* Default rate could hit 6 percent
* No big impact on capital
By Jana Mlcochova
PRAGUE, March 9 (Reuters) - Czech banks will need to double
or even triple their provisioning against bad loans this year as
companies suffer from the global economic downturn, Czech
Banking Association President Jiri Kunert said.
Czech banks are well positioned to withstand the
deteriorating environment without much pressure on capital,
Kunert told Reuters in an interview on Monday.
"I assume that this year (the proportion of bad loans) will
be much higher. Banks are preparing ... to create twice to three
times as many provisions as last year."
At the end of 2008, bad loans made up 3.1 percent of total
loans, according to Czech central bank data.
"(The default rate) could be around 6 percent ... But I
think it could go even higher," this year, Kunert said.
Kunert said Czech banks' solid profitability in the past
meant they should withstand the rising default rate, and their
capital adequacy -- around 12 percent according to the central
bank -- would not suffer substantially, with some banks beefing
up capital through subordinated debt.
Central bank Governor Zdenek Tuma told Reuters last month
stress tests were showing banks would withstand a rise in
defaults to levels around 10 percent.
The highly export-dependent Czech Republic has been badly
hit by a drop in Western European demand which has led to a
sharp drop in output and job losses, hurting the manufacturing
sector.
The banking sector has been relatively well positioned, with
almost no exposure to foreign toxic assets, relatively low
foreign debt and a strong domestic deposit base.
The central bank had said that unlike peers in other central
and east European countries, Czech banks were, in most cases,
net creditors of their mother banks abroad and thus would not
suffer from a cut in financing.
The Czech banking market is dominated by CSOB, a unit of
Belgian KBC <KBC.BR>, Ceska Sporitelna, a unit of Austrian Erste
Bank <ERST.VI> and Komercni Banka <>, majority owned by
French Societe Generale <SOGN.PA>.
THE SAME BAG
Czech authorities and bankers have been trying to convince
investors that countries in central and eastern Europe have
widely differing economic fundamentals that should not be lumped
together when assessing investment risk.
Kunert said putting the Czech Republic alongside the rest of
the region weakened interest in Czech government bonds.
"Today the entire central and eastern Europe is hit by being
put into one bag and by talk everywhere that all countries are
threatened that there will be a (ratings) downgrade," he said.
Standard & Poor's has held the Czech Republic's rating at A
with a stable outlook, Moody's rates the country A1 with a
stable outlook and Fitch rates it at A+ with a stable outlook.
Demand for Czech bonds has stayed relatively strong, but
yields have gone up in auctions, raising the price the
government pays for its debt.
Kunert said government plans to issue about 100 billion
crowns ($4.1 billion) in retail bonds in coming years would
siphon off liquidity from banks as people withdraw money to buy
more attractive government bonds.
"There will be an outflow of liquidity from the system and
money for loans," he said. "If the government pays 4 percent for
raising cash then it says that banks should also pay, perhaps
even more... That's bad news as for lending," he said.
(Editing by Dan Lalor)
