Bank Profits Fall as Windfall Tax Looms

The six largest domestic banks in the Czech Republic, due to pay a windfall tax for the previous year, earned a total of 70.6 billion CZK in 2023. This is a decrease from 76.2 billion CZK a year earlier, per the bank’s results. Analysts attribute this 5.6 billion decrease in net profits to a year-on-year drop in banks’ net interest income.

The year 2023 was less positive for domestic banks than the previous year. The profitability of the largest banks fell due to the abolition of interest on mandatory minimum reserves at the Czech National Bank and a reduction in the interest margin on deposits, as stated by XTB analyst Tomáš Cverna.

In the fourth quarter, only ČSOB was able to avoid this trend. Its net interest margin increased due to a larger volume of mortgage loans and loans for corporate clients. “Banks’ net interest income fell because the ČNB no longer raised rates. There was a lack of positive growth impulse in the form of further credit price increases. Instead, banks had to develop more attractive interest on deposits, which led to thinning interest margins,” said Cyrrus analyst Tomáš Pfeiler.

The so-called windfall tax accelerated this process, according to Pfeiler. “Banks, in a nutshell, sent money rather to clients to hook them in the future,” he commented.

The six largest banks will pay a tax on unexpected extraordinary profits from last year’s profits. The tax return for last year for this tax will be filed only this year. The government approved the windfall tax as a 60 percent tax surcharge for excessive profits. This corresponds to the difference between the tax base and the average cost of the tax base for the last four years, increased by 20 percent.

In light of the expected decrease in interest rates and margins from interest-bearing deposits, maintaining this tax on banks makes no sense this year, as it would bring even less than in 2023, Pfeiler added.