48,5 44,5 OTHERS COMPANIES HOUSEHOLDS PRIVATE FINANCIAL ASSETS* • Total household savings are expected to grow by 6-8%, i.e. 2-3% above nominal wages • Current shift from bank deposits to mutual funds will continue • Rapid growth of building savings should slow down due to lower government subsidy from 2004 38,5 35,0 32,7 29,1 MUTUAL FUNDS BUILDING SAVINGS BANKDEPOSITS Source: Czech National Bank (CNB)Flat Exchange rate used as of Dec 31, 2003 *) without pension funds and life insurance reserves

  5. LOANS PROVIDED TO INDIVIDUALS WILL REMAIN A KEY GROWING DRIVER OF TOTAL LOANS IN THE FUTURE EUR billion (CAS) 34,0 • In the medium term: • Total loans are expected to grow on average at 6-8% a year • Loans provided to households will remain a key growing driver of total loans (about 20% a year) • Loans provided to corporations and SME should show a reverse trend BANK LOANS 30,8 30,8 29,0 OTHERS COMPANIES HOUSEHOLDS PRIVATE FINANCIAL LIABILITIES • Mortgages will keep its high growth at 20-30% a year • Building loans should keep its high growth as well • We expect the growth of consumer loans to slow down (recent evidence) 6,5 4,9 3,6 2,9 OTHER LOANS* CONSUMER LOANS BUILDING LOANS MORTGAGES Source: Czech National Bank (CNB)Flat Exchange rate used as of Dec 31, 2003 *) includes overdrafts, FX loans, investment loans etc.

  6. DESPITE THE DROP IN INTEREST RATES, THE BANKING SECTOR MAINTAINED SOLID PROFITABILITY LEVEL EUR million (CAS) • Profitability of the banking sector was driven by several factors: stable interest income, growing fee income, better quality of credit portfolioand cost management • Net fee income showed double digit growth over the past three years • Banks increasingly focused on cost management (e.g.total bank staff decreased from 44k in 2000 to 39k in 2003) Net interest income Net fee income Operating Income* Net profit Source: CNB *) Other income includes income from financial operations (FX, derivatives, securities etc.) Excludes Other Expenses and Other Income

  7. Banking Sector in SR • Bank Deposits & Retail Savings • Bank Loans & Retail Lending • Sector Profitability

  8. RECENT FISCAL REFORMS MAY IMPACT THE GROWTH OF DEPOSITS (AND ITS STRUCTURE) IN SLOVAKIA EUR billion (SAS) • In medium term: • Total bank deposits are expected to grow at 3-5% on average a year • Household deposits are likely to remain stable (maximum 1-2%growth a year can be expected) BANK DEPOSITS 19,4 18,7 16,5 14,8 OTHERS COMPANIES HOUSEHOLDS • Total household savings will likely grow by 2-4% a year due to slow growth of real wages in SR • Current shift from term deposits to mutual funds will continue with decreasing interest rates • Building deposits stay flat (this product never reached the same level of attractiveness as in CR) • Pension funds are expected to be a key driver of growth after 2004 PRIVATE FINANCIAL ASSETS* 10,1 9,7 9,9 8,9 MUTUAL FUNDS BUILDING SAVINGS BANKDEPOSITS Source: National Bank of Slovakia (NBS)Flat Exchange rate used as of Dec 31, 2003 *Excluding Pension funds (0.27 billion EUR in 2003) and Life insurance (1.14 billion EUR in 2003)

  9. VOLUME OF LOANS SHOULD GROW AFTER BAD LOAN TRANSFERS REALIZED IN 2001 AND 2002 EUR billion (SAS) • In medium term: • Total bank loans are expected to grow by 6-8% a year • Loans to companies should grow at 5-6% a year due to higher banks’ willingness to provide loans to small and medium enterprises BANK LOANS 9,9 9,8 OTHERS 8,5 8,2 COMPANIES HOUSEHOLDS PRIVATE FINANCIAL LIABILITIES • Growth oftotal household loans at around 11-13% a year in the medium-term can be threatened by increasing uncertainty resulting from recent government reforms • Volume of mortgages is expected to grow at 25-30% a year 2,1 1,5 1,3 1,1 OTHER LOANS* CONSUMER LOANS BUILDING LOANS MORTGAGES Source: National Bank of Slovakia (NBS)Flat Exchange rate used as of Dec 31, 2003 *) includes overdrafts, FX loans, investment loans etc.

  10. BANKING SECTOR IN SLOVAKIA HAS MUCH HIGHER PORTION OF INTEREST INCOME THAN CZECH BANKING SECTOR EUR million (SAS) • Net interest income covers about 70% of total operating income • Net fee income is still low due to the strong competition on the Slovak market • Improvement in cost efficiency was visible in 2002-2003 when the bank staff was reduced by 9% • It is expected that the Slovak banking sector profitability will further decrease in the medium-term due to lower NII and stagnant fee income due to high competitiveness Net interest income Net fee income Operating Income Net profit Source: NBS

  11. International Comparison • Size of the Banking Sector • Credit Structure • Retail Lending • Loans to Deposits • Competitiveness

  12. SIZE OF THE BANKING SECTORS Banking assets as % of GDP The Czech and Slovak banking sector is still relatively underdeveloped compared to EU countries in terms of total banking assets as % of GDP. While most of EU countries have a banking assets/GDP ratio over 150%, the Czech and Slovak banking sector was around 85% in 2002 and 2003. Source: ECB, IMF

  13. STRUCTURE OF CREDITS COMPARED TO EURO-ZONELoans provided to private companies and households* EURO-ZONE90,3% LOANS/GDP CZECH REPUBLIC27,5% LOANS/GDP SLOVAKIA28,7% LOANS/GDP Household credits make only half of volume of loans provided to companies in the CR. In Slovakia, this ratio is even lower. *) loans to government and financial institutions are excluded **) include loans to individual enterprises, credit cards, overdrafts, FX loans, investment loans etc. Source: CNB, NBS, ECB

  14. THE GROWTH POTENTIAL OF THE MARKET IN RETAIL LENDINGHousehold Credits 2003 (% of GDP) 48% 10% 8% Total retail loans including individual enterprises still capture only 8-10% of GDP which is five times less than the average of the Euro-zone. Source: ECB, CNB, NBS *) include loans to individual enterprises, credit cards, overdrafts, FX loans, investment loans etc.

  15. COMPARISON BETWEEN BALANCE SHEET STRUCTURE IN EU COUNTRIES AND CZECH AND SLOVAK BANKSBanking Loans/Deposits Source: ECB, Patria

  16. OVERVIEW OF MARKET CONCENTRATION2002 Market Share of TOP4 Banks in loans and Deposits Source: CGE&Y analysis, CNB, NBS, Regulatory reporting of top banks in CR and SR, CSOB

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