Czech banking sector in better shape, still room for improvement

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The Czech banking sector underwent rapid development following the fall of Communism in 1989. However, within a few years, it became apparent that various individuals and groups took the banking business not as a serious entrepreneurial activity but as a quick way to make big money, benefiting form an insufficient regulatory framework. Besides that, there was also a political demand for banks to finance the country's unprecedented economic transition including large-scale privatisation regardless of the inherent risks of the process. The second half of the 1990s was marked by a wave of bankruptcies of banks due to an enormous burden of bad loans and under-capitalisation.

According to a recent analysis by the international ratings agency, Fitch Ratings, the Czech financial sector is in much better financial shape than two years ago. The current situation in the sector - now largely controlled by foreign banks - has improved significantly following extensive consolidation and restructuring and the problems of insufficient capital and bad loans have been largely resolved. The legal and regulatory environment has improved in line with government efforts to make the Czech Republic ready for membership of the European Union. The bankruptcy law has also been enhanced.

However, the agency reports that many banks are only marginally profitable and that the earnings outlook remains weak. Good corporate lending opportunities are hard to find, so many banks are focusing on retail banking in order to increase profits.

Vladimir Tax spoke to the author of the study, Libor Slechta, research director at Fitch Ratings Financial Institutions Group.