Banking statistics for February: the optimist will find his reasons
Commentary by Miroslav Zámečník, Chief Advisor of the Czech Banking Association
In last month's Commentary, we looked for signs of a recovery in lending activity, which is an unmistakable sign that at least in some sectors of the economy times are looking up. For example, falling interest rates and stagnant house prices should lift interest in mortgages, along with lower interest rates on deposits should reduce the incentive to build up savings, and consumer credit should rise. If interest in corporate loans, both operating loans for the purchase of inventories of materials and components and investment loans, were also rising, it would be a win-win situation. Not everyone is doing well, so it continues to be worth monitoring developments in non-performing loans, as these have risen in the past even after the economy has rebounded from the bottom.
Let's see if February's data confirms the hypothesis.
Year-over-year growth in business loans was the highest at 10.6%, followed by consumer loans at 8.5%, while housing-related loans were up 4.2% year-over-year. In the case of new consumer loans, we see the highest volume in three years in February. It's worth remembering that interest rates on this type of bank lending have not risen dramatically in the previous period, and are now, at 9%, at the same level as they were in June 2022. Interest in mortgages is also reviving as they gradually become cheaper, but they are still very far below the records set at the start of the decade in terms of volume, and approaching that era is not imminent.
Corporate loans in euros now have the same volume weight in new business as those contracted in crowns, with an interest rate differential of just over two per cent, much narrower than in the years when interest in euro loans grew very dynamically. It can be assumed that it will continue to decline and that as koruna rates fall, interest in koruna loans will rise again; this will be countered by the continuing "euroisation", especially of export-oriented companies. The time structure of loans is interesting, where interest in loans seems to follow the inverse shape of the yield curve, with short maturities being more expensive. Thus, short-term loans increased by less than 2.4% year-on-year, while the dynamics of loans with maturities between one and five years is very high (+26.1%), and long-term loans with maturities over five years increased by a solid 10.6%. The demand for long-term loans financing investment projects, especially in the manufacturing industry, awaits a more promising development of the order book, which is so far modest for both domestic and foreign orders.
Development of the main segments of the credit market (year-on-year, %)
Yield curve for government bonds (%)
New loans to non-financial corporations
What does it look like for deposits, where a decline in their interest rate and a more optimistic mood should lead to a gradual return of the savings rate to the long-term average?
For household deposits, we have seen the annual growth rate curve decline over the past three years, reaching a trough in the first half of 2022, when it rebounded to grow at an annual rate almost every month until it reached 8.5% in January, and remained at this high level in February. While this year's expected real wage growth is already translating into a rebound in consumer demand and sentiment, it remains to be seen when it will take root firmly enough for households to shift into an outright willingness to spend, and save less. This gradual change in behaviour may have a quite noticeable impact on macro numbers from private consumption to GDP. Meanwhile, the CBA forecast panel is much more optimistic in its median estimates than the CNB, so we will see who "got it right" in the coming months.
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. We are currently seeing a decline in momentum from December in the first two months of this year, but we will see the beginning of the trend again in the next few months.
Non-performing loans- still incomparably better than in past cycles
Although we know that the share of "non-performing loans" may be rising, the economy is showing unmistakable signs of recovery as "the weak pieces eventually throw in the towel". However, after 2020, thanks to the massive bailouts that have indebted the state, the recession has not taken its toll on banks' loan portfolios as it has in previous cycles. Simply put, the loan portfolio of banks operating in the Czech Republic remains as healthy as a turnip. At 2.60%, the share of non-financial corporates is seven hundredths of a percentage point below the absolute minimum. Households as a whole are a tenth of a percentage point above the minimum, driven by consumer credit. Mortgages continue to be paid off like clockwork.
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;