Croatian banks in 2018: rise in profits, but fall in operative business

Zagreb, Croatia (Mark Ahsmann, CC BY-SA)

Banks in Croatia doubled their pre-tax profits in the first nine months of 2018, according to Croatian National Bank (CNB). Crotain banking sector has the highest capital employed in the economy, around HRK60 bn.

Of the total of 23 banks, with the loss of six banks in the first nine months of 2018, their total loss amounted to HRK52.5m. Almost half, or HRK22m, relates to the Veneto bank, owned by Privredna Banka Zagreb (PBZ) and took over by PBZ. PBZ is the second biggest bank with over HRK1bn of profits in January-September 2018.

The largest profits before tax in this period had Zagrebačka banka (owned by Italian UniCredit), HRK1.7bn, followed by PBZ. Compared to the same period last year, PBZ’s gross profit increased by HRK211.8m or 23.1 per cent, while Zagrebačka banka recorded a strong growth in gross profit, up 189.6 per cent or HRK1.1bn.

After Zagrebačka banka and PBZ, the next is Erste & Steiermaerkische banka with HRK904.9m, followed by Raiffeisenbank Austria with HRK429.5m. Both these banks increased their profits y/y, Erste for about HRK200m, and RBA for slightly less than HRK100m.

Splitska banka had gross profit of HRK364.2m, while in the same period in 2017 it posted a loss of HRK76.5m. OTP banka Hrvatska recorded a growth of profits of almost HRK140m, up to HRK228,9m. However, the final 2018 results of the top banks will be different, because in May 2018, OTP banka Hrvatska took over Splitska banka.

The seventh place by the gross profit in the first nine months of 2018 was held by another foreign-owned bank, Addiko Bank (owned by Advent International and EBRD) with a profit of nearly HRK156m, and eighth place is taken by the domestically owned bank — the Croatian Post Bank with a gross profit of about HRK151m.

Quarterly data for the Q4’17 show a significant increase in the net profit of the Croatian banking sector by about HRK2.2bn. This result is explained by considerably smaller value adjustments and reservations in 2018. 2017 results were burdened with Agrokor-related losses, so 2018 value adjustment costs are down by about HRK2.4bn. As the results improved, although less than expected due to lower value adjustments and provisions, operating banking profits decreased. For example, total interest income for nine months of 2018 was down by about HRK1.2bn due to falling interest rates on the market.

Net interest income, i.e. when interest income is deducted from interest payments, is lower by about HRK400m. The conclusion is based on the Croatian Banking Association’s Surveys publication, which analyses bank operations for first nine months of 2018. The banking sector has the highest capital employed in the economy, about HRK60bn. Croatian banks are among the best capitalized banks in the EU and the world. Therefore, the rate of return on capital should be looked at, instead of absolute amounts. This rate is currently about 9.8 per cent and is still below the global average calculated on the basis of the Financial Soundness Indicators database. It is expected that in the favorable part of the business cycle growth the entire economy will continue to grow, including banking. Now, capital reserves are being created for the depreciation of losses in crisis. The fall in interest rates has raised the demand for loans, especially non-subsidized ones.

In 2018, compared y/y, 6.8 per cent more of mortgages were approved, with an increase of foreign currency denominated mortgages, and decrease of mortgages denominated in HRK, as well as a fall in variable interest rates and growth rates with fixed ones. On the one hand, it is possible that credits denominated in foreign currency are more demanding than earlier, because of the announcement of the introduction of the EUR. On the other hand, banks have reached limits on the ability to offer favorable fixed rate mortgages in HRK. Due to a much larger and more developed markets, fixing is much easier in EUR, and in the bank offer one can now see greater opportunities for using non-purpose loans with a fixed interest rate for a significant part of the repayment period.

Banks continue to manage risks in accordance with the highest professional standards, taking into account the state of the business cycle and the capacity of the debt service sector. At a time of the financial crisis citizens experienced a more lenient recovery in the loan, which began relatively late in 2016, and banking associations believe that after the crisis experience citizens are borrowing more conscientiously, as banks in their credit policies are trying to take into account all the possible risks.

Total deposits in commercial banks in Croatia amounted to HRK288bn at the end of September 2018, which is by HRK14bn, or 5.2 per cent, more y/y. Thus, the trend of total deposits growth has continued on an annual basis since December 2011. This is mainly due to the strong growth of deposit money, given that savings and time deposits fell in annual terms on a yearly basis. Demand deposits, which include current and giro account balances and bank liabilities on issued HRK payment instruments, exceeded HRK86bn in September 2018, HRK16.6bn or 23.8 per cent more than a year earlier. By contrast, total savings and time deposits have been in a negative trend since October 2016. By the end of September 2018, they amounted to HRK202bn, which is HRK2.2bn or 1.1 per cent less y/y. The fall of savings and time deposits is the consequence of the fall of foreign currency deposits, as by the end of September 2018 HRK savings and time deposits, with monthly and annual growth, exceeded HRK35bn. On the other hand, savings and time deposits in foreign currencies, accounting for about 82 per cent of total savings and time deposits, fell y/y by 1.5 per cent or HRK2.5bn to HRK166.5bn.

The structure and trends in the amount of deposits clearly show a greater tendency to hold liquid assets, which is certainly motivated by historically low interest rates on savings. Banks explain that this is a consequence of high liquidity in the financial system, thanks, among other things, to the expansionary monetary policy measures of the CNB. High liquidity was a feature of the domestic financial system throughout 2018, which, with projected moderate rates of lending, implies continued low passive interest rates. Thus, the increased savings funds are likely to be more directed to deposit money, and less on savings and time deposits.

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.

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