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Croatia’s banking sector: Facts & Figures

Updated December 2020 – For earlier editions of Facts & Figures click here

Croatian economic growth in 2019, has slightly speeded up to 2.9% based on stable domestic demand. Growth in personal consumption by 3.5% was supported by increase of available income as well as positive movements in the labour market. Investments grew by 7.1% while government consumption has strengthened to 3.3% year-on-year. Exports of goods and services continued positive movements but still stronger growth in imports of goods and services highlights the continued high import dependence. However, economic growth remains moderate in relation to other new EU members, but on solid foundations due to the significantly decreased external vulnerabilities and improved fiscal metrics. Thanks to improved debt ratios, Croatia satisfied the convergence criteria and filled an application for the entrance into the ERM II as a step towards joining the EMU and adoption of the euro.

Croatia ended 2019 with a budgetary surplus at 0.4% of GDP. That is the third surplus in a row driven by an improvement on the revenues side. Positive impact also came from decreased interest expenses. Favourable market conditions with low interest rates were used for the debt refinancing at a lower cost. Nominal GDP growth combined with continuation of fiscal consolidation and interest bill cuts, have reduced public debt to 73.2% of GDP. Consequently, the yields on government debt have fallen to the lowest level in the history of the Croatian state. Standard & Poor’s as well as Fitch have left Croatia in the lowest investment grade (BBB-) but with a changed outlook from stable to positive.

Moderate inflation, ample, and even rising, liquidity, low interest rates and a stable foreign exchange rate (HRK/EUR) have remained the main features of the financial markets. Monetary policy has an accommodative stance as long as inflation remains modest, and the FX rate is stable. From a risk perspective, monetary easing is allowed by banks’ strong external positions, steady FX rate outlook and reduced fiscal risk.

Rising surplus of liquidity in the financial system has focused the competition between banks on placement of loans to customers. But the credit demand remains subdued in the corporate segment. The restructuring process in the largest retailer company (former Agrokor, transformed into Fortenova) ended in April 2019 and former creditors took over the management of the company. But the conclusion of takeover deal was preceded by a settlement of the over-indebted company with creditors, where the debts were to a large part written off or converted into capital. In addition, at the beginning of 2019, creditors collected debt from the insolvent shipyard (Uljanik) through the protest of state guarantees placed to the shipyard as collateral, thus further reducing the volume of loans. Hence, in year 2019 the loan volume with corporate segment had been reduced by 3.6%. Without one-off negative impacts, the demand for working capital lending had decreased as a result of excess liquidity in the system, which motivates the short-term financing between companies and thus reduces the demand for loans from banks.

Loans to households increased by 6.9% in 2019 due to the continued double-digit growth of cash loans. In February 2019 the regulator sent a recommendation to banks to harmonize the criteria for assessing creditworthiness between long-term cash loans and housing loans. Implementation of recommended criteria in the processing of credit applications with consumers has slowed down the growth of cash loans in the second half and the year ended with an increase of 11.5%. At the same time, the demand for housing loans has been increasing.

Interest rates offered by banks on time deposits have fallen almost 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 below a half of total customer deposits. Interest rates offered on time deposits are under the pressure of monetary easing measures. Change in the direction of monetary policy in Croatia is not forecasted in the mid-term horizon as the country  awaits adoption of the euro in the ERM II. After joining the EMU the downward pressures on interest rates are more likely to strengthen than to weaken. Hence, the maturity gap in banking assets and liabilities will deepen further.

The banking sector has realized a 9.9% return on equity in 2019. Gross incomes were up by 11% on a yearly basis and operational expenses and risk costs raised by lower rates. Rise in the profit after tax was 17%. The NPL ratio fell to 5.5% as a result of improved collection and debt sales. Portfolio quality has had a positive contribution to the banking sector profitability in the mid-term period before 2020. On the positive side, the credit registry has renewed the consumer debt reports in 2019, after a year and half long period without activity when the system has been adjusted with to the GDPR. The approval process in consumer lending has been improved with information of total client indebtedness. Now, in the period of worsening in market conditions and clients’ creditworthiness, the banks are well prepared for the management of loan portfolio quality and for the prevention of NPL ratios and risk costs’ increase.

Thirteen small banks and three housing saving banks are still active on the market, but with low probability for sustainable business. Improvement in incomes is limited in the low interest rates environment and rising technology dependence in providing of services where the economy of scale is a decisive factor. On the other hand, the cost efficiency is limited by the rising complexity of regulation. Forecasted rise in risk costs during the already started recession could be a trigger for small banks to find a way out through enlargement. So the motivation for mergers and acquisitions will not be missing.

Contributor: Anton Starcevic anton.starcevic@rba.hr