Czech banks hit as central bank ceases paying interest on reserves

PRAGUE (Reuters) -Komercni Banka, the Czech Republic's third-biggest bank, said on Friday it expected to see a material impact from the Czech National Bank's decision to stop remunerating required minimum reserves, as the banking sector braced for the change.

Another Prague-listed lender, MONETA Money Bank, also expected a fall in net increase once the change took effect next month. The two banks were the biggest fallers on the Prague Stock Exchange, falling more than 2%.

The Czech National Bank (CNB) decided on Thursday to cancel paying interest on banks' mandatory minimum reserves from Oct. 5, a move to reduce the costs of implementing monetary policy.

The decision follows a similar move by the European Central Bank in July.

Analysts said it could cut billions of crowns from Czech banking sector profits.

Komercni Banka said its stipulated amount of required minimum reserves for the current maintenance period stood at approximately 19.6 billion Czech crowns ($861.12 million).

"Cancelling of remuneration of the required minimum reserves thus represents a decrease in interest income of KB Group by approximately 115 million crowns ($5.05 million) per month, in comparison with the currently applicable remuneration at the two-week repo rate of 7%," it said.

The bank had reported a 3% drop in its first-half net profit, to 8.1 billion crowns. Net interest income dropped nearly 10% to 12.8 billion crowns.

MONETA estimated the central bank's change would cut interest income by approximately 120 million crowns in 2023 and 450 million in 2024. Its first-half net interest income reached 4.2 billion crowns this year.

The central bank has maintained its main policy rate at 7.00% since the middle of 2022 but has said debate on the start of rate cuts could begin in the autumn at the earliest, although it is keeping all options open.

Banks have been required to keep a portion of liabilities at the central bank as reserves.

Mandatory minimum reserves are not used as a monetary policy instrument but can act as a liquidity buffer to ensure the smooth flow of interbank payments, the central bank said.

J&T Banka equity analysts estimated that with policy rates estimated at 7% this year and 5.5% next year, according to banking association forecasts, the hit from the change to the banking sector could reach 2.1 billion crowns this year and 6.6 billion in 2024.

($1 = 22.7570 Czech crowns)

(Reporting by Jason Hovet, editing by Jan Lopatka and Andrew Cawthorne)