Recession Increased Costs for Banks in Croatia

Negative trends in the real sector are gradually reflecting more strongly on the operations of the financial sector in the form of increased provisions and reduced profits, and analysts from Privredna banka Zagreb expect a continuation of the growth of provisions for bank placements and reduced demand for loans, especially long-term ones in the household sector, in 2010.

Such expectations are based on their forecasts of stagnation in GDP next year, the fact that a continuation of the deterioration of the situation in the real sector can be expected, and the anticipated continuation of negative trends in the labor market – a decline in employment and an increase in unemployment. In PBZ’s weekly analyses, data from the Croatian National Bank is cited, indicating that the total profit of banks after tax in the first nine months of this year decreased by 21.7 percent compared to the same period last year. This occurred, they note, due to the increase in provisioning costs for identified losses, which were nearly four times higher in the observed period compared to the previous year. Interest income has increased by 9 percent this year, which, considering the weak growth of credit activity in the private sector, is largely a result of increased active interest rates and growth in placements to the state.

On the other hand, the banks’ struggle for savers, or deposits, resulted in a sharp increase in interest costs by 22.5 percent in the first nine months, and ultimately, net interest income decreased by 6.1 percent. The largest impact on profit came from adjustments in the value of loans, which increased fourfold in the observed period. In the increase of total provisioning costs, about 45 percent is accounted for by the growth of provisions of the four largest banks, which at the end of September had a share of about 65 percent in the total assets and loans of the banking system.

The significant difference in the mentioned shares (a higher share in assets than in provisions), they explain, primarily arises from the high provisioning costs of HPB (284 million kuna in the first nine months, more than ZABA, PBZ, and Erste). If the growth of HPB’s provisions is excluded from the total growth of provisions, the share of the four largest banks rises to over 50 percent. As a result of the increase in provisioning costs, the gross profit of most banks is declining, with the exception of a few smaller banks and only Société Générale-Splitska banka among the larger ones, analysts from PBZ state.