Moody's: Rising Czech koruna will have uneven but manageable impact for the country's banks

The appreciation of the koruna will impact Czech banks unevenly, with UniCredit Bank Czech Republic and Slovakia (UniCredit CzSk) and Raiffeisenbank, a.s. the most vulnerable to the shift and Ceskoslovenska Obchodni Banka, a.s. (CSOB) and Ceská Sporitelna, a.s. (Ceská) likely to be least affected. The rating agency notes that overall the impact will still be manageable due to the primarily domestic focus of the banks' operations and the Czech National Bank's commitment to limiting excessive currency volatility.

The Czech National Bank removed its CZK27 upper limit on the koruna-euro exchange rate on April 6, allowing the koruna to rise for the first time in three and a half years.

Moody's report, entitled "Ceská; CSOB; Komercní; UniCredit CzSk; Raiffeisenbank; MONETA: Impact of Rising Koruna Will Be Uneven But Manageable," is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.

"Local currency appreciation in the Czech Republic will filter through to the country's banks via various channels, such as corporate margins, funding costs, and the value of government securities," says Arif Bekiroglu, Assistant Vice President and Analyst at Moody's. "UniCredit Bank Czech Republic and Slovakia and Raiffeisenbank are more vulnerable than their peers due to material exposures to the non-retail segment, leaner capital and weaker profitability."

MONETA Money Bank, a.s. (MONETA) has a high exposure to small businesses but strong capital, and Komercní banka has a high exposure to corporates which tends to be less vulnerable, but weaker capital. CSOB and Ceská are likely to be least affected due to their low to moderate exposure to riskier segments relative to their solid capitalisation.

MONETA and UniCredit CzSk could see rising problem loans as a result of their exposure to small and medium-sized enterprises (SMEs). SMEs are the most vulnerable to an economic slowdown. Exports account for more than 80% of Czech GDP and a strong currency appreciation means that Czech exporters may lose competitiveness. However, ongoing economic recovery in euro-area economies should help to offset most of this impact and to create growing demand for Czech goods. The euro area is the Czech Republic's biggest trading partner, accounting for 65% of Czech exports as of year-end 2015.

Banks holding larger shares of government securities as available-for-sale (AfS) assets, such as UniCredit CzSk, Ceska and MONETA could also be negatively impacted. This is because foreign investors looking for currency gains could exit long-held positions in Czech government securities as the currency appreciates, lowering the securities' market valuation.

Funding costs will rise as benchmark interest rates increase. We expect a rise in benchmark interest rates to control inflation once the exchange rate settles and this will impact funding costs at RBCZ and MONETA more than their peers due to their tighter koruna liquidity.

Moody's notes that since many Czech banks are subsidiaries of euro-area parents and provide those parents with a substantial part of their profit, these parents — Erste Group Bank AG, KBC Bank N.V., Société Générale, UniCredit S.p.A. and Raiffeisen Bank International AG— could benefit from improved revenues and capital. This is because the euro-equivalent of their Czech subsidiaries' revenue and capital will improve and the dividend equivalent in euros will also be higher.