The impact of low interest rates on bank profitability and asset prices in Central Europe

5- year government bond yields

Negative yield

Positive yield

Vladimir TOMSIK

Vice-Governor

Czech National Bank

Basel Consultative Group Meeting

11–12 October 2017, Abu Dhabi

2

Focus of presentation

• Negative monetary policy rates and government bond yields

• Net interest income and profits of banks

• Credit growth and residential property prices

• Responses of banks to challenging interest rate environment

• Presented mainly through data from the following countries: AT, CZ, HU, PL, RO, SK.

• Discussion on policy responses limited to macroprudential tools

• Broad array of tools and approaches described in detail in the ESRB report on the impact of low interest rate environment.

Decline in monetary policy rates

• Policy rates moved to 2% or less, with AT, SK and CZ at zero for a prolonged period.

• The CNB was the first central bank to make a hike in Europe.

3

Monetary policy rates

(% p.a.)

Source: Thomson Reuters

0

1

2

3

4

5

6

7

8

9

09/09 09/10 09/11 09/12 09/13 09/14 09/15 09/16 09/17

AT and SK CZ HU PO RO

4

Low government bond yields

• 5Y yields on government bonds have turned negative for relatively long maturities in AT and SK (for some time also in CZ).

• Yields have stayed higher in PL and RO.

• Reason behind the differences: long-term structural factors, safe haven status or not, monetary policies.

5-year government bond yields

(redemption yield at 21th September)

Source: Thomson Reuters

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

CH DE DK NL AT FR BE FI SK SE SI IE LT CZ ES BG LV UK IT NO PT HU HR PL RO

5

Developments in sovereign exposures

• Sharp decline in government bond yields prompted banks in CZ and SK not to roll over their positions as old bonds with positive yields mature. • Proceeds deposited in CB facilities at zero rate instead.

Domestic general government credits

extended by domestic MFIs

(% of MFI assets)

Source: ESRB Risk Dashboard

Note: Central banks credits are not included. The credits comprise

debt securities held and loans extended. MFI assets in the ratio's

denominator exclude "other assets". EA and EU averages are not

volume-weighted.

0

5

10

15

20

25

AT CZ HU PL RO SK EA19

July 2014 July 2017

6

Decline in banks’ lending rates

• Interest rates on new corporate and housing lending have reached very low levels in AT, CZ and SK.

• Downward pressures in the consumer credit segment have occurred recently in SK, CZ and HU.

Interest rate on new loans to private non-financial sector

(%)

Source: ECB, BNR, CNB, MNP, NBP

0

5

10

15

20

25

AT EA CZ SK HU PL RO SK EA AT CZ RO PL HU EA AT SK CZ RO HU PL

Non-financial corporations Households - housepurchase

Households - consumercredit

Q2 2015 Q2 2017 10y average

7

Decline in banks’ net interest margin

• Lower lending rates have eaten up the banks’ net interest margin. • A decrease in the net interest margin of 30–70 bp (i.e. 7–23 %).

Net interest margins (net interest income to

interest bearing assets)

(%)

Source: EBA

0

1

2

3

4

5

6

AT PL SK CZ RO HU

Q1 2015 Q1 2017

8

Risk to banks’ profitability

• The decline in margins is creating downward profit pressures. • Net interest income represents a relatively high share of operating income

for banks in the region.

Net interest income to total operating income

(%)

Source: EBA

0

10

20

30

40

50

60

70

80

90N

O

GR

SK

BG

NL

CY

PT

HR

MT

ES

PL

AT

CZ IE BE

HU

EE

RO SI

SE

LT

LV

GB

DK

DE

LU IT FR FI

Q1 2017 EU average Q1 2017 EU average Q1 2016

9

Maintaining operational efficiency

• Banks have offset pressures on interest income so far by lowering funding costs, reducing risk costs and keeping operational costs at low levels.

• Operational efficiency is relatively high in CZ, RO, SK and PL.

Cost to income ratio

(%)

Source: EBA

0

10

20

30

40

50

60

70

80

90

BG

EE FI

NO LT

LV

DK

CZ

SE

GR

HR

ES

RO

CY

SK SI

MT

PL

NL IE LU

GB

HU IT AT

PT

FR

BE

DE

Q1 2017 EU average Q1 2017 EU average Q1 2016

Growth in credit to private sector

• Selling more credit is the dominant response to profitability risk. • Both corporate and housing lending increasing considerably

except for HU.

• The pace of credit growth is related to the low levels of indebtedness in the “new” EU member states.

10

(%)

Source: BIS, BNR, NBS

Notes: Total credit contains all credit plus debt securities issued.

Annual growth rate of total credit to private non-

financial sector

-10

-5

0

5

10

15

HU EA AT RO CZ PL SK HU EA AT RO PL CZ SK

Non-financial corporations Households

Q1 2015 Q1 2017

(%)

Source: BIS, BNR, NBS

Notes: Total credit contains all credit plus debt securities issued.

Total credit to GDP

-10

10

30

50

70

90

110

130

HU EA AT RO CZ PL SK HU EA AT RO PL CZ SK

Non-financial corporations Households

Q1 2015 Q1 2017

11

Development in banks’ profitability

• Profitability in the regional banking sectors kept at relatively high levels so far. • True risk costs of new lending may occur with considerable delay.

Return on equity

(%)

Source: EBA

-5

0

5

10

15

20

RO

CZ

LV SI

HU

SE

DK FI

EE

BG LT

SK

MT

NL

NO

AT

ES

PL IT IE BE

FR

GB

LU

HR

DE

GR

CY

PT

Q1 2017 EU average Q1 2017 EU average Q1 2016

12

Capitalization of banking sectors

Total capital ratio

(%)

Source: EBA

0

5

10

15

20

25

30

35

40

EE

SE

NL FI

LU

LV

HR IE DK

RO

BG LT

GB

NO

SK

DE

AT

BE

HU

MT

FR SI

CZ

GR

CY

PL IT ES

PT

Q1 2017 EU average Q1 2016 EU average Q1 2017

• Sustained profits enable to keep the capitalization of the regional banking sectors also at relatively high levels in most cases.

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Residential real estate prices

• Apartment prices undergoing considerable recovery except for PL.

• The potential for a feedback loop between prices and credits for housing calls for macroprudential actions.

Residential property prices

(2010 = 100)

Source: Eurostat

Note: The House Price Index captures the residential property (flats,

detached houses, terraced houses, etc.) including the land component.

80

90

100

110

120

130

140

150

03/07 03/09 03/11 03/13 03/15 03/17

AT CZ HU PL SK EA

14

Macroprudential tools related to housing exposures

Use of residential real estate instruments according to stretches typology

Source: ESRB Annual Report 2016

• Countries in the region are active in the use of macroprudential tools (LTV, LTI, maturities …).

• Giving macroprudential authorities legal powers to do so is subject to political resistance and/or compromises.

RW LTI, DTI, DSTI

LTV

15

Capital buffers

• Some countries in the region apply a countercyclical capital buffer to mitigate risks related to the considerable increase in lending besides other capital buffers.

Combined buffer requirements as of 3 July 2017

Source: ESRB

G-SII

bufferO-SII buffer

SRB

CRD 129 Applied Announced CRD 131 CRD 131 CRD 133

0%

1%

0%

0%

1,25%

CCyB (CRD 130)

0%Austria

Country Details phasing in

CCoBThe higher of

Combined buffer

requirement

1.25% 0%7 banks:

0.25%-0.5%

12 banks:

0.5%-1%1.25%-2.25%

O-SII fully loaded by 01.01.2019

SRB fully loaded by 01.01.2019

3%-6%5 banks:

1%-3%

7 banks:

n/a0.5%2,5%Czech Republic

0%1,25% O-SII fully loaded by 01.01.20201.25%-1.75%8 banks:

0.125%-0.5%Hungary

1.25%-2%12 banks:

0%-0.75%0%1,25%Poland

Romania

Slovakia SRB fully loaded by 01.01.20182.5%-4.5%4 banks:

1%

5 banks:

1%-2%0,0%2.5%

1.25%-2.25%9 banks:

1%0%1,25%

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Thank you for your attention

www.cnb.cz

Vladimir TOMSIK

Vice-Governor

Czech National Bank

Vladimir.Tomsik@cnb.cz