Bank keeps its model traditional

The Czech banking sector, which is mainly owned by foreign companies, was largely unscathed by the recession, thanks to a tradition of conservative practices. The domestic sector's net profits were up 18 percent in the first half of 2010, and last year the banking sector saw profits grow nearly one-third, according to data from the Czech National Bank, to 60.2 billion Kč. Nevertheless, the volume of unpaid loans (loans unpaid for longer than 90 days) have been on the rise, and rose more than 16 percent in the first half of 2010, to 134.7 billion Kč. In the Czech Republic, there are 40 banks and branches of foreign banks: 17 are banks, five are building societies and 18 are subsidiaries of foreign owned banks.

The Prague Post caught up with Česká spořitelna (ČS) CEO Gernot Mittendorfer at the Social Business Tour event in Prague, which discussed social businesses, nonloss and nondividend entities. ČS is a domestic bank, established 185 years ago, that was acquired by Erste Group of Austria in 2000. Today it has 660 branches and 5.3 million customers. It also has the largest market share of retail banking in the Czech Republic.

The Prague Post: Is ČS incorporating the idea of social business into its practices?

Gernot Mittendorfer: It's something that's just starting. We're sponsoring this conference, and we're supporting it and seeing how this all develops. The Erste Group has a subsidiary that was created just for this, and they've started some projects in Bucharest already.

For us, it's a matter of looking at our roots and our history. Our bank was founded in 1825, and if you looked at its beginning and compared it with today, it'd be similar to the idea of social business. It's part of our history, but at the same time, it's a very modern concept.

TPP: You took over as CEO at ČS in 2007. How have you seen the retail banking market change since then?

GM: Until 2008, we saw a spectacular growth rate. Starting in early 2009, late 2008, we started to feel the impact of slower development, but still growth, in the retail business, and that slow growth rate continues even now. But I've seen the situation stabilize recently. Unemployment has stabilized, and I'm optimistic about the development in this country. We're not going to see the spectacular growth rates of 2005, 2006 and 2007 very soon, but we're doing well, especially compared with other countries.

TPP: On the other side, how has corporate banking fared?

GM: If you look at the overall corporate banking sector, lending has of course been reduced. Businesses have taken the past two years to increase efficiency and pick up orders within their capacity. There has not been much pickup in lending up to now, but thanks to conservative financing, we've seen solid equity ratios, and it's been reflected on the overall market on a year-to-year basis that lending has dropped. I think we've stabilized, and I can see it slightly picking up as we go forward. Corporate customers have been flexible and fast in their reactions, and now they're starting to profit from that.

TPP: The Czech banking sector, which is relatively conservative, was nevertheless not as badly hit as in other countries. Has that helped the country after the crisis?

GM: The advantage is our banking sector had kept it very stable and rock solid over the past two years. We've had very high capital ratios in funding, a lot of liquidity and there was no dependency on international markets, and this was a stabilizing factor for the whole country. We didn't see any big bubbles, there were no sub-prime areas, and the prudent practices we had before proved to be the best solution for keeping stable after the crisis.

TPP: The EU has proposed and will likely pass stricter regulations on the European financial sector. As a private bank, are you speaking to the Czech National Bank (ČNB) or other authorities on the matter?

GM: We're not only speaking to the ČNB, but we're speaking to all the parties involved because there will be new regulation coming, and there will be much tighter regulation. What has me a little worried is that there seems to be a mixing up of the causes of the crisis, and trying to establish regulations that go in this direction will have serious consequences in certain areas, and I'm not sure the European decision makers are aware of all these consequences.

TPP: By consequences, do you mean it will hurt the competitiveness of the European banking sector?

GM: That's one topic, but I don't think it's the most important one. The big topic is in which direction the system will go. Look at us, for example: We're just doing customer business; we're not trading. You have to look at the different performance areas in banks, their business models. With us and with similar banks, we focused on the customers throughout the crisis, and that proved to be a stable element in the overall economy, and now they're putting us in the same basket as everyone else. I don't think that's the right step moving forward. We're missing a big chance in this new regulation to really differentiate who is financing individual customers and helping small to midsize companies and who is active in the areas of investment banking transactions.

TPP: Is an important part of your strategy financing SMEs?

GM: We focus on the whole retail market but also on the commercial customers. SMEs are the backbone of every economy, and they are a job engine. You support them, and you're doing a good thing for the whole country.

TPP: What is ČS's strategy going forward?

GM: We are continuing to work on our efficiency, and providing attractive products and services for our customers. In terms of different customer segments, we're working on special services for customers who are requesting more and more services.

TPP: How does the Czech retail banking market compare to those in other countries?

GM: Generally, if you look at the Czech market - and the Slovak one is similar - you have more deposits than loans. There has been steady growth with more customers using credit cards and Internet banking. From that perspective, we're approaching western European standards in terms of how ratings institutes look at us. The Czech population is very conservative, so they're not taking out loans at the same rate as other countries. There is a very low indebtedness in the households reflecting the overall approach.

TPP: As a large, comprehensive bank, are you seeing more competition from smaller outfits like mBank that offer only the bare minimum of services in exchange for no fees?

GM: We have been seeing these market participants offering a very limited range of services. They are not burdened by heavy costs, but there's nobody investing in any kind of services. We have 660 branches in the country; we're basically providing infrastructure for the whole Czech Republic. There are always these kinds of participants that focus only on very small segments and can offer aggressive prices because they're not paying any of the costs for the infrastructure. This is a development we see in every country, and now we're seeing it here.

Claire Compton can be reached at
ccompton@praguepost.com