The six largest domestic banks in the Czech Republic faced a notable decline in profits in 2023, with earnings totaling 70.6 billion CZK compared to 76.2 billion CZK the previous year, according to the banks’ financial results. Analysts attribute this 5.6 billion CZK decrease in net profits to a year-on-year drop in banks’ net interest income.

The year 2023 proved less favorable for domestic banks compared to the preceding year, primarily due to regulatory changes and economic factors. The abolition of interest on mandatory minimum reserves at the Czech National Bank, coupled with a reduction in the interest margin on deposits, contributed to the decline in profitability, as highlighted by XTB analyst Tomáš Cverna.

In the fourth quarter, only ČSOB managed to buck this trend, with its net interest margin increasing thanks to a larger volume of mortgage loans and corporate client lending. However, overall, banks’ net interest income suffered due to stagnant interest rates and a lack of growth stimuli, leading to tighter interest margins, according to Cyrrus analyst Tomáš Pfeiler.

The imposition of the windfall tax further exacerbated this downward trend. Pfeiler suggests that banks redirected funds to clients to secure future business opportunities, reflecting the strategic response to regulatory pressures.

The windfall tax targets unexpected extraordinary profits from the previous year, with the tax return filed in the current year. Approved by the government as a 60 percent tax surcharge on excessive profits, the tax’s rationale is to bridge the gap between the tax base and the average cost of the tax base over the past four years, augmented by 20 percent.

Pfeiler argues that maintaining the tax on banks amidst anticipated interest rate and margin declines would be counterproductive, potentially yielding even lower returns than in 2023. Consequently, policymakers may need to reconsider the viability and implications of such taxation policies in the evolving financial landscape.

Article by Prague Forum