Standard&Poor’s Global Ratings has said that economic risk for Croatian banks has receded on the back of strengthening economic resilience. The performance of Croatian banks will likely pick up in 2016-2018 after large one-time costs related to the conversion of CHF denominated loans to EUR in 2015, S&P said in a statement.
“Banks’ capital buffers are sound and sufficient to absorb unexpected costs. We view the medium-term trends on the funding side as stable, although we observe that the funding base is becoming more reliant on domestic customer deposits,” the agency explained.
“After six years of recession, economic growth rebounded in 2015 on the back of a strong tourism season and a rise in domestic demand. Because these positive trends continued into 2016, we forecast annual real GDP growth to average 2.5% between 2016 and 2018,” the agency said.
“We expect net exports and domestic consumption will remain the main pillars of growth. As such, economic resilience has strengthened, in our opinion. Domestic credit growth was detached from the GDP recovery in 2016, but will gradually rebound in 2017, in our view. We expect banks will continue in the next two years to struggle with their sizable NPLs and elevated credit losses on the lending side, and private sector borrowing to be hampered by the ongoing deleveraging on the demand side. We consider that the Croatian economy remains in a correction phase, with credit losses still having a high, although gradually receding, impact on the banking system. Problem loans remain elevated, with a domestic NPL ratio of 15% in 2016. We expect the high share of NPLs to decrease to close to 12.0% by 2018 thanks to an intensified sale of problem loans,” the statement read.
“Our assessment of industry risk reflects the increasing pressures on Croatian banks’ industry dynamics, given the sluggish domestic growth and prevailing balance sheet vulnerabilities that weigh on the sector’s profitability and will take time to correct. Capacity of the sector to further grow, and finance more the local economy, hinges on an increase in the retail and corporate sector deposits, which should stem from higher GDP per capita and stabilization of leverage in the corporate sector. Recent government intervention challenges the operating environment. For example, the new regulation that forced banks to redenominate loans taken out in Swiss francs to euros, which caused large negative one-off shocks to banks’ income. The foreign-owned ownership structure and sound capitalization of the Croatian banking system supports the industry’s stability, in our view.”
“The stable industry risk trend reflects our view that banks’ performance will likely pick up in 2016-2018 after large one-time costs related to the conversion of Swiss franc loans to euro in 2015. Banks’ capital buffers are sound and sufficient to absorb unexpected costs. We view the medium-term trends on the funding side as stable, although we observe that the funding base is becoming more reliant on domestic customer deposits. Historically, Croatian banks have tapped cross-border funding from foreign parents to finance their business. The receding access to such funding sources, combined with the narrow domestic capital market, places a constraint on financing future loan placements to the economy,” the agency noted.
Croatia is planning an international bond issue this quarter and aims to raise €1.5 billion on international markets in 2017, though the total will depend on market conditions, Finance Minister Zdravko Maric said.
“In Q1, you can expect that we are going to do some domestic bonds, domestic transactions but we are also planning to tap the international markets,” Maric told reporters. “In our budget for the whole year we budgeted roughly EUR1.5bn but obviously the decision that we will eventually make will also be dependent on the conditions of the market,” he said.