1. AMCHAM-ICEG Conference on the expected effects of the EU accession on the Visegrad countries The Czech Republic's Banking Sector PhDr. Zdeněk Kudrna, e-Merit Presentation prepared for the AMCHAM-ICEG Conference on EU Accession Budapest, 20-21 March, 2003

2. AMCHAM-ICEG Conference on the expected effects of the EU accession on the Visegrad countries Introduction  The EU accession will not be a shock as all important changes already took place. EU is the main trading partner for the Czech economy Czech banks are stabilized and well integrated EU based owners now dominate Czech banking sector Regulatory framework is harmonized  Some transition related factors cease only after accession Weaker legal infrastructure State controlled work-out of past non-performing assets Stabilization and improved capacity of regulators

3. AMCHAM-ICEG Conference on the expected effects of the EU accession on the Visegrad countries Growth effects  The expected growth in 2001-2004 is around 10% for both deposits and credits. Supply side effects: new products and distribution formats based on the know-how transfer from foreign parent banks. Increased competition. Demand side effects: economic growth and convergence of the consumer patterns to the European ones. Fastest growth is expected in consumer loans segment: 20% in 2001-04.  Credits Deposits

4. AMCHAM-ICEG Conference on the expected effects of the EU accession on the Visegrad countries Foreign trade and exports  Despite excess liquidity the Czech banks do not export their funds; instead they invest them in government papers. Czech banks mobilize more funds the they can allocate domestically (client deposits = 188% of client credits).  Exports are restrained by foreign exchange regulations, lack of experience and falling interest rates in EU.  The international competitiveness is hardly relevant to the Czech universal banks. The pressure on productivity and efficiency improvements comes primarily from parent multinational financial groups.

5. AMCHAM-ICEG Conference on the expected effects of the EU accession on the Visegrad countries FDIs and privatization  FDIs were associated with the privatization in 1998-2001. There are hardly any opportunities left. The Czech banks now belong to the EU based financial groups (Societe Generale, KBC, Erste Bank, Raiffeisen Bank, HVB + GE Capital Services).  Accession prospects reduced the country risks and improved regulatory environment, which in combination with state bail outs, to attract credible strategic investors.  Strategic investors restructured banks up to European standards. Equity of the banking sector Assets of the banking sector

6. AMCHAM-ICEG Conference on the expected effects of the EU accession on the Visegrad countries Labor market  Banking employment stabilized; restructuring layoffs were partially compensated by expansion of medium-sized banks.  Lack of modern banking skills was among key causes of the disastrous performance of Czech banks.  Demand for skilled labor will be kept high; layoffs affect general banking staff. Migration after accession will not change. Profits and costs (CZK thousands) Number of employees

7. AMCHAM-ICEG Conference on the expected effects of the EU accession on the Visegrad countries Regulatory framework  The regulatory framework of the financial sector is fully harmonized; some weaknesses only in insurance supervision. Czech banks are under „triple“ supervision – Czech supervisor, parent company and EU member state supervisor. Euro is yet to become major issue. Banks concentrate rather on the adoption of the New Basel Capital Accord as the next major regulatory change. The supervision is stabilized, however needs further strengthening of cross-industry and cross-border cooperation.

8. AMCHAM-ICEG Conference on the expected effects of the EU accession on the Visegrad countries Market structures  „Big Three“ banks dominate the market. Their pricing strategies raise competition concerns. Competition: After large banks finish restructuring aggressive expansion into some segments such as consumer credits is expected. However the cozy oligopoly on retail market and institutional weaknesses on SME lending market will prevent more intensive competition. Concentration: Future mergers will be originated by mergers among parent banks. Concentration and the distribution of the market is likely to stabilize around current status. Credits Deposits

9. AMCHAM-ICEG Conference on the expected effects of the EU accession on the Visegrad countries Policy measures  Sector specific measures State aid, which was part of the bank privatization of major banks needs to be re- approved by the Commission prior to the EU accession. Strengthening of the regulation of the financial sector as a whole - improvements in insurance regulation and preparations for the New Basel Capital Accord  General measures Improved legal framework for information collection and workout. Public finance reform to fulfill EMU convergence criteria is needed.

10. AMCHAM-ICEG Conference on the expected effects of the EU accession on the Visegrad countries Conclusions  Major changes during the pre-accession process: Introduction of standard strict regulation State bail outs of major banks Privatization Restructuring  Results Stability Foreign control Profitability  Czech banks are well prepared for accession.  Transition related leftovers do not threaten them but limit further growth