This report analyses the performance of the Bank for the 3Q2014. You will find all the necessary details regarding volume growth, market share, margin and asset quality development in the Bank.
The key highlights are:
Hypoteční's profit falls 13%...
Hypoteční banka reported a net profit of CZK 701 mil. in 3Q2014, down 13.4% compared to the same period last year. Ongoing margin pressure and an increased cost of risk stand behind the profit deterioration.
...but the overall picture remains solid
The big picture remains solid in spite of the weak momentum. The bank remains highly profitable (ROE reaches 18% when adjusted for the bank's overcapitalization), cost efficient (with cost to income at less than 18%), maintains its leading position on the market (a further 26 bp have been added to bank's 26.5% market share over the last year) and has plenty of (too much) capital to play with.
The challenges therefore come from external factors such as the declining interest rates on new mortgages sold and the ongoing market pressure.
Increasing margin pressure
The low rate environment is taking an increasing toll on the mortgage business profitability. The average interest rate on new loans has approached a level of 2.5%, which means big pressure on pricing when refinancing existing stock (still priced at nearly 4.0%).
Although the margin on new lending still seems to be pretty fat (1.9% when adjusted for 5-year swap), we believe it will decline in the coming quarters:
Lack of volume growth is one reason for the expected pressure and increasing competition is the other.
Slowing volume growth
Mortgage lending still remains one of the fastest-growing parts of the banking business in the Czech Republic. In the last 12 months, it has grown 7.1% yoy, which represented 40% of the overall increase in the sector loan book (and 90% in 3Q14 alone).
The problem might be that the volume of growth is not as impressive as in the past, so margin pressure could eat more into bank's profits at this time:
Rising competition pressure
Hypoteční banka is one of the best banks in the country in our view. The bank is well managed, is exposed to the right segment and has built and defended a leading position on the market.
The margin pressure and slower growth could however increase competition in the coming quarters. Apart from the more active rivals Spořitelna and Komerční, there is a pack of small players to watch for (Sberbank, Air Bank, mBank, Equa).
While small on their own and fragmented, together they could make a difference.
You will find more details about the bank at www.helgilibrary.com/companies
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