PRAGUE, June 21, 2023 – The Czech Republic’s major banks have reported a year-on-year decline in net profit for the first quarter of this year, according to data released by the Czech National Bank. The six largest banks, subject to the newly implemented windfall tax, saw a decrease of CZK 2.4 billion, with net profits totaling CZK 21.12 billion.

The windfall tax, approved by the government, imposes a 60% tax surcharge on excessive profits for these banks. It is calculated based on the difference between the tax base and the average cost base over the past four years, resulting in a 20% increase in the tax burden.

The revenue generated from this tax is intended to cover extraordinary costs incurred by the state in relation to setting maximum energy prices. However, the introduction of the tax may have contributed to the decline in profits alongside other factors.

In the first quarter of this year, the combined profits of the six banks amounted to CZK 14.8 billion, down from CZK 15.6 billion during the same period last year. Analysts attribute the CZK 800 million decline primarily to a decrease in net interest income, affecting most banks in the sector.

Tomáš Cverna, an analyst at XTB investment company, noted that the payments from the special tax are expected to be lower than initially projected. The government had anticipated collecting around CZK 33 billion from the banking sector, but it is now estimated that the total payment from banks will be several billion lower. Cverna attributes this to the impact on net interest income.

Furthermore, the Czech National Bank’s decision to halt its cycle of interest rate increases has created a challenging environment for financial institutions. Analyst Tomáš Pfeiler explains that banks are struggling to find growth impulses, resulting in increased competition and higher interest costs. The production of new loans has also weakened due to the higher interest rates. Some banks have responded by reducing operating costs, which has further reduced net interest income and affected overall profitability.

As the banking sector adjusts to the implementation of the windfall tax and navigates changing market conditions, financial institutions are seeking new strategies to sustain growth and optimize their profitability in the coming quarters.

Article by Prague Forum