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In the first quarter of 2023, the net profit of banks and savings banks in the Czech Republic decreased by 2.4 billion CZK, reaching 21.12 billion CZK on an annual basis.

The Numbers

Czech banks, as of March 2023, recorded assets of 9.745 trillion Czech crowns, showing a growth of 840 billion crowns compared to the beginning of 2023, a growth of 9.4%. However, the growth in assets did not reflect in revenue growth, especially as the interest margin flattened. Revenues remained flat compared to the same period last year, decreasing from 15.6 billion crowns to 14.8 billion crowns in this first quarter of 2023, a decrease of 800 million crowns.

The Causes

“The profitability of the banking sector has been influenced year after year by a series of factors, from increased employee wage costs to lower dividend income or exchange rate fluctuations and asset revaluation. However, a significant role in the decrease in profitability has been played by the decrease in the interest margin. Although interest income itself continued to increase year over year, interest costs grew at a faster rate, leading to a 3.8% annual decrease in net interest income,” said Jakub Seidler, an analyst at the Czech Banking Association. The CNB report, which focuses on the developments and consequences of a high interest rate environment like this, highlights how high rates significantly impact the dynamics of passive interest for banks, which are forced to bear higher costs to retain depositors. The aforementioned factors resulted in an 11% annual decline in the profitability of the banking sector, which is expected given that banks benefited from the increase in rates in 2022 without incurring the costs of passive interest. In addition to interest margins, the bank profit was also affected by the tax on windfall profits imposed by the government. The revenue from the tax will be used by the government to cover extraordinary costs related to setting maximum energy prices. The tax is 60% of windfall profits, which are calculated as the actual taxable base minus the average cost of the same taxable base over the past four years, increased by 20%.

“From the announced extraordinary tax withdrawals, it can be understood that the state will collect less than previously expected. While the state previously hoped to collect 33 billion crowns from the banking sector alone, I now expect the total bank withdrawal to be in the lower billion range,” said Tomáš Cverna, an analyst at investment firm XTB ČTK. According to him, the expected extraordinary tax collection will be lower due to active interests.

PRAGA, REPUBBLICA CECA - 28 AGOSTO 2018: Ceco National Bank, CNB, Banca Centrale E Supervisore Del Mercato Finanziario Fotografia Editoriale - Immagine di storico, fronte: 124973831

Final Considerations

Since the Czech National Bank (CNB) has halted its cycle of interest rate hikes, banks and financial intermediaries have lacked growth impulses, added Cyrrus analyst Tomáš Pfeiler. He explains the causes of the decrease in bank profitability, identifying the main driver as the excessive overvaluation of deposits. Driven by intense competitive pressure, banks tend to increase deposit remuneration for clients, but this results in higher costs for passive interest. The increase in costs in a context where revenues from active interests, which come from lending, are slowing down due to rising rates, squeezes the interest margin and subsequently, revenues. Some banks have tried to respond to this decrease by cutting operational costs, typically through layoffs. It should be noted that what has been mentioned for the Czech Republic is valid and happening throughout Europe and America as well.

By Simone Orefice



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