Czech c.bank says banks resilient, property hot

PRAGUE, June 10 (Reuters) - The Czech banking sector is not threatened by a U.S.-style mortgage crisis and banks are resilient to the risks they face despite an expected rise in defaults, the central bank said on Tuesday.

"According to stress tests, the financial sector is currently resilient to the market, credit and some specific risks to which it is exposed," the bank said in its annual Financial Stability Report.

"The main risks include a further deepening of the credit crisis in the advanced economies, a more pronounced slowdown in economic growth abroad and a continued very strong exchange rate of the crown," it said.

It said defaults may rise among exporters, mortgage holders and low-income households and there were signs of overheating on the real estate market.

The Czech banking sector is dominated by units of west European banks - KBC's (KBC.BR) Ceskoslovenska Obchodni Banka, Societe Generale's (SOGN.PA) Komercni Banka (BKOMsp.PR), Erste Bank's (ERST.VI) Ceska Sporitelna are the biggest players.

Banks raised combined profits by 24 percent last year to 47.2 billion crowns ($2.99 billion) on growing lending in the central European economy, whose gross domestic product rose by 6.6 percent in 2007.

This year, a GDP slowdown to 4-5 percent is expected due to lower household demand and weaker growth in the euro zone.

Fast price growth on the real estate market pointed to overheating, it said.

"Although the property market growth still cannot be regarded as a bubble and the rise in prices as manifestly unbalanced, there are some indications that the market is overheating," the report said.

Rent returns have fallen below long-term bond yields and interest rates on home purchases.

Loans to developers have grown to 25 percent of total lending to corporates last year from 10 percent in 2001, the bank said, and grew by 50 percent last year alone.

Cooling of the property market is a significant risk, but banks will be able to handle it, the report said.

"In response to the property market problems in some advanced countries, domestic banks considerably tightened their credit standards vis-a-vis the property development sector in early 2008. This can be viewed as an appropriate response to the evolution of the risks in the sector." (Reporting by Jan Lopatka; Editing by Gerrard Raven)