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In a report on the Czech banking system Bank Industry Risk Analysis: Czech Republic Standard & Poor’s Ratings Services notes that the rehabilitation of the banking system has almost run its course and that the banks are benefiting from economic stabilisation and growth, as well as structural reforms and ownership changes as the Czech Republic (A-/Stable/A-2) moves toward EU membership.

“Although the high economic and industry risks have now lifted, Czech banks will face many challenges as the system matures. In the short term, the generation of sustainable core revenues and the establishment of long-lasting efficiency gains from the major restructuring programmes will be needed to offset lower margins as competition increases,” says Standard & Poor’s credit analyst John Gibling.

“In addition, the preservation of strong capital to absorb future losses and expansion and the implementation of solid risk management procedures will be crucial for the formation of a robust banking system,” he adds.

The Czech banking system has benefited from the state-sponsored bailout programmes, combined with privatisation and restructuring during 1999-2001. With 70% of banking capital now in foreign hands, the new foreign owners are aiming to benefit from the long-term developments of the

  • Czech Republic and have initiated substantial internal transformation programmes, integrating their Czech subsidiaries into their own practices and cultures, thereby laying the foundations for improved efficiency and asset quality.

    “In the longer term, increased financial intermediation, especially in the retail sector, is expected on the back of increased economic wealth as the Czech Republic reaps the benefits from EU membership, continual foreign direct investment, and improvements in economic growth in Western Europe,” adds Standard & Poor’s credit analyst Alise Ross. “Continued structural and administrative reforms and a lower interest rate environment should further stimulate banking sector growth and development.”

    The sector’s performance is on an improving trend, driven by lower provisioning levels, write backs and cost rationalisation. Traditionally dependent on interest-earning products to drive revenues, Czech banks are employing ever-increasing use of sophisticated client and product segmentation and cross-selling initiatives with greater emphasis on wealth management to diversify and increase revenues.