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Croatia’s banking sector: Facts & Figures

Updated September 2019 – For earlier editions of Facts & Figures click here

Croatian economic growth in 2018, based on stable domestic demand, slowed down to 2.6% as a result of the negative contribution of net foreign demand. Growth in personal consumption was supported by increase of available income as well as positive movements in the labour market. Investments grew by 6.1% while government consumption declined to 2.3% year-on-year. Exports of goods and services recorded positive movements but stronger growth in imports of goods and services highlights the continued high import dependence. However, in comparison to the pre-crisis period, economic growth remains healthier due to the significantly decreased external vulnerabilities and improved fiscal metrics. Thanks to improved debt ratios, the country exited the EU procedure on excessive macroeconomic imbalances in the last In-Depth Review. Finally, Standard & Poor’s upgraded Croatia to BBB- with stable outlook, thus becoming the first rating agency to award investment grade rating to the country.

Croatia ended 2018 with a small budgetary surplus at 0.2% of GDP. The second surplus in a row was driven by an improvement in the financial results of the government and public corporations and from better-than-expected tax receipts, which brought the biggest positive contribution to fiscal improvement. Positive impact also came from decreased interest expenses thus resulting in a primary balance surplus for the fourth consecutive year (2.5% of GDP). Furthermore, an increase in investments was recorded, which was 33.8% higher than in 2017. On the other side, payments for guarantees, called for shipyards, caused a decrease in the surplus. Stronger Croatian kana (HRK) and faster nominal GDP growth, combined with continuation of fiscal consolidation and interest bill cuts, have further reduced public debt to 74.6% of GDP.

Moderate inflation, ample, and even rising, liquidity, low interest rates and a stable foreign exchange (FX)  rate have remained the main features of the financial markets. No changes in monetary policy are expected during 2019 i.e. accommodative stance to be kept, as long as inflation remains modest, and the FX stable. From a risk perspective, monetary easing is allowed by banks’ strong external positions, steady FX outlook and reduced fiscal risk.

The rising surplus of liquidity in the financial system has focused the competition between banks on lending. In the corporate segment, credit demand remains subdued, as long as the result of the restructuring process in Agrokor – the largest private entrepreneur and main trading chain for numerous local producers – is uncertain. In April 2019, former creditors took over the management of the company. The consequent improvement in business optimism should have a positive impact on credit demand in the corporate segment.

Households with below-average salaries have limited access to housing loans as result of the more restrictive criteria applied last year. These criteria do not apply to non-housing consumer loans, and unsecured cash loans have accelerated by 12.5% on an annual basis. Finally, in February 2019 the regulator recommended that banks apply the same criteria to all non-housing loans with original maturity equal to or longer than five years as they apply to housing consumer loans. Regardless of recommendations, growth in cash loans is expected to continue.

Interest rates offered by banks on time deposits are close to zero. At expiry of time deposits, clients are not motivated to renew the contract and the amounts simply remain on their demand accounts. Consequently, the share of time deposits has fallen under half of total customer deposits. As interest rates offered on time deposits are not forecasted to change in 2019, the maturity gap in banking assets and liabilities will deepen further.

The banking sector has realised an 8.4% return on equity in 2018. Gross incomes were lower by 8% on a yearly basis, but the reduction of risk costs resulted in a 46% rise in profit after tax. The NPL ratio fell to 9.8% as a result of improved collection and debt sales. Portfolio quality is expected to make a positive contribution to the banking sector profitability in the coming period, but the base is shrinking. On the negative side, the credit registry has suspended consumer debt reports since May 2018 due to incompatibility with the GDPR. Rising consumer loans, disbursed without information of total client indebtedness could lead to higher NPL ratios and risk costs in the future. It is still unclear when the credit registry will be able to renew the full service.

In November 2018, the largest merger took place in the local market. The Croatian branch of SocGen merged with OTP. The rnlarged OTP took the fourth rank with more than 10% of market share. Twelve small banks are still active on the market, but with low probability to realise profitable business sustainably. Improvement in cost efficiency is limited in the rising complexity of regulation. The way out for small banks could be through the improvement in economy of scale, so the motivation for mergers and acquisitions would not be missing.

Contributor: Zrinka Živković Matijević zrinka.zivkovic-matijevic@rba.hr