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Croatia’s banking sector: Facts & Figures

Croatian GDP growth accelerated to 2.9% year-on-year in 2016 (versus 1.6% in 2015). Such performance is mainly owing to another record tourist season, stronger private consumption and exports. Private consumption rose 3.3% year-on-year on stronger tourist spending, employment and real income growth and lower savings rates. Investments also performed well on private capital expenditure (notably in tourism) amid business optimism, stronger EU funding, stronger firms’ profits and bank credit diversification.

In its February 2017 EU Semester report, the EC assessed Croatia as continuing to suffer from excessive macroeconomic imbalances given its significant debt burden and low growth potential. Fiscal imbalances improved substantially as the budget deficit sank 2.6% year-on-year to 0.8% of GDP in 2016. Importantly, the structural adjustment topped 1% in each of the last three years, in line with both the headline and structural deficit targets enshrined in the Excessive Deficit Procedure (EDP) in early 2014. In such circumstances, public debt faced a 2.5% decline to 84.2% of GDP in 2016, and is set to decline further thanks to stronger nominal GDP growth and ever lower interest rates. External debt fell from 103.8% in 2015 to 91.4% in 2016, driven by banks’ external deleveraging, non-performing loan (NPL) sales as well as debt-to-equity swaps. Following a successful launch of tax reforms with a positive impact on consumption, competitiveness and NPL sales, Croatia should show further appetite for reforms in the areas of non-price competitiveness, education system and public finance.

Notwithstanding the ECB’s hints of a gradual development towards less dovishness, the Croatian National Bank (CNB) shall maintain easing bias in its ongoing support to relatively subdued credit activity and the ever cheaper cost of credit. That said, stable exchange rates, the position of sound banks’ net foreign assets, fiscal risk mitigation and improvement in net international position all make the CNB’s life easier.

The Croatian financial system is dominated by universal banks. They account for more than 70% of financial sector assets. Currently 26 banks and five housing savings banks operate on the market. Top six banks account for roughly 80% of market share by assets. Bank assets declined to 120% of GDP in 2016 (from 124% in 2015) on the back of Swiss Franc loan conversion and the subsequent loan stock adjustment as well as accelerated non-performing loans (NPL) sales. That said, after the NPL ratio declined by 2.9 percentage points to 13.8% in 2016 we see potential for further NPL reduction given tax-incentivised NPL sales solely in 2017. The financial and operating restructuring of the food-to-retail conglomerate Agrokor poses risks to bank provisioning.

Foreign ownership in the banks is prevailing with 90% assets under the control of 16 foreign-owned banks, while only two banks are still state-owned (6% assets). The rest are locally owned private banks.

In terms of infrastructure, the number of ATMs, EFTPOSs and internet users is growing while the branch network is shrinking slowly. There are 1.1 ATMs and 24.1 EFTPOSs per 1,000 inhabitants and 0.27 branches per 1000 (1 per 3,703). There are two payment cards per inhabitant on average.

Credit deleveraging continued for the fifth year in a row in 2016, and accelerated to -5.1% year-on-year from -1.7% year-on-year in 2015. Such a performance is owing to lower lending to the public sector, as the government opted for cheaper market funding, plus strong decline in retail loans due to forced CHF loan conversion as well as NPL sales. NPL ratio fell to 13.8%, end of 2016 from 16.7%, end of 2015. Corporate de-leveraging eased somewhat in the course of 2016, in line with stronger business optimism and investment recovery. Stronger private consumption as well as investment outlook and further kuna interest rate compression ahead bode well for lending activity in 2017, while further, yet-to-be-quantified, bank portfolios restructuring will act as an offset.

Deposit growth slowed from 5.6% year-on-year in 2015 to 4.7% year-on-year in 2016 under the impact of interest income tax and ever lower passive interest rates, which has motivated deposit migration to open-end investment funds. We expect further deposit deceleration. Meanwhile, the loan to deposit ratio declined to 97% in 2016 (from 107% in 2015).

Bank capitalisation is among the highest in the EU, as capital adequacy ratio consistently exceeds the 20% threshold (with the latest figure at 22.5%).

After hefty losses in 2015 caused by the CHF housing loan conversion, banks managed to increase net interest income by 3.6% year-on-year in 2016 as funding cost slump offset declines in interest income. Net income was also boosted by some one-off revenues, including reversal of too conservatively booked, loan loss provision, mostly in CHF conversion case. Pre-tax ROA and ROE thus reached 1.5% and 11.8%, respectively, representing the highest levels since 2008.

Key initiatives of Croatian banks are related to further NPL resolution, especially in the corporate sector where the NPL ratio is 28.3%. Settling the disputes related to forced CHF loan conversion and deposit insurance reform in order to bring it in line with the EU average and cut the cost of regulation, remain high on the agenda.