This report focuses on comparing the performances of major Czech, Hungarian
and Polish banks. Czech banks showed particularly poor financial results i
n 1997, and their outlook for 1998 is even worse. The report reveals that l
oan book quality, profitability, and overall capital strength of Hungarian
and Polish banks significantly exceed those of their Czech counterparts. In
terms of operating efficiency or balance sheet structure, banks in all thr
ee countries are similar. The decomposition of ROE (return on equity) shows
that high provisioning, stemming from a very poor loan book quality and in
adequate credit risk coverage, is the major factor behind the poor performa
nce of Czech banks. The main reasons for the poor loan quality of the Czech
banking sector appear to be delayed privatization, an economic recession,
the absence of state help regarding loans granted in the early 1990s, an ov
er-reliance on low-quality real estate collateral, and incompetent manageme
nt.