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Croatia’s banking sector: Facts & Figures

Updated September 2018 – For earlier editions of Facts & Figures click here

Croatian GDP growth slowed in 2017 to 2.8%, versus 3.2% in 2016, in line with consensus expectations at the beginning of 2017. Despite financial issues related to Agrokor – a conglomerate, largely centered in agribusiness, with headquarters in Zagreb – the main drivers behind such a performance were a record tourism season, stronger private consumption, robust EU trade partners’ demand and favourable funding conditions. That said, private consumption rose by 3.6% driven by the tourist-related spending, strong wage growth, rising employment, lower savings rate and citizens’ re-leveraging.

Despite strong business optimism, higher firms’ profits, price competitiveness gains and cheap capital, investments surprised on the downside, reflecting halted capital expenditure (related to Agrokor and its economically intertwined companies), accompanied by some EU funding under performance. Net trade contributed negatively to the GDP growth against the background of stronger import-intensive domestic demand.

Croatia ended 2017 with a small budgetary surplus just above 0.5% of GDP due to cyclically stronger tax revenue, a positive impact from tax reform, general spending restraint and capital expenditure under-execution. Stronger HRK and faster nominal GDP growth combined with one of the strongest fiscal deficit reductions in two years in the CESEE and interest bill cuts have brought about further decline in public debt to 78% of GDP.

We expect the Croatian National Bank (CNB) to hold its easing policy, maintaining hefty Kuna liquidity and bringing down the Kuna yield curve as well as liquidity costs for banks. From a risk perspective, monetary easing is allowed by banks’ strong external positions, steady foreign exchange outlook and reduced fiscal risk.

Currently 25 banks and five housing savings banks operate in the market. The top six banks hold roughly 80% of market share by assets. Banks assets declined to 110% of GDP in 2017 (from 114% in 2016) on the back of strong government deleveraging and accelerated non-performing loan (NPL) sales. That said, the sales of NPLs intensified during the year amounting to HRK 8.4 billion of sold claims, resulting in NPL ratio decline by 2.4 percentage points to 11.4%.

Foreign ownership in the banks is prevailing with 90% of assets under the control of 15 foreign-owned banks, while only three banks are still state-owned (6% assets). The rest are locally owned private banks.

In terms of infrastructure, the numbers of ATMs, EFTPOS terminals and internet users are constantly growing while the brick outlets network continues to shrink slowly. There are 1.2 ATM and 28.8 EFTPOS terminals per 1,000 inhabitants and 0.27 brick outlets per 1,000 (1 per 3,710). There are two payment cards per inhabitant on average.

Gross loans decreased by 4.2% in 2017, with public sector (-21.4%) the main drag after state road companies’ bank debt was swapped with a much cheaper €1.25 billion Eurobond. Notwithstanding higher business optimism and easier SME credit standards, the corporate loan book fell 1.3%, largely due to NPL sales (HRK 6.2 billion) but also due to lower disbursements, as a result of Agrokor-related uncertainty along with a €530 million life-line to Agrokor in June that effectively lowered local demand for working capital loans. Retail re-leveraging (up 1.8%) due to a stronger labour market, consumer sentiment and in turn demand for non-purpose loans. Housing loans soared in the second half of the year thanks to state subsidies. Private sector lending thus displayed only a modest 0.5% year-on-year growth under strong impact of NPL sales, while excluding this effect the actual private credit growth, i.e. performing portfolio, reached 4.7% year-on-year.

Deposit growth decelerated to 3.2% year-on-year (versus 4.7% in 2016). The strongest positive contribution came from corporate deposits (9.0% year-on-year) due to another record tourist season and stronger firms’ profits. Growth in household deposits was modest (1.2% year-on-year), reflecting low interest rates offered on savings.

Regarding profits, net interest income increased 1.4% year-on-year supported by a significant drop in funding costs (-32.6%) which managed to compensate for lower interest income. Agrokor financial restructuring forced higher provisioning costs (51.2% year-on-year), resulting in strong pre-tax profit deterioration (-29.2% year-on-year) and higher cost of risk (up 63 basis points year-on-year).

Bank capitalization remains among the highest in the EU, with the capital adequacy ratio consistently above the 20% threshold, most recently at 23.2%.

Key initiatives of the Croatian banks are related to further NPL resolution, in the context of still very high NPL level, especially in the corporate sector (22.3%). However, the banking system still lacks clear criteria for automatic NPL resolution. That said, the potential starting point could be to follow up on write-offs executed in 2017, in order to analyse the effects of temporary regulation and suggest modifications to the existing income tax legislation, with the aim to establish a permanent and efficient procedure for write-offs in terms of tax deductibility that would balance the interests of creditors and debtors.

Settling the disputes related to forced Swiss Franc 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. Furthermore, the Croatian banking sector has to bring a plethora of regulation into line with EU standards, on the other hand, and reduce the cost of regulation on the other.

Contributor: Hrvoje Stojic hrvoje.stojic@addiko.com

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