Banks in CR remain resilient to risks - CNB tests

Ilustrační foto - České bankovky, koruny, muzeum České národní banky, bankovní trezor - ilustrační foto.

published: 10.12.2013, 10:40 | updated: 10.12.2013 15:00:04

Prague - The Czech banking sector as a whole remains resilient to a potential negative development, according to results of the latest stress tests conducted by the Czech National Bank (CNB), the CNB said today.

The sector's capital adequacy ratio would stay high above the required 8 percent minimum level even in a scenario that reckons with continuing recession in the next three years. But some banks would have to increase capital in the CNB's baseline as well as alternative scenario.

The results of the tests are similar to the previous tests which the CNB made public in June this year.

Banks' capital adequacy ratio exceeded 17 percent at end-September.

The results confirm that the Czech economy greatly benefits from the high quality of management, bank owners' responsible approach and substantial investment made to boost banks' capital over time, Jan Matousek, deputy managing director of the Czech Banking Association (CBA), said.

"Banks have helped to keep the economy afloat in the past period and it would be a pity if their contribution was to be diminished by raising the tax on the financial sector, for example," Matousek said.

Despite the sector's high resilience, several banks representing about 1 percent of the entire sector's assets would get into a situation of insufficient capital adequacy in the baseline scenario, the CNB said.

"In this case, this is a result of the banks' business model, which is unsustainable in the long run according to the stress test methodology, implying a need to adjust the model or top up capital in the future," the central bank said.

The CNB also said the banking sector shows a higher level of resilience in the baseline scenario compared with the result of the June stress tests.

The baseline scenario used in the stress tests represents a development which the CNB considers the most likely and which corresponds to the bank's forecast.

This forecast assumes a 0.9 percent decline of the Czech economy this year and a 2.1 percent growth next year. The development is based on the forex intervention which the CNB launched recently and therefore expects the crown's rate to be near Kc27 per euro.

In this scenario, banks' operating profit drops by about 5 percent year-on-year.

The stress scenario of continuing recession reckons with an economic decline in the next three years.

In this scenario, the banking sector as a whole records a loss which substantially reduces its aggregate capital adequacy below 14 percent.

A total of ten banks, representing about 11 percent of the sector’s assets, would get into a situation of insufficient capital adequacy in this scenario. The banks would have to raise their capital by about Kc10bn.

"Relative to the size of the banking sector, this figure is not significant enough to jeopardise its stability," the CNB said.

In the alternative scenario, unemployment in the Czech Republic rises significantly and wages decline.

As a result of the long-running unfavourable situation, some households and companies would exhaust their financial reserves and their ability to repay debts would worsen significantly.

Their worsened solvency would affect the banking sector, causing it substantial losses.

Loan impairment losses would more than triple in 2014 compared to 2012, exceeding 2 percent of the total loan portfolio (roughly Kc45bn).


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