Banking statistics for January: is a recovery coming?
Commentary by Miroslav Zámečník, Chief Advisor of the Czech Banking Association
In last month's commentary we looked back (not only) at the past year, so the banking statistics for January are a good opportunity to look for a recovery in lending activity, an unmistakable sign that the whole economy is waking up. At the same time, we remain vigilant in monitoring the evolution of non-performing loans, as these have historically risen even after the economy has rebounded from the trough.
For household deposits, we have seen the annual growth curve decline over the past three years until it bottomed out in the 2022 half-year, when it rebounded to grow at an annual rate almost every month except January's high of 8.5%. Should macroeconomists' predictions of fairly brisk real wage growth this year prove correct, the curve should invert again and slide downward as household consumer confidence and the associated willingness to spend grow. Another factor undermining efforts to save and save will be lower interest rates on deposits: banks are projecting a fall in market rates in response to the CNB's monetary easing in the face of rapidly falling inflation. This should mark the end of an era of a strongly (by about half) increased savings rate, which characterises the behaviour of Czech households at times when they feel increased uncertainty and fear future developments;
If we look at the graph of the year-on-year dynamics of deposits of non-financial corporations, there is much higher volatility characterised by ups and downs of the curve, often very sharp. At the moment we see a decline in the pace in January, but it is impossible to draw conclusions from this as to whether this is the start of a trend. Signs of a recovery should rather be revealed by the development of companies' interest in operating or investment loans. In the first case, it would be a renewed inflow of orders and a need to replenish inventories (the negative change in inventories has dragged down Czech GDP for a number of quarters). What we see so far is a low volume of new business, while interest in euro-denominated loans persists, driven by interest rate differentials, where significantly lower rates in the euro have meant savings for export-oriented firms or businesses that have long been collecting payments in the European currency (for example, leasing commercial space and offices has long been a "euro thing" for larger transactions). The role of the interest rate differential is very clear from the chart: look at how strong the prevalence of koruna loans was still in June 2021, and how high their take-up was when the interest rate differential was just 0.3%. Now that the CNB has started to cut monetary policy rates, and the differential is narrowing again, it will be very interesting to see whether the interest rate differential will start to dominate again for loans in koruna. If not, this could be interpreted over time as one of the most conclusive confirmations of the hypothesis of the continuing "euroisation" of the Czech economy. This should already be visible this year.
Households should start to show more interest in borrowing as they feel that their financial situation allows them to do so. The latest CSO economic survey for February suggests that this could happen in the coming months, as sentiment improved for the second consecutive month in February. People are not worried about losing their jobs and are no longer concerned about rising prices. Meanwhile, we see caution about the appetite for large purchases over the next twelve months, and with falling interest rates evident in both mortgages and consumer credit, interest in borrowing could start to pick up more quickly.
In the meantime, however, the development of "non-performing loans", which have the ugly property that their share grows once the economy starts to revive after the shock has passed. Let us admit, however, that the past recession was, for example, atypical compared with the one that followed the global financial crisis. We can therefore see that it has not yet had any impact on the banks' loan portfolio, which remains as healthy as a turnip. In the case of non-financial corporations, the share is again at a new record high, at 2.63%. Households as a whole, at 1.28%, are a hundredth of a point off the record low. Consumer credit is above it by tenths of a percentage point. The trades are similar. And people who borrowed to buy homes are paying off their mortgages like clockwork.
Chart: non-performing loans are at or just above historical lows
Note: the year-on-year comparison of stock variables (loan stocks as of the date, not new business for the month) is distorted by the "Sberbank factor", which lost its licence last spring, so all loans, uninsured deposits and some insured deposits that former Sberbank clients initially kept at home dropped out of the banking statistics. For April 2023 and onwards, Sberbank's loan portfolio with a nominal value of CZK 47.1 billion appears in the banking statistics again at a cost of CZK 41 billion, as it was taken over by another bank in one contract. In a year-on-year comparison, this distortion will be particularly noticeable for loans until April 2024;