BMI's Executive Summary

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From Q108 we will be calculating the Commercial Banking Business Environment Rating (CBBER) for each of the countries surveyed by BMI. This will permit a more systematic and comprehensive comparison of the conditions within the banking industries of the various countries than was possible in the past. For each country, it will also facilitate a comparison of the conditions within the banking sector and conditions prevailing in other sectors.

The Czech Republic's overall CBBER is 55.8. The equivalent figures for the US and the eurozone are 84.8 and 81.4, respectively. The Czech Republic's CBBER places it in the middle of the range of CBBERs of countries from Central and Eastern Europe surveyed by BMI.

Within the CBBER, the most important aspect is the (banking) market element of the limits of potential returns. This element accounts for 42% of the overall CBBER. The Czech Republic's rating for this element (48.8) is significantly lower than the overall CBBER and lower than the country risk element of the risks to realisation of returns (66.7). The Czech Republic has average overall total assets and shows limited growth potential in total assets and client loans.

The Czech Republic has a high level of GDP per capita relative to other countries in Central and Eastern Europe. This is, however, subject to a reasonable high level of volatility. Economically, the Czech Republic is entering a period of strong inflationary pressure. Following November 2007's 5.0% year-onyear (y-o-y) inflation, the highest yearly price growth since August 2001, we believe that inflationary pressures arising from the surge in food prices will remain in play until the end of H108. As a result of strong economic growth and elevated price pressures, we believe that there is scope for further monetary tightening in 2008. As a result of sustained price pressures, we forecast end of period inflation in 2008 at 3.4% y-o-y.

The fastest growth in the consumer price index came from the ‘food and non-alcoholic beverages' and ‘alcoholic beverages and tobacco' categories, increasing by 10.4% y-o-y and 15.7% y-o-y, respectively, in November, with the growth rate of the former substantially above October's 6.3% y-o-y increase, and representing the highest month-on-month (m-o-m) increase in food prices since January 1993. In addition, both categories are important drivers of inflation, contributing 1.7pp and 1.3pp, respectively to November's 5.0% y-o-y inflation figure. The reason for the surge in food prices continues to be the impact of the summer drought in central and south eastern Europe. Indeed, data show that agricultural prices increased by 24.4% y-o-y in October 2007, up from 18.1% y-o-y in September. Furthermore the prices of crop products increased by 42.9 y-o-y in September alone.