The share of non-performing loans among households is falling, while the share among firms has risen slightly
Commentary by Miroslav Zámečník, Chief Advisor of the Czech Banking Association
Households and firms are sitting on cash, interest in new loans is still cautious.The Czech Banking Association publishes a series 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/category/loans-and-expenses you can find monthly updates of selected data from banking statistics published by the Czech National Bank.
Although we do not yet have the data for December, the banking statistics for November published by the Czech National Bank provide some insight into the past year.
Although we do not yet have the data for December, the banking statistics for November published by the Czech National Bank provide some insight into the past year.
November brought a break in the series of declining corporate non-performing loan ratios, rising to 2.76% from October's absolute all-time low of 2.61% in the entire time series since January 2002. Even after this dip, however, this is the third best figure ever achieved. Given the confirmed second recession, describing the letter W, and the generally rather pessimistic economic sentiment, no one expected that the quality of the corporate loan portfolio would improve further in the second half of 2023. Notwithstanding inflation and the increase in bank balance sheets over the past 10 years, there are half as many non-performing loans to households "in the system" today as there were in November 2013. For corporates, the loan balance is 53% higher than it was a decade ago, but the share of non-performing loans was 7.15% then, so there are almost 30 billion fewer loans than then.Bankers are understandably comfortable with the extremely low share of non-performing loans, defined as 90 days or more past due, and are happy to boast about it. It is remarkable that business representatives from the non-financial sphere do not comment on the extremely low share of "bad" loans in almost all business sectors, nor on the fact that non-financial enterprises have deposits of almost one and a half trillion crowns in banks. Taken as a whole, they could pay off all their credit obligations to the banks and still have around CZK 100 billion left over. Of course, loans and deposits are unevenly distributed in the population, even in the corporate sector, but nevertheless the excess of deposits over loans is so significant that even in the corporate sector there are entities whose financial performance is driven by interest income that exceeds the interest costs of loans. The Czech economy's key manufacturing industry, which is also the most exposed to international competition, had CZK 208 billion in CZK deposit accounts and another CZK 144 billion in foreign currency deposits at the end of November 2023, while it owed CZK 290.8 billion in loans, an overhang of over CZK 60 billion. At 4.37%, the share of non-performing loans in manufacturing industries is higher than in non-financial corporations as a whole, but in a time comparison it is very good: five years ago it was 6%, at the height of the boom; the current incidence of non-performing loans is not at all comparable to ten years ago, when it was 12.8%.
Firms and households are sitting on deposits, borrowing little, and banks are financing the state
Something remarkable has happened in the Czech economy since the pandemic of covidence: firms, trades and the population as a whole are showing a surplus of deposits over loans, which they are repaying exceptionally well. The only one that is massively indebted is the Czech state, whose bonds are bought by banks: at the end of November, their share of total holdings of domestic government bonds was 40.59%, or CZK 1 190 billion in absolute terms. By issuing bonds, the state covers its deficits, with a significant part of the deficit due to transfers to the population and the corporate sector. In the past, not so long ago, banks collected deposits from the population (often short-term) and, as part of their most important national economic function, transformed them into loans, typically with longer maturities, which were used to finance investments by both businesses and the population (mortgages). The household sector was typically in a high "asset balance", with much more money on deposit than it owed to banks, while firms traditionally owed much more, and held only limited capital in the form of cash on deposit. It is difficult to explain the current anomaly other than as a consequence of the high degree of uncertainty that has persisted for years, which has discouraged firms from investing largely financed by debt, and encouraged cash hoarding. Certainly, the rise in interest rates has also played its part in dampening demand, although until the spring of 2023, the real interest rate was negative given the massive inflationary surge in 2021-2022, especially in those cases where 'long' fixed rates are used in financing. The inflation 'fog' deepened the information asymmetry, which firms took advantage of to pass on increased costs to clients and increase profit margins wherever market conditions allowed. Non-financial corporates now have CZK 954 billion in non-term deposits, but two years ago it was a staggering CZK 1.163 trillion - since then they have moved some of that money into fixed deposits at more favourable rates.Non-performing residential mortgages are now close to the absolute lows reached this year at 0.6%, and consumer loans comprise just 3.88% of non-performing ones, also a historic high. While real wages have fallen for two years, unemployment was and is the lowest in Europe, much lower than in the last double-dip recession of 2012, and it is the loss of jobs and the associated loss of income that leads to difficulties in repaying obligations. Those who had fixed mortgages during the record love-in have effectively spent a declining proportion of disposable income, which has been rising in nominal terms, on repayments. Although refinancing will continue to be uncomfortable for many households next year, as five-year fixes on mortgages will at best start with a four, not a two as in the first fix, the market is nevertheless starting to revive;
Something remarkable has happened in the Czech economy since the pandemic of covidence: firms, trades and the population as a whole are showing a surplus of deposits over loans, which they are repaying exceptionally well. The only one that is massively indebted is the Czech state, whose bonds are bought by banks: at the end of November, their share of total holdings of domestic government bonds was 40.59%, or CZK 1 190 billion in absolute terms. By issuing bonds, the state covers its deficits, with a significant part of the deficit due to transfers to the population and the corporate sector. In the past, not so long ago, banks collected deposits from the population (often short-term) and, as part of their most important national economic function, transformed them into loans, typically with longer maturities, which were used to finance investments by both businesses and the population (mortgages). The household sector was typically in a high "asset balance", with much more money on deposit than it owed to banks, while firms traditionally owed much more, and held only limited capital in the form of cash on deposit. It is difficult to explain the current anomaly other than as a consequence of the high degree of uncertainty that has persisted for years, which has discouraged firms from investing largely financed by debt, and encouraged cash hoarding. Certainly, the rise in interest rates has also played its part in dampening demand, although until the spring of 2023, the real interest rate was negative given the massive inflationary surge in 2021-2022, especially in those cases where 'long' fixed rates are used in financing. The inflation 'fog' deepened the information asymmetry, which firms took advantage of to pass on increased costs to clients and increase profit margins wherever market conditions allowed. Non-financial corporates now have CZK 954 billion in non-term deposits, but two years ago it was a staggering CZK 1.163 trillion - since then they have moved some of that money into fixed deposits at more favourable rates.Non-performing residential mortgages are now close to the absolute lows reached this year at 0.6%, and consumer loans comprise just 3.88% of non-performing ones, also a historic high. While real wages have fallen for two years, unemployment was and is the lowest in Europe, much lower than in the last double-dip recession of 2012, and it is the loss of jobs and the associated loss of income that leads to difficulties in repaying obligations. Those who had fixed mortgages during the record love-in have effectively spent a declining proportion of disposable income, which has been rising in nominal terms, on repayments. Although refinancing will continue to be uncomfortable for many households next year, as five-year fixes on mortgages will at best start with a four, not a two as in the first fix, the market is nevertheless starting to revive;
Share of non-performing loans (%)
Share of non-performing loans in the household segment (%)
New loans to non-financial corporations
Revival in new loans will come with falling rates and improving business sentiment
The total stock of corporate loans came to CZK 1,339 billion, down by CZK 14.8 billion compared to October, of which foreign currency loans accounted for almost CZK 666 billion, but this is down by CZK 17 billion month-on-month. Given the previous development, when, on the contrary, due to the interest rate differential, loans in foreign currencies, which are particularly attractive for exporters with foreign currency collections, grew dynamically, the share of foreign currency loans reached almost half. However, with the falling interest rate differential between the euro and the koruna, the attractiveness of euro-denominated loans is declining, and if the CNB cuts monetary policy rates earlier and faster than the ECB, this trend will accelerate further.As already mentioned, a significant recovery in corporate lending can only be counted on as domestic and foreign order books become better filled.The share of non-performing loans will rise as firms and households begin to feel the effects of positive real interest rates more strongly, but there will be no significant problems in the year ahead.Not only falling inflation and rising real incomes of the population, but also the drawdown of part of financial savings could contribute to the recovery of domestic demand: households alone had CZK 2.616 trillion in non-term deposits at the end of November, essentially available for immediate use, a hundred billion more than a year ago. Banks, exceptionally well capitalised, have the capacity to lend to the Czech economy at a much more dynamic pace than in the past two years. Note: year-on-year comparisons of stock figures (loan stocks to date, not new business per month) are distorted by the "Sberbank factor", which lost its licence last spring, so that 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;
The total stock of corporate loans came to CZK 1,339 billion, down by CZK 14.8 billion compared to October, of which foreign currency loans accounted for almost CZK 666 billion, but this is down by CZK 17 billion month-on-month. Given the previous development, when, on the contrary, due to the interest rate differential, loans in foreign currencies, which are particularly attractive for exporters with foreign currency collections, grew dynamically, the share of foreign currency loans reached almost half. However, with the falling interest rate differential between the euro and the koruna, the attractiveness of euro-denominated loans is declining, and if the CNB cuts monetary policy rates earlier and faster than the ECB, this trend will accelerate further.As already mentioned, a significant recovery in corporate lending can only be counted on as domestic and foreign order books become better filled.The share of non-performing loans will rise as firms and households begin to feel the effects of positive real interest rates more strongly, but there will be no significant problems in the year ahead.Not only falling inflation and rising real incomes of the population, but also the drawdown of part of financial savings could contribute to the recovery of domestic demand: households alone had CZK 2.616 trillion in non-term deposits at the end of November, essentially available for immediate use, a hundred billion more than a year ago. Banks, exceptionally well capitalised, have the capacity to lend to the Czech economy at a much more dynamic pace than in the past two years. Note: year-on-year comparisons of stock figures (loan stocks to date, not new business per month) are distorted by the "Sberbank factor", which lost its licence last spring, so that 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;
Disclaimer: Text translated automatically, excuse any imperfections.