The Czech Republic's largest banks are likely to pay much less than the 33 billion koruny, or roughly $1.3 billion, that the country's government aims to raise from the sector through a windfall tax, analysts told S&P Global Market Intelligence.
The three-year windfall tax, which the Czech finance ministry announced in early October, targets the banking and energy sectors and is meant to raise funds amid Europe's energy crisis. It followed similar moves in Hungary and Spain, and comes after lenders reported sharp increases in first-half profits following multiple interest rate hikes by the country's central bank.
The ministry confirmed Oct. 19 it was leaning toward a 2023 introduction of the tax after government officials and governing coalition politicians had suggested that the levy could be expanded to cover 2022 profits.
Analysts are skeptical as to whether that government's target is achievable given the proposed criteria.
"I don't understand how government officials arrived at that number," said Tomáš Pfeiler, an analyst at Czech Republic-based securities broker Cyrrus. "It cannot be ruled out that the parameters will change."
The planned tax will hit banks that had net interest income of more than 6 billion koruny in 2021. This would include Erste Group Bank AG unit Česká spořitelna a.s., KBC Group NV unit Ceskoslovenská obchodní banka a.s., also known as ČSOB, Société Générale SA unit Komercní banka a.s., UniCredit SpA unit UniCredit Bank Czech Republic and Slovakia a.s., Raiffeisen Bank International AG unit Raiffeisenbank a.s., and Moneta Money Bank a.s., Market Intelligence data shows.
"What is particularly unfortunate about this proposal is that the finance ministry would put selected business entities at a disadvantage… which in my view would disrupt economic competition," Patria Finance analyst Michal Křikava said.
Smaller Czech banks, which regularly invest clients' funds with the central bank and into government bonds, are more likely to have "windfall profits" than the targeted large market players that generally provide more loans, Pfeiler added.
Analysts' calculations on the likely proceeds from the windfall tax vary, but none came close to the government's projections. The 33 billion koruny target is higher than the total projected increase in pretax profits of the six affected banks above the windfall tax threshold, J&T Banka analyst Milan Lávička said.
Pfeiler estimates the 2023 tax figure at 5 billion koruny to 7 billion koruny. Contributions from listed lenders Moneta Money Bank and Komerční banka, as well as Česká spořitelna, whose parent Erste has a dual listing on the Prague Exchange, would not exceed 1.7 billion koruny in 2023, according to Patria Finance's calculations.
J&T Banka estimates that the three lenders would pay between 3.4 billion koruny and 3.7 billion koruny per year in the next three years.
The finance ministry did not respond to a request for comment on how it calculated the 2023 windfall tax proceeds or how much it expects the banks to contribute in 2024 and 2025 under the planned levy.
Based on the government's criteria, the two biggest banks, ČSOB and Česká spořitelna, would pay a windfall tax on pretax profits above 21.4 billion koruny and 21.6 billion koruny, respectively, according to Market Intelligence's calculations.
Investment climate concerns
Česká spořitelna, Komerční banka and ČSOB said they were still analyzing the impact of the proposed tax.
"We agree with the Czech Banking Association, which together with banking experts, perceives the proposal as inefficient and non-systemic," a spokesperson for ČSOB said.
Česká spořitelna and Komerční pointed out that the tax's introduction could have negative implications for the investment climate in the country.
"Adopting the proposal would damage the predictability of business environment in the Czech Republic and reduce the country's attractiveness for investors," a spokesperson for Komerční said.
The other three banks targeted by the proposed tax and their parent companies declined to comment or did not respond to requests for comments.
In its current form, the levy should not impact the lenders' capacity for dividend payouts, Křikava said. However, if the government is set on collecting the 33 billion koruny, the impact would be significant which could prompt the lenders to make some adjustments in their dividend policies, Lávička said.
The banking sector is being targeted by the proposed windfall tax due to its high profitability and has been benefiting from the central bank's high interest rates, the finance ministry told Market Intelligence shortly before details of the tax were announced. The Czech central bank raised its key rate from 0.25% to 7% in the 12 months ending June 2022. It has suspended its monetary policy tightening cycle for the time being, awaiting more economic data.
All six banks to be hit by the tax grew first-half net profit year on year at a double or even triple-digit pace, Market Intelligence data shows. The Czech banking sector is very likely to report a record net profit this year, Křikava said. After a strong increase, banks' earnings are expected to stagnate in 2023 due to the normalization of risk costs and rising operating costs amid inflation, Lávička noted.
Banks could also attempt to optimize their earnings next year in order to minimize the impact of tax, according to analysts. "A typical strategy is to try to reduce the net interest income through higher interest costs. The banks would rather use their funds to hook clients in than to pay the money to the state," Pfeiler said.
The Czech Banking Association said it is waiting for the final version of the tax to be disclosed and added that its 50 billion koruny counter-proposal is still on the table. The assistance package includes affordable housing support and help for borrowers with covering financial obligations on loans.
The government, for its part, seems to be determined to go ahead with the tax.
"The finance ministry repeatedly negotiated with representatives of the banking sector, and the alternative solution proposed by the banks always consisted primarily of loans, not money that the government could use in the current energy crisis to help people," the ministry told Market Intelligence.
It is not the first time that the Czech Republic is looking to tax the banking sector. The country's previous government planned to impose an additional levy on banks in 2019, but lenders said at the time they would instead contribute 7 billion koruny to a special state fund intended to finance development projects around the country.
Three years later, the banks have not made any contributions to the fund, according to a recent article by Hospodarske Noviny.
"Banks were and still are ready to provide the funds, but not a single project has been prepared [by the state] in which the money could be invested," the banking association told Market Intelligence.
As of Oct.19, US$1 was equivalent to 25.08 Czech koruny.