This Year, the Share of Bad Loans Will Reach Its Peak

Due to the expected continuation of GDP decline and the announced new regulations that would tighten the classification of restructured loans, analysts from Privredna banka Zagreb expect that 2013 will mark the peak of the trend of increasing the share of bad loans in the banks’ loan portfolios, reaching levels of around 16 to 17 percent.

They assess that 2013 will be an exceptionally challenging year for banks in Croatia, perhaps even the toughest since the onset of the crisis, marking another year of lower profits, competition for clients, and maintaining portfolio quality, which may eventually stimulate the processes of merging smaller banks.

In the Weekly Analyses published today, PBZ analysts estimate that the share of bad loans in total loans, although official data on this is not yet available, has already reached 15 percent of the total loan portfolio.

The GDP decline they forecast for this year leaves banks little room for maneuvering, so the share of bad loans will inevitably grow, further exacerbated by the announced new regulatory rules that would, among other things, tighten the classification of restructured loans. Consequently, they expect that 2013 will see the peak of the trend of increasing the share of bad loans in the portfolio, reaching levels of around 16-17 percent, according to PBZ.

In their analysis, they remind that the previous year did not end on a positive note for the Croatian banking system – the total consolidated assets of banks fell by 2 percent year-on-year, gross loans by 3 percent, and net profit (unaudited) by 26 percent, while only total deposits recorded a positive rate (growth of 3 percent).

PBZ assesses these results as expected, highlighting that only the strong decline in loans to companies in December last year was surprising, which fell by 5 percent compared to November and by as much as 13 percent year-on-year.

While the year-on-year decline was influenced by the well-known takeover of shipyard loans by the state, the drop in the last month stems from regular maturities and refinancing of obligations abroad, without simultaneous new placements. As in previous months, the level of investment remains extremely low, with companies currently financing only survival, PBZ emphasizes.

Regarding loans to citizens, all types of loans recorded a decrease last year, with housing loans at the end of December being nearly 1 percent lower year-on-year, auto loans down by 30 percent, credit card loans by 4 percent, and all others combined decreased by 0.2 percent, resulting in total loans falling by just under 2 percent compared to 2011.

Total deposits, however, were 3 percent higher at the end of last year than at the end of 2011, with corporate deposits falling by 6 percent, while citizen deposits increased by 4 percent.

Corporate deposits have thus fallen by 15 percent in the crisis, compared to the end of 2008, while household deposits have increased by more than 20 percent, according to PBZ.

They emphasize that the 20 percent growth in citizen deposits during this period represents an average cumulative annual growth rate of about 5 percent, and when considering the interest rate on savings (which averaged over 3 percent for short-term deposits in euros), it is evident that about half of that growth rate is attributed to interest accrual.