Term Deposits Are a Refuge for Investors

Bankers expect that citizens will have increasing confidence in traditional term deposits. Therefore, they believe that some of the money that has been invested in funds or stocks will be entrusted to them instead.

Written by: Valentina Starčević

Despite financial difficulties in the global market, banks in Croatia generally do not expect these problems to significantly affect domestic term deposits in the long term. Banking experts agree that it is difficult to assess what the future will bring, but in any case, it will take some time for the financial market to consolidate. A slowdown in growth is anticipated, which will reflect on bank profits, as investments will decrease. Due to monetary constraints, banks have recently been relying less on foreign sources of financing, thereby reducing the possibility of negative spillover effects. Quality risk management and a high level of capitalization of the banking system, along with the fact that bank capital is not dependent on the stock market but is owned by institutions, further support the stability of the banking system.

Out of the vault

Bankers view the measures of the Government and the Croatian National Bank positively, and some expect that in the preparation of the budget for the next year, expenditures will be reduced to the level of revenues and the budget will be balanced. Due to the crisis, there have been inquiries from citizens regarding deposits, as well as early withdrawals or terminations of deposits. However, as stated by OTP Bank, many have decided not to realize those requests. In principle, they emphasize that trust in banks has not been shaken, as many clients primarily came to consult or inform themselves about the situation in Croatia. OTP Bank understands people’s concerns and that they will be more cautious in their investments in the future, but they expect that there will be increasing confidence in traditional term deposits compared to other investment instruments. Therefore, they claim that citizens will prefer to keep part of the money that was in funds or stocks in the bank.

Savings at Privredna Banka Zagreb began to stagnate in early October due to bad financial news from around the world. Although there were inquiries from citizens during that period, very few decided to withdraw funds. It was mostly about sight deposits with a negligible number of terminations. However, now at PBZ, they say that it is evident that this was a temporary fluctuation as the current situation is stable, especially after the Government’s decision to raise the insured deposit amount to 400,000 kuna. Regarding foreign financial institutions that have encountered problems in recent weeks, Erste & Steiermärkische Bank is not directly exposed. Since the beginning of the year, Erste Bank has seen a steady increase in deposits, as it did in September, although this increase was lower than in previous months, which was also the case in previous years after the end of the tourist season.

– The Croatian banking system is significantly above the EU average in terms of available liquidity reserves, and banks, in accordance with monetary regulations, hold a larger liquidity reserve than EU member states. Due to monetary constraints, banks have recently been relying less on foreign sources of financing, thus reducing the possibility of negative spillover effects. Quality risk management and a high level of capitalization of the banking system, nearly 50 percent above the EU average, further support the stability of the banking system – say at Erste Bank.

Temporary unrest

In a period of optimism, investors turn to riskier types of investments, such as stocks and equity funds, says Anton Starčević, chief economist of Raiffeisenbank Austria, and with the onset of stagnation and rising pessimism, they again turn to the security of savings in banks. He also emphasizes that both the Government and the Croatian National Bank have done a lot to highlight the security of savings deposits in banks, and the temporary unrest due to liquidity problems in banks in America and Europe could not be completely avoided. – Trust has been restored in a short period, both due to the activities of domestic institutions and due to the coordinated action of EU governments and the ECB. The consequences of these movements for the banking sector in Croatia are minimal. Some clients will still, regardless of guarantees, withdraw their deposits and temporarily move them to vaults. However, after a few months, they will realize that the security of banks has not been compromised. Since deposits in vaults do not yield any return, they will soon return them to banks – emphasizes Starčević.

The main advantage of saving in banks is the security of deposits, which is a significant factor under current conditions, and RBA, for example, offers a fixed interest rate for savings in euros of up to 6.25 percent until the end of the year. During 2007, kuna deposits grew faster, says Zdeslav Šantić, director of the Economic Research Directorate at Raiffeisen Consulting, while this year banks are again recording faster growth in savings in foreign currencies. According to the latest data from the end of August 2008, savings in foreign currencies accounted for more than 68 percent of total deposits in commercial banks. He adds that deposits can be fixed for various periods, while investments in capital markets generally have a longer-term character. However, investments in stocks and other securities are significantly riskier. There is also the possibility of achieving higher returns than with traditional savings, and the decision to invest or save depends on individuals’ willingness to take risks. Compared to investments in stocks or purchasing shares in investment funds, emphasizes Šantić, the advantage of saving is that there are no additional costs such as brokerage fees and entry/exit charges.

Education and security

– Although we have had stresses in the banking sector in the past, surveys of client attitudes indicate that citizens generally understand the security of savings. What should be emphasized is the education of citizens about other forms of investment. There is an impression that many in Croatia decided to buy stocks or shares in funds last year without actually understanding the different levels of risk. Regardless of the fact that more and more people are opting for other forms of investment, when a crisis occurs, it is evident that savings are still a low-risk investment compared to other forms – emphasized OTP Bank, which also has various models of term deposits, and for deposits in kuna, interest rates can reach up to 6.98 percent.

At Hypo Alpe-Adria Bank, a very successful campaign called Golden Savings is currently underway, which entered its third cycle at the beginning of October, with more favorable interest rates. Until the end of October, Hypo also offers short-term deposits in kuna, euros, and US dollars, with terms of one, two, or three months. For these deposits, interest rates are agreed daily and fixed in agreement with the Bank’s Treasury Sector, in accordance with capital market conditions, and cannot be postponed. The bank guarantees the interest rate agreed on the day of the deposit, and the minimum investments are 2,000 dollars, 1,500 euros, or 10,000 kuna.

Savings at Zagrebačka Bank is a product that clients traditionally recognize as a profitable and secure form of investment. Total deposits of citizens have exceeded 36.7 billion kuna, and the total number of term deposit accounts exceeds 300,000. Citizens still prefer traditional term deposits in euros. In total savings at Zagrebačka Bank, the share of kuna savings is about 18 percent, about 74 percent is in euros, about five percent in dollars, and about three percent relates to other currencies. The capital and reserves of Zagrebačka Bank are the highest in the financial sector, amounting to 12.4 billion kuna, and have increased by 7.6 percent compared to the end of the previous year. The capital adequacy ratio is 16.95 percent, which is significantly above the average of the Croatian banking sector, so Zagrebačka Bank claims that they are stable and secure for their clients and savers. They emphasized that in new reports, two leading rating agencies – Fitch and Moody’s confirmed the positive credit rating of that bank. In their offer, which lasts until December 31, 2008, Zagrebačka Bank offers its clients a special offer for term deposits with special, more favorable terms of deposit during the promotional period. Citizens can contract two models – classic and rent term deposits in kuna, as well as classic and rent term deposits in euros, for a period of three to 36 months and with higher fixed interest rates compared to the regular offer.