His pitch to voters is simple. The Czech banking system is impressively profitable and almost entirely foreign-owned. This means a large chunk of those profits leave the country – nearly Kc500 billion ($19.9 billion) in total over the past 16 years, according to Sobotka.
He wants to stem this outflow through an incremental tax on bank assets, starting at 0.05% for the smallest banks and rising to 0.3% for lenders with balance sheets of more than Kc300 billion. Proceeds, which Sobotka says could total up to Kc11 billion a year, would be used to finance schools and infrastructure.
This is clearly designed to hit the big foreign-owned banks hardest. The levy could slice as much as 25% off the net income from UniCredit’s combined Czech and Slovak operations, according to Moody’s, while subsidiaries of KBC, Erste and Société Générale could all see their bottom line eroded by close to 20%.
The good news for these groups – several of which have relied on Czech profits to make up for lacklustre returns elsewhere in central and eastern Europe over the last seven years – is that the betting is currently heavily against the proposed tax making it onto the statute books.
For one thing, it is not a new idea. Tim Umberger, a portfolio adviser at regional fund management firm East Capital, notes that a bank tax was mooted during the last Czech election cycle in 2013 but quietly dropped from the SDP’s agenda after the party went into coalition with the more business-friendly ANO.
The chances of it being implemented this time around should be even lower, given that Sobotka’s party was trailing ANO by eight percentage points in the polls in mid-March. The latter’s leader, billionaire businessman and finance minister Andrej Babis, has said he opposes a bank tax on the grounds that it could add to costs for consumers.
With the exception of the communists, other Czech parties have been similarly unenthusiastic. Locals also report limited popular support for the proposal. Banks in the Czech Republic are fairly well-regarded by the country’s voters, having come through the global financial crisis relatively unscathed and avoided the problems with legacy Swiss franc mortgages that have plagued lenders elsewhere in the region.
Nevertheless, some in the industry fret that the SDP’s bank-bashing could yet strike a chord with the Czech public. “The substantive arguments they use are questionable, but the rhetoric is such that it may damage the good reputation of the banking industry in this country,” says Pavel Stepanek, executive director of the Czech Banking Association.
Others see it as ominous that the issue of bank profits has been raised so early in the election campaign. “Given that this is already part of the discourse, it’s not out of the question that something will come of it,” says one regional banker. “Other parties may yet have to jump on the topic.”
Worried Czech financiers have only to look across the border to see how quickly anti-bank sentiment can gain momentum. In early 2015, following the Swiss central bank’s removal of the cap on its currency, Poland’s opposition Law and Justice Party (PiS) decided to make Swiss franc mortgages a central plank of its election campaign.
The fact that in Poland such loans had been mainly sold to more affluent borrowers failed to prevent the issue becoming an effective rallying cry for PiS politicians, who promised to make banks foot the bill – estimated at up to $6 billion – for a Hungarian-style forced currency conversion at pre-crisis rates.
Two years on, with PiS firmly entrenched in power, those proposals are now quietly being dropped. Final agreement on the issue has yet to be reached, but it seems likely that Poland’s banks will be encouraged to work out their FX portfolios on their own terms – as the industry had urged all along.
For many bankers, however, relief at the news has been tempered by frustration at the damage done to their sector by 18 months of uncertainty.
Bank share prices, lending growth and M&A activity have all suffered. More importantly, the Swiss franc mortgage furore stoked sufficient ill-will against Poland’s largely foreign-owned banks to allow policymakers to claim a mandate for both a hefty bank tax and a grand campaign to nationalize large parts of the sector.
At present, the populism of PiS has few echoes in the Czech Republic, the most prosperous and developed of the former communist-bloc states. Yet, as one banker notes, as long as the substantial profits from the country’s banks continue to find their way into the hands of foreign groups, the sector will remain a potential target for advantage-seeking politicians.
The fact that Czech lenders have so far escaped a levy is no reason to assume that they will be able to do so in future, he adds. Fourteen of the European Union’s 28 members have imposed bank taxes of one sort or another over the last decade, including – as Sobotka has pointed out – all of the Czech Republic’s nearest neighbours.
What is more, there are already signs that the SDP’s determination to bring bank profits into the Czech election campaign is having an effect. Even Babis, an opponent of bank taxes, recently indicated an interest in limiting the repatriation of dividends by foreign owners of Czech banks. They could be forced instead to spend the cash on salaries and support for local public programmes, he added.
Czechs pride themselves on their pragmatic and pro-business attitude. Whether it will be proof against the lure of easy money from the EU’s most profitable banking sector, however, remains to be seen.Local bankers may not be seriously worried yet, but they are well aware that there is no cause for complacency. There is plenty of time between now and October – and plenty of precedent on all sides for a less forbearing approach to the industry.