The data from the annual financial statements of the entrepreneurs reveal an extremely interesting dynamics in the structure of the Croatian corporate sector. But the changes are still located at the bottom of the corporate pyramid.
In the beginning of June Financial Agency (FINA) has announced the results of Croatian business for 2018, which is the first opportunity to see changes that take place in the depth of the corporate sector structure in Croatia. Micro enterprises are champions of growth. With the growth of 28.8 per cent of total revenue, 13.8 per cent of employees and 44 per cent net investment, no other segment came close to these results. Two thirds of the total growth of the number of employees (about 46,000 on the basis of working hours) is employed in the micro segment. And in the spectacular growth of the number of companies earning foreign market revenues again the micro-corporations dominate.
The most interesting data refers to the growth of investment that is very unevenly distributed — it is concentrated among the smallest and largest companies, while investments among small and medium-sized enterprises are unexpectedly reduced. This information is a cause for concern, regardless of the solid overall result. Profitability gained, and losses were significantly reduced compared to 2017. Capital and reserves recorded a solid growth of 5 per cent year on year. As corporate sector commitments have not increased, it can be concluded that growth in this cycle is still dominated by its own sources of funding, which is the guarantee of sound budgets.
State-owned companies vs private
Looking at the sectors’ ownership, the private sector is convincingly dominated by employment, income and revenue growth, but the state and mixed equity sector dominates in terms of investment growth. On the one hand, this is the result of a long stagnation or a reduction in government sector investment (with EU funds there is room for a healthy public investment growth). On the other hand, the slow growth of new private sector investment still raises the eyebrows, especially in view of the moderate decline in the medium. And without a deeper analytical insight, this uneven growth in corporate investment can be associated with classical failures — poor regulation, investment barriers and high burdens, coupled with strong labour market pressure. It is no longer possible to exclude the hypothesis that the pressure on labour costs partially excludes investments in the corporate sector.
Croatia still has nearly 1,500 companies in which the state has some form of holdings (majority or minority). The total share of enterprises in state or mixed ownership in the employment of the corporate sector is 17.6 per cent (about 166 thousand employees). These companies are slower to grow and employ, but now they have more growth in investments, probably because there is a greater orientation towards the use of EU funds. Their profits grow solid, especially in 100 per cent state-owned enterprises (about 8 per cent of all companies), but this does not have to be good in terms of companies with privileged positions and positions in the market, whose economic efficiency is questionable. Growth in terms of under-utilized efficiency reserves means that the inefficiency cost is overwritten by private companies and citizens, and this is a meltdown on healthy growth.
Managerial limited and interest-motivated administration cannot economically and rationally manage such a large and branched state-corporate system. This is reason why some developmental occasions may be missed. On the other hand, the dynamics in the micro segment are excellent, but small and medium enterprises (SME) are lagging behind in terms of investment. It is evident that there is still a problem of dynamics — the problem of the lack of a steady growth of enterprises and the transformation of micro enterprises into small, medium and so on. And some other research shows that in Croatia there is a lack of mature growing companies.
The biggest companies in Croatia
That is why nothing has changed at the very top of the corporate pyramid. The largest Croatian company — and this is already traditionally the oil&gas company INA — realizes total annual income of HRK21.9bn with 4 125 full-time employees (FTE). INA also achieved a high growth in revenues — 19.3 per cent in 2018 compared to 2017. This can be explained by the rise of world oil prices in 2018. For the same reason, gas company Crodux jumped from 12th to 7th place compared to 2017. This year, in the top 10 unconsolidated financial statements, Croatia have five energy companies (together with electricity company HEP, gas company PPD, and oil distributing company Petrol). Consolidated reports will change the landscape a bit, as diversified businesses, such as insurance, tourism, food and real estate cluster Adris, production, development, sales and distribution company Atlantis, distribution company Orbico, and others will also enter the top places, but this will not significantly change the overall picture.
After the return of Konzum (as the second largest enterprise) among the companies that submit their annual reports, Croatia has three retail chains (Konzum, Lidl and Spar). Accordingly, with the dominance of the energy business and retail, the very top of the line can only be broken by communication company HT and Zagrebačka banka, which now appear to be “intruders” in the sectoral sense, especially if we take into account the fact that on the non-financial list the biggest bank was replaced only by the fourth largest retailer. In this case Croatia would have 5 energy companies, 4 retailers and one telecommunications company on the top 10, according to total revenues. If we were to look for the largest industrial company on the list, we would find pharmaceutical company Pliva in the 12th place, and after Pliva, we should go down to the 22nd place where food production company, Vindija is located.
The banking sector brings some news as well. The Q1’19 show a slight decrease in net profit of about 3 per cent compared to the same period of 2018. Return on assets was maintained at 1.2 per cent, return on equity at 8.4 per cent, and capital inflows grew to 22,6 per cent. This indicates that still there is insufficiently mobilized potential for lending. The reduction in the total net interest margin to 2.56 percentage points and the renewed pressure to drop interest rates reflected the decline in interest rates on housing loans. The total average of housing loans in the HRK decreased from 3.59 per cent at the end of 2018 to 3.10 per cent in April, and on loans with a currency clause from 3.47 per cent to 3.17 per cent in the same period. In some categories of credit, rates are also noticed, which are slightly below 3 per cent.
Loan volumes and their quality are not accompanied by competitive pressures and interest rate cuts. The ratio of non-performing loans fell to a still relatively high 9.5 per cent, with apparent halting the sale of bad credit portfolio at the beginning of this year. The fall trend of this ratio obviously slowed down in 2018 and early 2019, as compared to the previous period. Sales in the Q1’19 were negligible HRK80m. This is also linked to the uncertainties associated with amending the enforceable law, which has been announced for a long time and which should lead to a further increase in the number of enforced collection procedures. If other regulatory changes are added the safest way to maintain profitability, capital and financial stability is to increase cost efficiency.
This is a typical strategy for a mature industry at the stage of consolidation. It is well known that banking is one of the few industries in which employment does not grow despite the favourable business cycle stage — on the contrary, it decreases. There is no significant salary growth, and increasingly investing in systems and applications that support processes with the smallest engagement of people. The most important cost-benefit indicator (which is better if the value is lower), the cost-to-income ratio, has reached a historical 43 per cent minimum, which is very low due to relatively small credit volumes compared to developed countries, where the volumes are much higher and the cost efficiency is lower.
In the actual figures, the total administrative costs and depreciation of Croatian banks in the Q1’19 were 1 per cent lower than in the Q1’18, with the lowest administrative costs being reduced. The depreciation costs grew, probably as a result of the increased software investment over the past period. Banks are obviously looking for optimal business responses and market strategies that are characterized by a combination of high costs of traditional regulation and legal uncertainty on the one hand, and deregulation of some business segments on the other, followed by major technological changes, and changes in habits consumers in moderate potential for growth of credit that is limited by modest economic growth and demographic changes.
It is, therefore, still a very traditional corporate structure at the very top of which is characterized by energy, retail, finance and some industry. There are no new ups and downs in the top segment. Retaining dynamics in the lower parts of the pyramid is key to preserving the development process and structural changes that will only take place in the long run after a multi-annual growth period.
The Croatian economy is indeed going through the period of structural transformation after integration with the EU, where the best micro entrepreneurs have the chance to become bearers of growth and some may have a chance and skip class to welcome the year, when market changes finally bring visible changes to the very top of the Croatian corporate pyramid.
Vedran Obućina is an analyst and a journalist specializing in the Croatian and Middle East domestic and foreign affairs. He is the Secretary of the Society for Mediterranean Studies at the University of Rijeka and a Foreign Affairs Analyst at The Atlantic Post.