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Croatia’s banking sector: Facts & Figures

Updated December 2021 – For earlier editions of Facts & Figures click here

The Covid-19 pandemic determined not just the economic, but all other aspects of everyday life in 2020. Notwithstanding the fact that the root of the crisis was not the economy, every single economic variable was affected – from oil prices and inflation to personal consumption, supply chains, production and labor markets. Croatia’s high dependence on tourism led to the strongest GDP decline on record, of -8% year-on-year. Social distancing measures curbed spending, as private consumption fell 6.4% year-on-year, while the drop in business sentiment weighed on investment performance (-2.9% year-on-year). The closing of borders and reluctance to travel shaped the plunge in overall export performance (-23.8% year-on-year), thus outweighing the drop on the imports side (-13.2% year-on-year). The sole positive contribution came from public spending, which rose 3.5% year-on-year. This year will bring a recovery, although the extent will largely be determined by the outcome of the main tourist season.

The drop on the revenue side of the budget alongside the swollen expenditure side due to the pandemic has considerably worsened the fiscal health of the country. The general budget deficit amounted to 7.4% of GDP, while public debt rose 15.9 percentage points to 88.7% of GDP. On the positive side, Croatia was included in the ERM II mechanism in July. The inclusion, given the underlying commitment to further reform efforts, has helped the country to maintain its investment grade rating, as rated by Fitch and S&P. In November Moody’s even upgraded Croatia’s outlook by one notch, setting it to Ba1, just one notch shy of IG rating.

The drop in overall aggregate demand considerably affected overall inflation trends. Energy prices have fallen, mostly due to the plunge in global oil prices. The latter drop reflected weak global growth prospects. Low inflation was also spurred on by muted inflationary pressures from the external environment, due to low inflation in key trading partners. As a result, the annual average inflation rate slowed to just 0.1% year-on-year, down from 0.8% year-on-year in 2019.

Monetary policy was highly expansionary in order to counter negative economic effects stemming from the pandemic. For the first time ever, the CNB has bought government bonds directly from banks, thus alleviating pressure on yields. The central bank has strongly intervened on the FX market as well, selling a total of €2.7 billion to banks, mostly in March and the beginning of April when strong depreciation pressures on the kuna emerged. Overall liquidity was boosted through structural and regular operations alongside the lower reserve requirement rate. As a result of the expansionary stance of monetary policy, the excess liquidity of banks reached its highest level on record, rising from HRK 34.1 billion at the end of 2019 to HRK 54.7 billion at the end of 2020, thus reaching almost 15% of GDP. Obviously, the abundance of liquidity further compressed interest rates.

Total credit growth, excluding the public sector, in nominal terms gathered some momentum and accelerated to 3.9% in 2020, though transactions based data reveal overall some slowdown throughout 2020. Looking at sector dynamics, there was solid growth in corporate credit activity (4.9% year-on-year), owing to paused repayments due to the moratoria effects. Credit growth in the household segment slowed considerably, from 6.9% in 2019, to 2.3% in 2020. The slowdown was being solely driven by cash loans turning red amid rising uncertainty, while housing credit, remaining underpinned by the government subsidy program, accelerated further into the high-single-digit region.

The cost of financing remained favorable, despite the crisis environment. The household segment maintained a downward trajectory as new business on the housing and consumer loans were priced approx. 30 basis points and 40 basis points lower than in 2019, respectively. On the corporate side, the trend came to a halt as new business is concerned, reflecting higher uncertainty and but also moratoria impact on new business volumes, though average rates on outstanding business continued to decline.

As far as banking sector performance goes, increasing provisions (mostly of a precautionary nature) weighed on profitability as both ROA and ROE more than halved compared to 2019, standing at 0.6% and 4.4%, respectively. Meanwhile, the CIR (Cost Income Ratio) increased by almost 9 percentage points to 55%. Despite the pandemic, the level of NPL edged marginally down towards 5.4%, while the solvency ratio remained among the highest on the EU level and stood at 25.9%, signaling the robustness of the local banking sector. The consolidation trend paused during 2020, as a number of credit institutions remained unchanged (23). Nevertheless, the trend is likely to continue amid the challenging operating environment and sustainable business model being increasingly reliant on achieving economies of scale.

Contributor: Alen Kovac  akovac2@erstebank.hr