Czech government bond yields are poised to rise, risking an erosion of bank profits, central bank Governor Miroslav Singer said.
Yields in the country are now “unsustainably low” after a “flight to quality” during Europe’s debt crisis, Singer told journalists in Prague today. The share of domestic sovereign debt held by the Czech banking industry rose last year to 17 percent of balance sheets from 15 percent, almost triple the proportion in the euro area, he said.
Demand for Czech bonds, which had the biggest rally in a decade last year, has eased on optimism the euro region will contain its debt crisis and the global economy will recover. While the domestic financial industry is “very resilient” to external shocks, increased holdings in government bonds pose a risk to some companies, Singer said at a presentation of the central bank’s financial stability report.
“In some cases we’re beginning to look into whether or not the concentration of bonds begins to be a reason for us to consider to what extent a given bank is vulnerable to a potential decline in bond prices,” Singer said. “Should the yields suddenly start rising, the bonds need to be repriced and the banks will book losses.”
First-quarter profit at Komercni Banka AS, the only listed Czech lender, fell 9.9 percent from a year earlier as income from fees and financial operations shrank and one-time gains booked in 2012 were not repeated, the Czech unit of Societe Generale SA said on May 7. The net income, which jumped to a record 13.95 billion koruna ($728 million) in 2012, is set to drop to 12 billion koruna this year, according to the median estimate of 13 analysts surveyed by Bloomberg.
Yields on benchmark 10-year koruna notes rose four basis points, or 0.04 percentage point today, to 2.04 percent by 3:37 p.m. in Prague, taking the advance over the past month to 56 basis points after touching a record-low 1.48 percent on May 17. The premium over comparable German bunds was 47 basis points, up from a 12 point spread five weeks ago, the narrowest since 2008, according to generic indexes compiled by Bloomberg.
Increased ownership of government bonds are a “natural reaction” to uncertainties associated with the EU’s debt crisis, the Czech Banking Association said today in response to e-mailed questions from Bloomberg. The holdings are higher than the average for euro-region countries, it said.
“This is one of the reasons why the CBA has for several years emphasized the need for a stable fiscal development in the Czech Republic, in order to avoid an increase in the risk premiums on these securities,” Jan Matousek, the deputy executive director at the association, said in the statement.
The three-year-old government of Prime Minister Petr Necas, who resigned yesterday amid a spying and bribery scandal, has credited its fiscal-austerity program with luring bondholders and lowering its bond yields. It predicts its budget deficit will shrink to below the European Union’s limit of 3 percent of gross domestic product this year for the first time since 2008.
Czech bonds have the highest credit ratings in emerging Europe, on par with Estonia, and are the cheapest to insure with credit-default swaps. The contracts, which fall as perceptions of creditworthiness improve, dropped two basis points today to 58 today, compared with 71 for higher-rated France, according to data compiled by Bloomberg.
“The Czech Republic’s current fiscal situation is stable and sustainable,” Singer said. “The government is the banks’ biggest borrower, which represents an exposure that, should the fiscal situation start worsening, would create a real risk of concentration.”