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Czech Banking Sector Will Benefit From Receding Economic Risks; Ceska Sporitelna Outlook To Stable From Negative

  • We believe the Czech economy will expand by 1.25% in 2024, after an estimated real GDP contraction of 0.3% in 2023. The labor market remains resilient with strong employment and disposable income figures.
  • The rapid disinflation and further cuts of policy rates by the central bank will support financial conditions in the country, in our view. The price correction in the housing market has likely bottomed out, and we expect residential real estate prices to rise again in 2024.
  • The Czech banking sector should benefit from pent-up loan demand thanks to households' stronger consumer confidence and corporates' higher investment appetite. We expect a mild increase of credit losses and nonperforming loans in 2024 because of what we view as delayed effects of the higher interest rate environment.
  • We have affirmed our ratings on Ceska Sporitelna. The ratings on Ceskoslovenska Obchodni Banka and Komercni Banka are unaffected by our banking sector review.
  • We revised our rating outlook on Ceska Sporitelna to stable from negative.

FRANKFURT (S&P Global Ratings) May 16, 2024--S&P Global Ratings said today that it has revised its outlook on Czechia-based bank Ceska Sporitelna, a.s. (Ceska) to stable from negative and affirmed its 'A/A-1' long- and short-term issuer credit ratings on the bank. We also affirmed our 'BBB+' issue rating on the bank's senior nonpreferred debt instruments.

The ratings on Ceskoslovenska Obchodni Banka A.S. (CSOB; A+/Stable/A-1) and Komercni Banka A.S. (Komercni; A/Stable/A-1) were outside the review's scope.

Economic activity in the Czech Republic (Czechia) will improve thanks to a recovery of private consumption and business investments.   We expect the Czech economy will return to growth in 2024. The disinflation process in the country and ongoing monetary easing will likely contribute to higher household consumption and corporate investments. This improving economic environment will be beneficial to banks. We believe risks to the Czech banking sector are receding. Their high earnings generation capacity and resilient portfolio quality, despite challenging operating conditions over the last 18 months, are proof of structural strengths, in our view.

Our ratings on Czech banks reflect the banks' importance to their parent groups.   We believe that, as subsidiaries of Western European banking groups, the three rated Czech banks would benefit from group support if needed, and we reflect this in our long-term ratings. Consequently, our ratings on CSOB and Komercni include two notches of uplift and one notch of uplift, respectively. However, our long-term rating on Ceska does not include any uplift for potential group support. This distinction results from our assessment of the relative importance of the banks within their groups, which is largely informed by the groups' differing resolution strategies. Ceska benefits from one notch of additional loss-absorbing capacity (ALAC) because of its success in building material amounts of ALAC in the last three years. Our revision of our outlook on Ceska to stable reflects reduced downside risks to the long-term rating.

We project economic activity will rebound into positive territory in 2024, with real GDP growth of 1.25%.   Recent data show that retail sales and industrial production in the country have been gradually improving since their lows in 2023, while consumer and business confidence indicators have improved notably in the initial months of 2024. We believe that household consumption will contribute to domestic growth in 2024 on the back of higher real disposable incomes, increasing the purchasing power of consumers. Data from the Czech Statistics Office show that nominal quarterly wages have been rising 6.0%-9.0% year on year since fourth-quarter 2022, but growth of real wages remained negative until fourth-quarter 2023 because of inflation. The labor market remains tight and should lead to further wage increases supporting real income, while a potential shortage of talent might limit growth potential in the country. Similarly, we expect an increase of private investments within the nonfinancial sector as borrowing costs are falling while foreign demand will likely improve, boosting export activities, supported by a likely recovery of Germany, Czechia's most important trading partner, in the second half of 2024.

An easing of financial conditions through lower policy rates is a relief for the economy.   Reduced pressure from the external environment and subdued domestic demand over 2023 allowed the Czech National Bank (CNB) to kick off its interest-rate easing cycle in its December 2023 meeting with an initial 25 basis-point (bps) policy rate cut. The CNB has continued its easing with three consecutive rates cuts of 50 bps in February, March, and May 2024, bringing its policy rate to 5.25% currently. At the same time, Czech inflation fell more than expected in first-quarter 2024. The annual inflation rate dropped to 2.0% in March 2024, from 6.9% in December 2023. We expect the CNB to employ a gradual and cautious monetary policy approach to keep the inflation rate at its target tolerance band. Although the monetary easing process will take some time, we believe it will support lending activity and interest income of banks in the next two years. The CNB's decision to lower the countercyclical capital buffer to 1.75% as of April 1, 2024, will also support credit growth, in our view.

We expect the price correction in the residential real estate market to end in 2024.   Residential real estate prices in Czechia recorded the highest annual growth rates among European countries until mid-2022 on the back of a mismatch between supply and demand and historically low interest rates for housing loans. The mild correction over 2023 was healthy, in our view, and has somewhat reduced imbalances in the country. We believe price corrections in the housing market will fade out. The nominal decline of nationwide prices eased to 1.0% on an annual basis as of December 2023. New building permits continued to decrease and have constantly fallen over the past two years, limiting supply on the market. Lower borrowing costs in the next 12-24 months should improve demand for housing. Considering these supply-and-demand dynamics, we expect prices to recover, with nominal growth rates of 5%-8% annually until 2026.

Czech banks will benefit from robust earnings supported by pent-up demand for loans.   Although loan demand remained low in first-quarter 2024 according to the CNB's latest bank lending survey, we expect a broad-based recovery throughout 2024. Demand for housing loans, for example, has started to recover as interest rates decreased. The average rate on new mortgage loans reached 5.2% in March 2024, its lowest level in almost two years. The banking sector reported after-tax profits of Czech koruna (CZK) 104.4 billion (about €4.2 billion) in 2023, an annual increase of 2.1%. While the growth is materially lower than in other European countries, we note that Czechia is in the later stage of its interest rate cycle. The year-on-year profit growth was almost 50% in both 2021 and 2022. We expect that the banking sector's return on equity will normalize toward 15% in 2026, after having reached 16.4% in 2023. A gradual reduction of funding costs will stabilize banks' net interest income, in our view, while operating costs should move in tandem with revenues thanks to management teams' efforts to keep costs under control.

A moderate pickup of nonperforming loans and credit losses is likely in 2024.   Czech banks have been reporting strong asset quality indicators in 2023, outperforming our initial projections. The total nonperforming loan (NPL) ratio reached a low of 1.9% as of December 2023 and continued to decrease toward 1.7% in the first quarter of 2024. We note a strong resilience across all loan segments except for consumer loans, which deteriorated moderately to 4.2% as of February 2024 (from 3.9% as of December 2023). We expect a slight uptick of the total NPL ratio to 2.1% in 2024 because of the delayed impact of higher interest rates on portfolios. Credit losses have also remained surprisingly low, at 27 bps in 2023. We project a minor increase towards 35 bps in 2024 and stabilization at 30 bps by 2026. We understand that Czech banks still have COVID-19-induced loan loss reserves that were booked in 2020. A release of these reserves will help banks to keep their total provisioning ratio at sound levels.

BICRA Score Snapshot

Czech Republic

To From
BICRA group 3 3
Economic risk 3 3
Economic resilience Intermediate risk Intermediate risk
Economic imbalances Low risk Low risk
Credit risk in the economy Intermediate risk Intermediate risk
Trend Stable Negative
Industry risk 4 4
Institutional framework Intermediate risk Intermediate risk
Competitive dynamics Intermediate risk Intermediate risk
Systemwide funding Intermediate risk Intermediate risk
Trend Stable Stable
Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores are on a scale from 1 (lowest risk) to 10 (highest risk). For more details on our BICRA scores on banking industries across the globe, please see "Banking Industry Country Risk Assessment Update," published monthly on RatingsDirect.

Ceska Sporitelna A.S.

The outlook change reflects our view that Ceska will benefit from a recovery of the Czech economy. We view Ceska's first quarter results as indicating a solid fiscal year 2024. This follows a rather challenging 2023 fiscal year, in which net profits declined by 7.7% year on year largely because of higher funding costs. While profitability mildly deteriorated in 2023, Ceska maintained sound asset quality indicators with a nonperforming asset (NPA) ratio of 1.8% and a surprisingly low cost of risk, at 8 bps. This trend continued into the first quarter of 2024, in which Ceska reported an unchanged NPA ratio of 1.8% and a mediocre cost of risk, at 3 bps. The bank's net interest margin has stabilized and ticked up, contributing to a significant year-on-year increase of net profits by 73%. We forecast that the bank's return on average common equity will range between 14%-16% over 2024-2026, from 14.2% in 2023. We also expect risk costs to moderately increase to about 15 bps-20 bps over 2024-2026.

Outlook

The stable outlook reflects our expectation that Ceska will preserve a solid balance sheet and financial performance with sound profitability and asset quality ratios. A recovery of the Czech economy in the next 12-24 months supports our view. We also think the bank will stick to its capital strategy and issuance plans, thereby maintaining sound capital ratios and ALAC buffers.

Downside scenario

We could lower the rating over the next 12-24 months if Ceska's asset quality deteriorated against our baseline expectations, leading to higher credit losses and a setback to profitability. In our view, an unexpected change to aggressive growth of its retail and corporate portfolio or a loosening of underwriting standards could be early indicators.

Upside scenario

We could take a positive rating action in the next 12-24 months if Ceska achieved sustainable high capitalization or loss-absorbing capacity. This could occur, for example, if its RAC ratio improved well above 15% on the back of higher earnings retention or through derisking of its portfolio. Higher-than-expected issuances of ALAC-eligible instruments pushing the ALAC ratio sustainably above 8% could also lead to a positive rating action.

Ratings Score Snapshot

To From
Issuer Credit Rating A/Stable/A-1 A/Negative/A-1
SACP a- a-
Anchor bbb+ bbb+
Business position Adequate (0) Adequate (0)
Capital and earnings Strong (+1) Strong (+1)
Risk position Adequate (0) Adequate (0)
Funding Adequate (0) Adequate (0)
Liquidity Strong Strong
Comparable ratings analysis 0 0
Support +1 +1
ALAC support +1 +1
GRE support 0 0
Group support 0 0
Sovereign support 0 0
Additional factors 0 0
SACP--Stand-alone credit profile.

Related Criteria

Related Research

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.spglobal.com/ratings for further information. A description of each of S&P Global Ratings' rating categories is contained in "S&P Global Ratings Definitions" at https://disclosure.spglobal.com/ratings/en/regulatory/article/-/view/sourceId/504352. Complete ratings information is available to RatingsDirect subscribers at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.spglobal.com/ratings. Alternatively, call S&P Global Ratings' Global Client Support line (44) 20-7176-7176.

Primary Credit Analyst:Cihan Duran, CFA, Frankfurt + 49 69 3399 9177;
cihan.duran@spglobal.com
Secondary Contacts:Gabriel Goetz, Frankfurt +49 69 33 999 9287;
gabriel.goetz@spglobal.com
Anna Lozmann, Frankfurt + 49 693 399 9166;
anna.lozmann@spglobal.com

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