Fitch Ratings says in a special report that the Czech banking sector has proved resilient to the global market slowdown since the summer in 2007. The operating environment is, however, expected to deteriorate slightly due to slower economic growth in the Czech Republic and its major export countries.

"The Czech banking sector has weathered the financial market crisis relatively well. The sound domestic economy over recent years has supported increased lending volumes, particularly in the retail sector, which has compensated increasing margin pressure. We consider the Czech banking sector relatively strong and believe the overall outlook on banks' profitability remains promising," says Zarema Lyanova, Associate Director in Fitch's Banks team. "However, narrowing spreads due to strong competition and a slowdown in lending, which the sector witnessed in Q108, could moderate profitability in the coming years."

Asset quality has been sound so far, although this is attributed to a benign domestic credit environment for the last five years. The current downturn would be a major test, particularly as it may trigger a correction in the domestic property market to which Czech banks have substantial exposure.

The four largest banks - Ceska Sporitelna, ('A'/Positive), Ceskoslovenska obchodni banka, ('A+'/Stable), Komercni banka, ('A+'/Stable) and UniCredit Bank Czech Republic - accounted for 61.8% of total banking assets at end-2007. Around 97% of the sector's assets are now controlled by the private sector and foreign institutions. Foreign ownership has also brought with it the transfer of international best practice, particularly in relation to risk management, product development and marketing.

Major Czech banks enjoy good access to funding sources, mainly benefiting from their strong domestic retail banking franchises but also from access to their parents' funding base.