Announcement: Moody's maintains stable outlook on Czech banking system amid supportive operating conditions

Moody's Investors Service is maintaining its stable outlook on the Czech banking system, reflecting the rating agency's view that a favourable operating environment will support the country's banks. The outlook expresses Moody's expectation of how bank creditworthiness will evolve in the Czech Republic over the next 12-18 months.

Moody's report, entitled "Banking System Outlook: Czech Republic: Economic and Employment Growth Will Support Loan Demand," is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.

"Household spending, rising employment and low funding costs in the Czech Republic will support debt servicing and credit demand into 2018, creating favourable conditions for the country's banks," says Arif Bekiroglu, Assistant Vice President and Analyst at Moody's.

The rating agency expects real GDP growth to accelerate to 2.7% in 2017 from 2.3% in 2016 on the back of strong private consumption and a new cycle of European Union-funded investment, before moderating to 2.4% in 2018, as noted in February 2017. Moody's does not expect a material adverse impact from the central bank's exit from the euro peg because of supportive economic conditions and the structural features of the banks (noted in todays' research).

Moody's expects nonperforming loans to fall marginally to 4.5% of total loans over the next 12-18 months -- from 4.8% in 2016 -- one of the lowest levels in Central and Eastern Europe. Loan performance -- though benefiting from strong operating conditions -- will also be tempered by new delinquencies as loans mature after a period of rapid growth and sporadic repayment problems to emerge.

Robust capitalisation should decline modestly, according to the rating agency. "Lower profits, generous dividend payouts, and negative valuation losses on Available for Sale securities as the local Czech currency appreciates will likely drive a decline in capital for the country's banks," explains Mr. Bekiroglu.

Market funding will increase moderately as low interest rates and rising household spending translate into lower savings.

Finally, profitability, while strong, will likely come under pressure as a result of low interest rates, inter-bank competition, an expected rise in funding costs, and lower fee and commission income. This could push banks to focus on higher-yielding (and riskier) small business and unsecured consumer loans, particularly in light of the improving economic outlook.