Petr Řehák, Managing Director and Chairman of the Board of Directors, Equa Bank. The transparency of establishments such as Equa has convinced many Czechs to step away from conservative banking 

New low-cost banks entered the Czech market three years ago, breaking through the country’s legendary conservatism and motivating clients to change banks. One of these new banks is managed by Petr Řehák, Managing Director and Chairman of the Board of Directors of Equa Bank.

How can the Czech banking market best be described?
The Czech banking market is one of the most stable in the region of Central and Eastern Europe. This is mainly because of the legendary Czech conservatism, which is expressed as a very circumspect attitude to banks and risk (which was particularly positively manifested during the last crisis), and also the high degree of loyalty clients have towards their banks and their reluctance to move to another bank.

Only three to five years ago, the Czech banking market was controlled by just three banks, which jointly held a 70 percent share of the market. Although there were other banking subjects active along with these three major banks, their product offer did not deviate from the average offered by the dominant banking houses, nor were they forced to consider innovations and effectiveness. This situation on the Czech banking market was unique and difficult to explain in comparison to other countries in Central and Eastern Europe. If we compare the situation with neighbouring Poland for instance – most of the market there was originally divided between six major banking houses. But at the beginning of the decade, a whole number of other institutions – who based their strategy on offering simple, comprehensible and transparent services, and on communication with the client through direct channels, such as low-cost banking – originated in this country. The volume of deposits per person in Poland was significantly lower than in the Czech Republic, but, in spite of this, there were more players fighting for the Polish client.

Nothing happened for a long time and then three banks suddenly entered the market. How did these banks convince clients they did not have to fear change?
These banks entered the market at a time when the world was slowly beginning to recover from the global financial and economic crisis. In spite of the fact that this crisis had minimal impact on the Czech Republic, it did influence the behaviour of consumers to a specific degree. Czechs began to save more and borrow less. The newly arriving banks offered modern low-fee banking, attractive interest rates on savings products, as well as refinancing of consumer loans, for instance – as a result of which, clients were able to make significant savings on their existing loans. Furthermore, these banks offered a simple and transparent price policy conversely to the dominant banks. Clients were consequently able to accurately calculate what they would be paying for, which had not been the rule on the Czech market until that time. It was the Czech population’s desire to save on ordinary services, and its desire for clear and transparent prices that caused the breach in the conservative behaviour, and motivated clients to change banks and move to low-cost banks. To date, the five new banks have acquired 1.25m clients, during which time over two thirds of this number have moved to the new banks from the three largest banks.

Your bank entered the market in the middle of the worldwide crisis and not even the domestic economy was developing positively. What are your observations and expectations with regards to economic revival?
Reduced economic activity was manifested in the past by the falling demand for loans, by both retail and corporate clients. Since 2013, we have observed signs of economic revival, not only in macro-economic indicators but also in the structure and volume of demand for loans. Households are utilising low interest rates to a greater degree for reducing costs on mortgage loans. They reduce their burden of payments similarly by refinancing their consumer loans. As the family budget situation improves, interest in new loans increases. Corporate clients have also responded to the increased demand for housing and have launched many developer projects in the residential field, which has increased interest in the financing of these projects. More growth in loans can also be observed in the field of operation financing, where companies react to the increasing volume of orders.

How do you perceive the impact of the new stricter regulation of the Czech banking market? Do you expect changes to be made to bank strategies and impact on changes to their business models?
The Czech banking market is in a very good state and is very well prepared for the stricter regulation of requirements for capital facilities, liquidity and also in regards to the quality of loan portfolios in the balance sheets of local banks. This is also one of the reasons the Czech National Bank (the local regulator) has decided to apply the Basel III rules effective immediately, without utilising temporary provisions – that is, without their gradual implementation by 2019, as the remainder of Europe has done.

The new Basel III requirements, particularly in the field of capital and capital adequacy, undoubtedly increase pressure on the higher bank profitability. This, together with the requirements of caution linked to higher cost demands, is creating new challenges for banks. In this regard, the situation does not differ in any way from the rest of Europe. A new phase of achieving higher productivity by modifying the business model is approaching. As a new bank, we have the undoubted advantage that we are not as encumbered by the burden of old infrastructure and we can establish our business model primarily on the use of the latest information technologies.

The differences of the Czech banking sector include a high surplus Crown liquidity. Recent steps by the central bank (application of exchange rate intervention for monetary easing) have emphasised this situation even more. We have been in an environment of low to zero rates for several quarters. The basic rate by the national regulator is on the level of 0.05 percent, the three month interest rate is on the level of 0.35 percent, yields from five-year government bonds are on the level of 0.63 percent, variable five-year bonds are actually only 0.06 percent. This situation is linked to the limited offer of investment opportunities for placement of free short-term liquidity in risk-free instruments on the monetary market, which again places greater pressure on the ability to increase the value of short-term deposits with paid interest, and chiefly on the ability of individual banks to retain the growing volume of their loan portfolios. The ability to grow the loan side of the balance sheet becomes even more crucial because the revenue from fees can no longer be as strong a contributor to the bottom line as it was in previous years. And if we have hit the bottom in terms of the prices of loan products, then we are back to changes to the business model, for instance by offering completely new products, more easily comprehensible and simpler methods of operation, and innovative distribution instruments.

Has the behaviour of clients changed following the entry of low-cost banks?
The behaviour of clients has changed, not only because of the entry of low-cost banks, but also because the attitude to new forms of communication between the client and the bank is changing through the generations. Czech clients are much more demanding today thanks to increasing competition. They compare offers by banking houses more, not only from the aspect of interest and fees, but they also base their decisions on the range of services the bank can offer them in addition. Internet and mobile banking is gaining more and more popularity, which is why most banks have recently been forced to expand the sale of their products through these channels. But there is still a certain degree of conservatism rooted in most Czechs. In spite of increasing interest in modern communication channels, a significant percentage of the banking clientele continues to prefer a personal visit to their bank branch. However, low-cost banks usually operate with a very limited network of business premises, which limits their potential for addressing a wide spectrum of clients in relation to the Czech conservatism. This is why, if low-cost banks wish to continue the expansion in progress and continue to acquire more and more clients, mainly from the major banks, they will also have to invest in development of their branch network so that they have representation in all regional and district towns and cities in the Czech Republic. This is the only way to address a wider spectrum of potential clients and increase their share in the market.