“The share of foreign currency loans in business lending has been increasing gradually since the middle of last year, when domestic interest rates started to rise. By the end of last year, it has already reached almost 46 percent, which is a new record, while in mid-2021 it was around 32 percent,” Jakub Seidler, chief economist at the Czech Banking Association, told Práv.
The vast majority are loans in euros, with a smaller share in dollars and other currencies. By the end of November last year, their volume had risen to the equivalent of 583 billion crowns, a year-on-year increase of about half.
However, rising interest rates in the Eurozone are gradually starting to make euro loans more expensive, with their average rate for business loans rising from 2.5% in October to 4% in November.
The strong crown broke 24 CZK per euro
Despite the gradual increase in euro interest rates, however, euro loans to businesses are still significantly cheaper than koruna loans, for which the average rate was 8.3 percent in November.
Exchange rate risk
“We typically provide euro financing to clients who have sufficient net income in euros. For others, when assessing demand, we focus primarily on the client’s overall creditworthiness, rationale of the proposition and client relationship history,” Komerční banka spokesman Michal Teubner told Práv.
“We apply the above in corporate banking. In general, we believe that the small business and individual trader segment is more sensitive to any significant changes in the exchange rate,” he added.
With currency loans, the aforementioned exchange rate risk must always be taken into account. “The loan and the installments are in the vast majority of cases denominated in foreign currency. The weakening of the krona would therefore be unpleasant news for the borrowers,” Roklen economist Pavel Peterka stressed.
For example, if a payment of 10,000 euros is approximately CZK 241,500 per month at the current exchange rate, then if the exchange rate moves to 26.50 kroner per euro, the payment would increase to 265,000 CZK.
While the CNB should not allow such a significant weakening through monetary interventions, it cannot be ruled out, for example, in the event of unforeseen events, and every company should expect this.
“However, if the company generates sufficiently high euro sales, the exchange rate risk is significantly limited, because the company does not have to pay much attention to the krona exchange rate development and simply pays off the debt with the euros it earns” Peterka added.Furthermore, the exchange rate risk can be hedged with various instruments on the financial markets, such as so-called forwards.
“Loans in euros are cheaper right now, companies will save money because they will pay less interest,” confirmed Chamber of Commerce spokesman Miroslav Diro.
He added that companies started looking more closely at euro lending already during the covid-19 pandemic. At the beginning of the first wave of the pandemic, the Czech currency weakened sharply against the euro and companies responded to the fluctuation of the krona by financing themselves in euros and tried to cushion the currency risk.
The government of Petr Fiala (ODS) does not plan to introduce the euro and has not even set a date for its introduction. From next year, on the other hand, it plans to enable companies to keep accounting and tax records in euros.
Unlike other countries, national banks only very rarely offer mortgages and loans in euros to natural persons. Income in European currency is a condition.
The economy grew 1.5% year-on-year in the third quarter, according to updated data