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Austrian banks Erste, Raiffeisen to benefit from Czech interest rate hike

Erste Group Bank AG and Raiffeisen Bank International AG stand to receive a boost from the recent interest rate hike in the Czech Republic, a key foreign market for Austria's two largest banking groups, analysts said.

The Czech central bank on Sept. 30 upped its two-week repo rate by 75 basis points — the biggest increase in nearly a quarter of a century — to 1.50%. More raises are in the offing, with Bloomberg News quoting Governor Jiří Rusnok as saying debates on future decisions would now be on the size and frequency of further rate hikes.

The increase came as a surprise, S&P Global Ratings credit analyst Cihan Duran said via email, adding that the decision illustrates how the central bank is now more focused on its inflation mandate than on economic growth. The rating agency's consensus is that the rate will increase to as much as 2% by 2022.

The Czech banking association said the effect of the rate rise will reflect most quickly on corporate loans. The impact on mortgages is expected to only be partial as they respond more to longer-term rates.

Land of opportunity

The Czech Republic is the most important overseas market for Austrian banks, DBRS Morningstar said in a Sept. 20 note. Erste has about 4.5 million customers in the country. Raiffeisen, or RBI, has 1.4 million clients, a spokesperson said.

In the second quarter, Erste derived €382 million of its group-wide €1.96 billion operating income from its Czech business, while RBI's accounted for €124 million of its €1.38 billion group-wide operating income, S&P Global Market Intelligence data shows.

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Erste's Czech business accounts for about 22% of group assets but about 40% of group profit, reflecting the importance of the market to the bank's margins, Concorde Securities analysts Hai Thanh Le Phuong and Gábor Dániel Péntek noted. For RBI, the bank's ongoing expansion in the Czech Republic, which includes the acquisitions of Equa bank a.s. and ING Groep NV's local retail operations, could increase the unit's profit by 10% to 20%, they added.

Both banks' loans to Czech customers have also been steady over the past few quarters. As of June 30, Erste's Czech loan book amounted to €32 billion, while that of RBI was €12 billion. Erste and RBI's group-level loans to customers totaled €176.09 billion and €94.05 billion, respectively, at the end of June.

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Clear positive

All six analysts contacted by Market Intelligence viewed the rate hike as a welcome development for the two banks. That, together with a stronger koruna, will support a partial net interest income recovery, said Sonja Förster, vice president for global FIG at DBRS Morningstar.

Erste and RBI booked €268 million and €77 million of net interest income, or NII, respectively, from the Czech Republic in the second quarter, compared to €242 million and €82 million a year before. Their Czech pretax profits in the quarter were significantly higher year over year.

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The rate hike will improve both margins and loan-to-deposit ratios, said Le Phuong and Péntek, though they added that the latter usually takes about two quarters to be visible. Their ballpark estimate is that Erste books between €20 million to €25 million of annual NII growth and RBI between €5 million and €10 million starting in the second quarter of 2022 for every 25-basis-point rate increase.

Barclays analyst Krishnendra Dubey projects a similar level of improvement, which equates to roughly 1% of both banks' pretax profit for 2021. Dubey also noted that Erste has historically moved some of its excess liquidity into the Czech central bank, so it could benefit from an additional positive yield.

RBI expects a positive effect on the NII of its Czech unit amid "substantial customer deposit increases in recent quarters," a spokesperson said. Erste did not respond to a request for comment.

Several rate hikes could spur competition and result in a potential adverse impact on volumes for Czech banks, Le Phuong and Péntek warned. But Andrea Wehmeier, a vice president and senior analyst at Moody's, said that even amid stronger competition, better loan demand due to an economic recovery combined with rising rates will boost profits.

Steady hand

Though net interest margins in the Czech Republic are "lower than in other more economically volatile" central and Eastern European countries, the market is "a stabilizing factor" for Austrian banks due to the good asset quality and limited cost of risk, Wehmeier said.

Loan loss provisions taken by Erste and RBI for the Czech Republic have been elevated during the COVID-19 pandemic, Ratings' Duran said, but a significant chunk were released amid a better-than-expected loan book performance in the first half.

The country also "acts a positive diversifier," not just for Austrian banks but also for larger ones in Western Europe, Duran added. Various key metrics "clearly indicate that Czech banks are strong performers and have a resilient business model," he said.