As the Czech Republic enters its third week in lockdown due to the coronavirus, the country’s largest bank is gearing up for a wave of credit impairments in key sectors such as manufacturing and tourism.
CSOB has already taken action to help customers through the Covid-19 crisis. The lender, which is part of the KBC group, announced payment holidays for borrowers as soon as a state of emergency was declared by the Czech government on March 12.
So far, take-up has been relatively slow, according to chief executive John Hollows.
“We do already have customers ringing up and asking for financial help, but not perhaps as many as some might expect,” he says. “We anticipate this number will increase, however, and we are preparing our staff to help those clients with the correct procedures and documentation.”
In the short term, the impact of the crisis on CSOB’s business has been most sharply felt in the dealing room after global risk-off sentiment and a 75-basis-point benchmark interest-rate cut sparked a sharp sell-off in the Czech koruna.
“We have faced a major challenge due to the volatility in the koruna money market and FX markets, in terms of our own trading positions and also helping clients deal with the impact of these changes,” says Hollows.
“Covering your positions fast in such a currency and in such a market can be challenging.”
Exchange-rate volatility looked set to continue after a further 75bp rate cut by the Czech National Bank (CNB) on Thursday, taking the base rate 1%.
Looking ahead, however, Hollows expects the impact of the crisis to spread to CSOB’s loan portfolio.
“Of course, many SMEs, as well as private citizens and self-employed people, will likely have a short-term cash crisis and we can’t exclude that some SMEs will find it difficult to survive,” he says.
“Therefore, we would expect that our credit impairments will rise. By how much, who knows? It all depends on how long the crisis lasts and how fast the recovery works.”
The big question for banks in the Czech Republic, as elsewhere, is how such impairments will be treated by regulators – particularly in light of the global move towards IFRS 9 accounting standards, which require full provisioning of loans more than 30 days overdue.
We are asking the CNB to give us certainty. It won’t cost them anything, but it would enable us to be much more nimble when the crisis is over
– John Hollows, CSOB
Hollows says the new regime risks sucking up the capital that could otherwise be redeployed by banks to rebuild the Czech economy after the Covid-19 crisis.
“I’m sure some of our clients can manage in the short term to retain staff, but when the crisis is over and orders come in, they will need to purchase raw materials, etc, so they can start producing again fast,” he says. “This means they will need a lot more working capital than in normal times just to get going again.
“We want to deploy capital at that stage for that purpose rather than impairing short-term advances or forbearance, which had been made simply to tide clients through.”
The CNB has indicated that if the only reason for payment deferment is Covid-19 then assets will not have to be immediately reclassified.
Hollows, however, would like to see a more specific and more automatic commitment.
“We are asking the CNB to give us certainty,” he says. “It won’t cost them anything, but it would enable us to be much more nimble when the crisis is over.”
CSOB is also calling for regulators to provide defined criteria for loan forbearance by banks.
“In the next few weeks, we will likely have a lot of SMEs asking for forbearance,” says Hollows. “We could have long drawn-out discussions on each file, but it would be more efficient to just say do they qualify or not, if they meet these criteria then we will forbear.
“For example, if at January 31 an SME had no overdue payments to banks, suppliers or tax authorities and was operating normally with average profitability, in those circumstances we can forbear a loan or overdraft for three months and that would automatically not be impaired.”
As well as payment holidays, CSOB is also providing non-financial support to the Czech economy. The bank has retrained staff in one of its outbound call centres to take emergency calls and has opened the nursery at its headquarters building to the children of essential healthcare workers.
“This is a big opportunity for us, as a bank that is the second or third most profitable company in Czech Republic, to show that we can use our money, physical size and reach to help the country in a difficult moment,” says Hollows.
The bank has seen also some light amid the Covid-19 gloom. Hollows says the bank’s investments in digitalization are paying off as Czechs start to turn away from cash.
CSOB already has the highest digital customer base in the Czech Republic, with more than 1.4 million users of its mobile and online banking platforms, and offers fully digitalized account opening, short-term loans and investment products.
“Indeed, it may be that this crisis will prompt more of our clients to start using the digital approach,” says Hollows. “That would be helpful for us long term – although at this stage in the crisis that is not our immediate concern.”
Investment in technology has also smoothed the move to mass remote working for CSOB. Of the group’s 9,500 employees, nearly 70% are now working from home. This figure includes branch staff, after CSOB closed 40 of its 230 branches and discouraged all but essential visits to the remainder.
Hollows says the successful switch to home working has been a “huge surprise” to everyone at the bank – and could prompt a rethink in working patterns going forward.
“Our experience in the last few days is that ‘home office’ is not only an emergency alternative but actually quite a practical way of working,” he says.
“In our headquarters building, we already hot-desk and there are only desks for 80% of the workforce, but we could maybe move to a 70% or 60% ratio in future. Our employees could potentially then spend less time travelling and better serve their families, as well as reducing their carbon footprint.”
Hollows adds: “All these ideas suddenly this week seem much more in our grasp than they were before.”
For the moment, the most notable impact has been a sharp decline in meeting length.
“Everyone has noticed that Skype meetings take less time than regular meetings,” says Hollows. “You don’t have the extra time chatting and people only ask the really important question that they need to ask in order to make a decision.
“Board meetings which would normally have taken eight to nine hours we can suddenly do in two to three hours. That has been quite an interesting statement on the inefficiency perhaps of meetings in the past. Most of us feel that meetings are too many and too long, and the home-office way of working has actually solved that problem pretty effectively.”