Even in Loss, Banks Stand Firm

Of the 28 banks, 15 had losses in 2015, but the banking sector continues to benefit from a high level of liquidity, and loans, according to estimates from the European Union, could soon begin to grow.

Croatia finally emerged from a six-year recession in 2015. The sustained growth recorded in the years before the crisis was based on unsustainable drivers. Consumption driven by credit and an investment boom caused the accumulation of significant domestic and foreign liabilities, mostly in foreign currency. However, the financial sector proved resilient despite a high share of bad loans and policy measures that reduced its profitability. This was also shown in the latest report from the European Commission.

– The financial sector resisted the crisis even though profitability was weakened by the accumulation of bad assets. The share of bad loans in September 2015 was 17 percent. In the corporate sector, which was particularly affected by the crisis, the ratio of bad loans reached 30 percent, while in the household sector it was approximately 12 percent. Although high levels of capital and asset quality reviews in the banking sector have strengthened confidence in the stability of the financial sector, bank profitability will significantly decrease due to administrative measures regulating the conversion of household loans denominated in Swiss francs to euros. On the other hand, the banking sector continues to benefit from a high level of liquidity, so loans could soon begin to record growth and finance the initiated recovery – estimates the European Commission.

Current Figures

The operations of banks in Croatia last year were marked by the ‘Swiss franc case’, kuna loans, and falling interest rates.
The loss of banks last year amounted to 4.75 billion kuna, as shown by the provisional unaudited indicators of credit institutions for 2015. Of the 28 banks, 15 reported losses. The largest loss was recorded by Hypo Alpe-Adria-Bank, whose CEO is Mario Žižek, amounting to 2.25 billion kuna, due to the largest share of loans in Swiss francs. Following are Erste Bank with a loss of 1.24 billion kuna and Zagrebačka Bank with a loss of 662.3 million kuna. If that bank were to exclude, for example, conversion costs, the result last year, they estimate at the bank led by Miljenko Živaljić, would have been positive.
Losses greater than one hundred million kuna were recorded by Raiffeisenbank Austria, Sberbank, OTP Bank, and Jadranska Bank. Losses of up to 70 million kuna were recorded by Veneto Bank, Imex Bank, Vaba Bank, Banka splitsko-dalmatinska, Karlovačka Bank, Samoborska Bank, Slatinska Bank, and Tesla Savings Bank. The largest profit, amounting to 207.96 million kuna, was reported by Privredna Banka Zagreb. In addition to PBZ, greater profits were reported by Société Générale – Splitska Bank and Hrvatska Poštanska Bank.

Lower Interest Rates

In all organized countries, lending without a currency clause is a common practice because banks should be experts in risk management. The usual practice would be for banks to take on currency risk and charge clients a certain margin for that assumed risk, emphasizes Saša Žiković, a professor at the Faculty of Economics at the University of Rijeka.

– The decline in interest rates should primarily be attributed to movements in interest rates in European and global capital markets. Interest rates in many developed countries have already gone into negative territory. Likewise, we cannot say that the reduction of the risk premium on Croatian debt is a result of better performances in Croatia, but rather the fact that investors are seeking any positive yield. The liquidity of Croatian banks is extremely high, but the poor credit rating of the country reduces the possibility of placing loans at lower interest rates. The positive trend of increasing liquidity, and thus reducing interest rates, will certainly be contributed to by the expansive monetary policy of the Croatian National Bank (HNB) through structural repo operations, where the HNB, against collateral of securities, places kuna on the market for a period of four years at a low interest rate of 1.8 percent – emphasizes Žiković.

At Raiffeisen Bank, they say that the general trend of lowering interest rates is a result of the relaxed monetary policy pursued by central banks in the eurozone and other countries aimed at stimulating growth and employment in economies that have not yet fully recovered from the financial crisis. Central banks have lowered, they say at RBA, whose CEO is Michael Georg Müller, the base interest rates to around zero, some even into negative territory, and enabled banks to finance at approximately the same prices. Consequently, the yields that banks pay on deposits, states on debt instruments, and companies and consumers on loans have been reduced. Thus, the impact of the increase in the supply of cheap capital from the eurozone is also transmitted to the domestic financial system, and the beneficiaries are then the loan users, they say at RBA.

Currency Balance

However, it should not be forgotten that a large part of Croatian clients, they emphasize at Erste Bank, save in euros, while a smaller part saves in kunas, so due to the need for currency balance on the active and passive sides of the balance sheet, credit products will have to maintain that ratio in the future.

– At this moment, Erste Bank offers cash loans in kunas for up to 10 years and housing and adaptation loans with a repayment period of up to 20 years. Cash loans in kunas have been available since 2012, while housing loans have only been available since July of last year – they say at Erste Bank.

At Société Générale – Splitska Bank, they also believe that demand for kuna loans dominates the market today in the segment of business with the population, citing as the main reasons the fact that the timing of Croatia’s entry into the eurozone is extremely uncertain due to the level of public debt, but also the increasing financial literacy of citizens. However, they add, there are also unpleasant experiences with loans in Swiss francs. The demand for kuna loans in Croatia is a consequence of changes in the supply of loans. In conditions of zero base interest rates, the difference in interest rates between kuna and foreign currency loans is becoming smaller. Historically, the demand for loans with a currency clause was based on a significant difference in interest rates. Without that difference, borrowers have no reason to contract foreign currency loans, except in cases where they earn income in foreign currency.

Žiković also believes that citizens and entrepreneurs will benefit the most from kuna loans, warning that the greatest risk is borrowing in a currency that is not simultaneously a source of income, as this way the risk of exchange rate changes is completely transferred to the end user.

– The current low interest rates in the world, including Croatia, are attractive, but one must be very cautious because a low variable interest rate today does not mean a low interest rate in two, five, or ten years. Kuna loans for purchasing or renovating real estate, once an exotic banking product, are now being offered by more and more banks. In addition to offering loans in kunas for longer periods, they also offer the option of choosing fixed/variable interest rates, which truly provides borrowers with greater opportunities for protection against currency and interest rate risk. Of course, all this is done by banks due to the decline in credit activity, lack of attractive options for placements, demands from foreign parent companies for profits, and high market liquidity – believes Žiković.

New Measures

At the Croatian Banking Association (HUB), led by Zdenko Adrović, they say that the offer of kuna loans has so far been limited by the borrowing capabilities of banks in domestic currency, so the current HNB measure, i.e., structural repo operations, will reduce those limitations. HUB simultaneously expects that HNB will remain committed to the stability of the EUR/HRK exchange rate, which is, given the previous lack of a stabilizing role of fiscal policy and the high degree of euroization, completely justified.

– Therefore, we do not expect that the emergence of a new instrument could bring any negative impacts. Of course, it will take some time for market participants to get used to the new monetary policy instrument and to be convinced that it will be available even in the event of potential disturbances in the domestic market, so only after a certain period will the full potential of the new measure be revealed. This also applies to any potential for reducing interest rates, emphasizes HUB.

When it comes to interest rates, fiscal consolidation and structural changes are a necessary condition for improving ratings and permanently reducing interest rates, so the new HNB instrument should by no means be seen as a substitute for other good policies, is the stance of the umbrella association of all banks.

Positive Digitalization

However, conversion of loans from Swiss francs to euros and low interest rates are not the only challenges facing financial institutions. Banks are very much aware of the digital transformation of business in all segments, including banking. In addition to savings, digitalization also brings some difficulties. The most important issue is certainly information security, both for banks and for clients, but that does not mean, believes Žiković, that branches will die out. Perhaps, but not entirely, but this will certainly result in a reduced need for employees, which is already visible worldwide. Digitalization will ultimately have a positive impact on the operations of banks and the ease of use of services for clients, but on the other hand, the need for employment will continue to decrease, and clients will hardly feel reduced costs in the cheapening of services.

– This is a very bad scenario for Croatia because it can be expected that foreign banks will start transferring more banking functions to their home countries – emphasizes Žiković.

At RBA, they say they are constantly developing digital communication channels with clients and sales processes based on those channels. Since overall demand in the market is stagnating, the speed and quality of introducing new technologies will separate the successful from the unsuccessful. RBA will certainly remain on the winning side, they say at that bank. The use of modern banking services, such as internet and mobile banking, is today the preferred and usual way of communication between the bank and the client, they also say at Privredna Banka Zagreb, which, as they claim, continuously listens to the desires and monitors the needs of its clients and accordingly improves and develops its modern banking services.

– PBZ, with its digital service offering, enables the execution of financial and non-financial transactions that save clients money and time. Speed, simplicity, and intuitiveness of using services are also characteristics that the bank adapts to the needs of clients, and the goal is for the experience of working with internet and mobile banking applications to be optimal for the widest possible circle of users. Thanks to the fast, simple, and secure use of direct banking applications, the number of satisfied users is continuously increasing, and we have more than 300,000 users of internet banking and 180,000 users of mobile banking – they conclude at that bank.