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10 Questions

with Gernot Mittendorfer
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February 6th, 2008 issue

Jan Přerovský/THE PRAGUE POST
Mittendorfer says the banking sector here remains "stable and robust" amidst turmoil in Western financial markets.
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THE MITTENDORFER FILE

Job title: CEO and chairman, Česká spořitelna
Age: 43
Nationality: Austrian
Previous position: CEO, Salzburger Sparkasse Bank
Education: Law Studies, University of Linz; MBA, Webster University, Vienna

Gernot Mittendorfer took the reins of Česká spořitelna, one of the country’s largest banks, at an auspicious time in 2007, scant months before the U.S. subprime crisis that came to dominate international finance for the rest of the year. Unlike some of its Western neighbors, the Czech Republic has remained relatively unaffected by the subsequent credit crunch. Mittendorfer talks to The Prague Post about slowdowns in the mortgage market, euro adoption and the crisis of confidence in banking.
➊ Let’s start with some recent news. An interview with one of your deputy directors mentioned that the bank would be tightening its conditions for mortgages. Does the market have much risk of default?
I wouldn’t say there are mortgages of a riskier type in the country. You have to look at the mortgage business in the overall context. We’ve seen a mortgage boom in the last years. We announced last autumn that, due to some tax changes, including the rising value-added tax (VAT), we think there was some pre-stocking last year. This year will have a slower start.
Overall indebtedness in the Czech Republic is relatively low in comparison with international levels. What changed in the last year are interest rates. They went up, so mortgage rates naturally went up, and that will be reflected in the overall development. Last year was astounding in terms of growth rates in the overall market. This year, we’ll see slower development, but there will still be a growth rate that’s higher than in other countries.
➋ What’s your bank’s position on government tax reforms?
The reforms have positive and negative impacts, as do all reforms. Overall, it’s clear that if the personal tax rate is lower, then people will have more in their pockets. But, on the other hand, you have an increase in the VAT that’s adding to inflation. We’ve seen some high inflation rates recently. So that’s a negative. In the end, we expect the reform will have a positive impact, though.
➌ The large U.S. and European banks continue to announce losses stemming from the subprime crisis, though local banks have been largely immune. What way do you most expect the crisis to impact the Czech Republic?
The banking sector in the Czech Republic is stable and robust. I doubt there will be any major development or impact here. The news flow was definitely negative in the last couple of weeks. We’ll see whether this will have an impact on the European economy. That’s the biggest question for the Czech Republic. The U.S. economy has a smaller impact on overall development. Generally, the Central European economies have shown, last year and the year before, strong growth rates. We were expecting a bit of a slowdown this year but still a high level of growth in comparison with Western Europe or the U.S. So I don’t think there will be any sort of “shockwave” hitting the country. We will see an effect in various segments, but not a major impact.
➍ Many have attributed the subprime crisis to banks’ use of increasingly complex and opaque financial instruments, which were used to buy securitized bundles of mortgages. Do we need more regulatory oversight of such instruments?
What we’ve seen in the last couple of months is something completely new. Yes, products have gotten more complex, but in past years, in any crisis situation — you’d have markets going up, markets going down — we’ve never seen this kind of missing trust in the system. There’s been a huge impact on liquidity.
Due to this, once everything is cleared up, I expect this can’t happen again to such an extent. Every market participant will have to react and behave in a different way. You will always have to have in the back of your mind the liquidity situation. It’s not a given anymore that markets will supply endless liquidity.
➎ So you think the market itself can correct for these excesses?
It will take some time until everything is corrected. I think most market participants underestimated what could happen. Now they realize what can happen, and this will change behavior in the future.
Generally investors want to know where they are investing and in what markets and in what products. It will be much more difficult in the future to have very complex products. The important thing is you [as a bank] need to understand what products you’re offering and the customer needs to understand what product he or she is buying. It’s a simple thing. As long as this rule is followed, I don’t see a big issue.
➏ Some fault must also be with ratings agencies like S&P and Moody’s, which rated many of these mortgage-backed securities highly, helping lead traders’ investments. Are their reputations tarnished?
The ratings agencies will have to learn lessons from this as well. There will be a new attitude for ratings agencies because they now understand the liquidity element. I’m pretty sure they will update their models and the ratings they apply to various products.
One thing you have to keep in mind is that we’re coming out of an era where you’ve seen no large problems in the credit markets for a relatively long period of time. So if you look at the long-term perspective, it was clear that a correction would come sooner or later. This is just following the economic cycles.
➐ Moving to another looming issue, what’s your take on euro adoption?
If you have your own currency, you have some means [to control the economy] in your hands. This is what we’ve seen in the last couple of years, where the Czech National Bank set interest rates on the crown lower than the euro. When you have monetary policy in your own hands, you can react to developments within your country.
When you join the common currency, you have to follow what the rest of the countries are doing, and this sometimes favors some countries and disfavors others. For example, if you look at the development of Ireland in the last couple of years, they had a booming economy with relatively low interest rate levels. If they had their own currency, they definitely would have reacted differently.
Overall, it’s a question of when the economy converges with the average of the euro economies. Then the country can join without any major impact. We’ll see how the introduction of the euro in Slovakia [in 2009] works out, and then we’ll have more experience.
➑ There remains a limited but growing amount of investing among domestic bank clients. As investing in mutual funds and similar vehicles expands, creating increased revenue for the bank, can we expect ČS to lower its fees on retail banking?
Yes. It’s a normal development in every market. The importance of transaction fees goes down as the economy becomes developed. The importance of investment products — pension funds, life insurance, whatever — is growing.
You will see some countries that have market habits develop in a certain area. So you’ll get something for free in the banking system in one country that you have to pay for in another country. At the end of the day, there will be various price models in various countries. We haven’t seen any convergence in these, even in euro countries.
➒ What are you looking for out of the currently discussed pension reforms?
Everybody agrees that reform is necessary. There are various alternatives that we’ll see. There is a good chance for us to help introduce a sustainable pension fund system into the Czech Republic. We have a pension fund subsidiary in our financial group that is successful in the market and shows positive development in terms of returns it delivers to unit holders and growing market share. Hopefully, the government will let the banking sector get involved in building a long-term, stable system.
➓ Czech banks have had to adapt to a succession of directives from the European Union. Do you expect any more changes in the near future?
Being in the EU has certain consequences. One after another we’ve seen the MiFID [Markets in Financial Instruments Directive], the single European payment system and Basel II. That was a heavy burden on the banking system. I hope we have a period with less change, because every change in underlying legislation has caused large investments in our system. I hope we’re entering a quiet period for the next few years.
Want your manager to answer our 10 Questions? Contact Paul Voosen at pvoosen@praguepost.com


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