OREANDA-NEWS. September 30, 2011. Renaissance Capital, the leading emerging markets investment bank, has initiated research coverage of the Czech Republic’s banking sector, with a report on Komercni Banka (rated HOLD at Renaissance, with a 12-month target price of CZK3,427).

In the report, Komercni Banka: Boring is good in banking, Renaissance analysts – taking a fresh view of the Czech banking sector, in light of the 2008 crisis and subsequent events – note that in many respects very little has changed. They conclude that “Czech banking remains a highly concentrated sector, even if competition is picking up in some segments. It is highly profitable, and while lending growth has slowed substantially from pre-crisis levels, mid-sized corporate/SMEs and mortgages remain sources of future growth.” Long-term growth, even if at a slower pace, is assured by still-low penetration ratios, argues the report, even though the Czech Republic has one of the more penetrated Eastern European banking markets.

Due to a benign economic environment, with a continuously strengthening currency and inflation in the low single digits, Komercni Banka’s net interest margin (NIM) is one of the lowest in the EMEA banking space at about 3.3%, and has been among the most stable in its peer group over the past seven-to-eight years, according to Renaissance analysts. The report also highlights that the bank’s cost of risk has consistently remained among the lowest in the peer group. In Renaissance’s view, the lower NIM reflects the perceived lower risk profile of the bank in an EMEA context – making Komercni Banka look more like a developed market institution than its emerging markets peers on this measure.

Placing Komercni Banka in a wider context, the report highlights GDP growth expectations for the Czech Republic of around 2% and a measure of risk to the downside here. It argues that the Czech National Bank’s base rate is unlikely to change before mid-2012 (vs. consensus expectations at the start of this year for a rise in 2011); concluding that “a lower base rate for longer does not help banks.”