Czech Republic Commercial Banking Report Q3 2007

Long-Term Real Convergence In Place Real convergence in the Czech Republic is continuing apace. Since 2006, the Czech Republic has been richer on a GDP per capita basis (in purchasing power parity terms) than eurozone member Portugal according to eurostat figures, and by the mid-point of our five-year forecast period in 2008 will have exceeded 80% of the EU-25 average. This equates to over three quarters of France's GDP per capita. The driving forces behind these long-term structural changes - which are unlikely to reverse - are the strength of the local economy both in absolute and relative terms. While strong Czech growth has been key, the underperformance of the eurozone economies both historically and in the future will likely open up a long-term growth differential between the two of just under 3%.

Turning to the Czech domestic outlook, we expect real GDP growth to remain well above the long-term average. While economic expansion has averaged 2.8% per year over the past 10 years, we are anticipating an average of 4.8% to 2011. While this includes a slowdown from last year's 6.1% to 5.3% this year and 4.8% in 2008, the risks currently seem to be on the upside. Recent weeks have provided good news, with the real GDP data series for 2004-2006 being revised upwards. Growth rates for 2004 and 2005 have been boosted by 0.4 percentage points (pps) to 4.6% y-o-y and 6.5% respectively, while 2006's outturn has moved 0.3pps higher to 6.4%.

Real GDP growth rates in the Czech Republic are going to moderate over our five-year forecast period, averaging an annual 4.8% against the 6.1% recorded in 2006. The recent strength of the eurozone economies and robust domestic demand have been the main drivers of this trend, and will underpin ongoing convergence with the eurozone economies.

The Commercial Banking Sector The hard numbers that BMI has collated with respect to the Czech Republic's commercial banking sector indicate that the country is home to a fairly large, stable and mature banking sector relative to those in most countries in CEE. As you might expect in these circumstances, the sector will achieve solid growth at rates above GDP development. On the other hand the growth rates are very much lower than those in many of the other countries in the region that are able to grow explosively from a very small base.

During 2006 total sector assets grew by 16% from US$118.3bn to US$136.9%. Over the same 12 month period GDP grew by 7.9% or just half as much. Growth rates are not remarkable, but the results are still substantial.

In contrast to its neighbour Poland, the Czech Republic has one of the highest levels of bank deposits per capita in the region. As at December 31 2006, bank deposits per capita in the Czech Republic amounted to US$9,449. To compare performance, the closest regional comparison is Hungary, which has a similar population size and GDP per capita. In this latest data comparison, the Czech Republic's deposits per capita are slightly less than double those of Hungary. The Czech Republic's market is then, by implication, more mature than most of its regional peers.

Of particular note in the Czech Republic is the low level of the three key ratios. As at December 31 2006, the loan/deposit, loan/asset and loan/GDP ratios were 64%, 45% and 46% respectively. While all three have been rising over the last year, they are all fairly low in comparison to other countries in our survey, Of the 59 countries for which we have compiled information, Czech Republic ranks 49th in terms of the loan/deposit ratio, 42nd in terms of the loan/asset ratio and 36th in terms of the loan/GDP ratio. The implication of this is that bankers are finding it hard to identify sufficient numbers of attractive businesses/consumers to lend deposits to. It could also demonstrate a continuing trend of disciplined lending in a system dominated by international banks.

Press Reports Recent press reports indicate that the Czech Republic's banking sector is highly active, creating opportunities for some and stumbling blocks for others. A case in point is manner in which some banks have faired better than others in the profit stakes in 2006. Bawag Bank and Hypotecni Bank both posted net profits while eBanka reported losses. Meanwhile, a number of foreign investors have sought to enter or increase their stake in the Czech Republic's banking sector. Belgian firm KBC has opted to purchase an additional 1.13% stake in CSOB, increasing their holdings to 98.58%. The Polish bank, BRE plans to enter the Czech market in the second half of 2007, establishing its presence via its retail arm mBank. In addition, South Korea's second and fifth-largest lenders, Woori Bank and KEB respectively, are reported to be considering entering the Czech banking market in the medium term.