The Banking Environment of Czech Republic and Remaining Opportunities for Foreign Banks

Diplomarbeit von Pauel Kroha

Abstract:

The Czech banking sector has undergone a fairly dramatic development due to the large number of non-performing loans, which remain a problem for the banking industry.

The industry is now driven by restructuring as a consequence of privatisation. There is a strong domination of Western banks in the market, which are successfully focusing an the banks' profitability. Efficiency is increasing through the implementation of electronic banking, associated with the closure of bank branches. The banks show a strong customer orientation, which facilitates a change in their income structure: moving away from income generated by interest towards that generated from fees and charges. Competition between the Czech banks is beginning to show similar patterns to competition in the Western markets.

Although the main opportunities for entering the Czech banking market, including privatisation, are gone, some remain. The emergence of the competitive room is a result of the commonly pursued strategy of large, universal banks. These niche markets can be accessed more easily by foreign banks that take advantage of their existing structures, which in turn leads to better economies of scale.

One segment with high potential is the property market. The economical development, together with the likely EU accession, facilitates high stability. Particularly suitable is the commercial properties sector. A bank carrying out activities in this market would operate at a lower credit risk than others.

Retail opportunities result from the excess liquidity in the Banking industry. The high volume of primary deposits could be directed towards asset management services, such as life insurance and private pension. Famous foreign brands stand a better chance of winning peoples' trust. At the moment, there are too many restrictions preventing the banks from carrying out these activities. This will change with the Czech Republic's EU accession. There is an emerging personal loan market with high margins but a credit-rating agency for individuals is missing.

The forthcoming EU integration will decrease the general risk in both corporate and private lending. The stable and growing economy provides a good basis for the expansion of banking activities and exploitation of the emerging market premiums provided they are emerging.

Table of Contents:

	List of Abbreviations	5
	List of Figures and Tables	5
1.	Introduction	6
2.	Macroeconomic Conditions	7
3.	Development of the Banking Sector	10
3.1	Emerging of the Czech Banking Sector	10
3.2	Role of Banks During Transition	10
3.4	Banking Crisis	14
3.5	CNB Interventions	15
3.6	Dealing with Bad Loans	17
3.7	Czech Banks and Their Privatisation	18
3.7.1	Reasons for privatisation	18
3.7.2	Privatisation Process	19
3.7.3	Evaluation of the Outcomes	21
4.	Current Issues	22
4.1	Concentration and Competition	23
4.2	Customer Focus	24
4.3	Profitability	25
4.4	Risk	28
5.	Opportunities for Foreign Banks	29
5.1	Foreign Banks	29
5.2	Foreign Banks' Competitive Position	30
5.3	Remaining Business Opportunities	31
5.3.1	Wholesale	32
5.3.2	Retail	35
5.3.3	Existing Structures	37
6.	Conclusion	38
7.	Bibliography	40
7.1	Sources of Primary Research	40
7.2	Sources of Secondary Research	40
8.	Appendices	42
8.1	Survey	43
8.2	Interviews	54
8.3	Credit Rating	65