Households and businesses are sitting on cash. Repayment continues to be exemplary.
Commentary by Miroslav Zámečník, Chief Advisor of the Czech Banking Association
The Czech Banking Association publishes a number of economic indicators in the CBA Monitor, including the main parameters of the development of loans and deposits in the domestic banking system. Thus, at https://www.cbamonitor.cz/kategorie/uvery-a-vklady you will find monthly updated selected data from banking statistics published by the Czech National Bank.
The December banking statistics are also an opportunity to look back (not only) at the past year. This time, we focus mainly on the development of "new business" on both the deposit and loan sides, and look at it through the prism of the entire decade.
The long time series allows us to interpret the development in context and to capture more significant changes.For deposits, we can see a clear pandemic effect, with deposits leaving the trend curve from February 2020 onwards and monthly volumes of new business rising sharply due to uncertainty about future developments, but also due to the closures that have caused deferred consumption. At the national economy level, we see a mirroring of the same phenomenon in the national accounts statistics - a substantial increase in the savings rate, which is about half the long-term average (18% versus 12%).
The subsequent calming of the situation has led to a lower propensity to make additional deposits (new business), but total savings have continued to rise (Chart 2). The rise in interest rates from the second half of 2021 onwards was reflected in a change in the time structure of deposits, in favour of better-performing deposits with notice periods. After the outbreak of the war in Ukraine, monthly volumes of new deposits began to rise, a trend that has continued to date;
Chart 1: Crown deposits of households - new business
Chart 2: Development of deposits in the household sector
Even more remarkable is the development of new business and total deposits
in the case of the corporate sector. We can clearly see a sharp increase in overnight
deposits after the pandemic, followed by a strong rise in deposits
of fixed maturity deposits at the expense of short-term deposits after corporates were
were able to negotiate better interest rates. On the stock variable of total volume
of deposits, we see a rise where the explanation lies in both the ongoing
uncertainties that dampen investment activity, but also in the good profitability
at the level of non-financial corporations as a whole. The Ministry of Finance in its latest
Macroeconomic Forecast forecasts a decline in the corporate profit rate in this
year and, conversely, with a rise in long-suppressed real wages, where there should be
turnaround, which should feed through into the ability to generate spare cash
ending up in bank deposit accounts.
Chart 3: Deposits of non-financial corporations - new business
Chart 4 :Deposits of non-financial corporations - total volume
Corporate and household loans
Economic growth and improved confidence in future developments should be reflected in rising demand for loans, which should be further accelerated if interest rates fall significantly. In the case of companies, the development of demand for loans in euros is very interesting, as these have long been disproportionately cheaper for companies with foreign currency sales. What do the charts tell us in this respect? The ten-year time series clearly shows how demand for borrowing has declined over the past two years, with overdraft and revolving credit volumes at their lowest levels in a decade. What has been very successful, on the other hand, given the large interest rate differential between the euro and the krona, has been overdrafts and revolving loans in euro (Chart 6), many times higher than at any time in the past decade.
Chart 5: Crown loans to corporates-new business
Chart 6: Euro corporate loans - new business
Chart 7: Situation of koruna loans to non-financial corporations
Chart 7 is remarkable if we consider that the gross domestic product at current prices, at CZK 4.1 trillion, was significantly lower than last year, when it reached around CZK 7.3 trillion. In other words, the corporate sector is making do with a much lower volume of credit, is largely able to finance itself from its own resources and still generates a large volume of deposits (see Chart 4), so that they have more money on deposit than they owe.
If it were not for household demand for credit, banks would have been much worse off.
In other words, the growth in total lending depended partly on corporate interest in euro loans, but mainly on how business with households, where housing loans play a dominant role, went. Recognise that this is an incomparably different rising curve (Chart 8). True, the evolution of new business reveals a considerable cyclical swing related both to the fall in real household incomes and to the rise in interest rates, which have greatly dampened demand for housing loans in particular. The relaxation of mortgage lending rules and a slight decline in house prices is bringing a gradual recovery, but the volumes of new business from that very anomalous pandemic year of 2020 will not be repeated immediately. He probably won't repeat for a very long time, I mean: let's hope. In fact, such a jump cannot be considered healthy and desirable. Fortunately, this boom did not last that long and did not meet with other negative factors such as rising unemployment that would have made steep curves in business produce steep rises in non-performing loans;
Chart 8: Evolution of total lending to the household sector
Chart 9 New business in the household sector: the boom of 2020 will not be repeated immediately
Chart 10 Payment performance excellent: non-performing loans still at historic lows
December brought a return to an all-time low of 2.61% of non-performing corporate loans for the entire time series since January 2002. In the case of households, several months last year were better, but by a slight margin of second place after the decimal point. While this is a rear-view mirror, there is no indication yet that households' ability to repay will deteriorate going forward with real incomes expected to rise and unemployment still very low. It will be a bit more tense for businesses, but I daresay that there will not be any deterioration in the share of non-performing loans of a few percentage points this year either.
Note: the year-on-year comparison of stock figures (loan stocks to date, not new business per 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 up to April 2024.