HNB recorded a deficit of income over expenses of 2.55 billion kuna

The Croatian National Bank (HNB) recorded a deficit of income over expenses in the amount of 2.554 billion kuna in 2017, influenced by negative unrealized exchange rate differences amounting to 2.6 billion kuna, they emphasized on Friday from HNB, stating that this is not an operational loss but negative unrealized exchange rate differences.

– The Croatian National Bank recorded a deficit of income over expenses for 2017 in the amount of 2,554,231 thousand kuna (in 2016, a surplus of income over expenses was achieved in the amount of 42,113 thousand kuna), and the greatest impact on the financial result was from unrealized net exchange rate differences which were negative for 2017 and amount to 2,641,458 thousand kuna. The deficit of income over expenses for 2017 in the amount of 2,554,231 thousand kuna is covered by the general reserves, as stated in the audit report by Deloitte, which is an integral part of HNB’s annual report for the previous year.

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HNB published the report for the previous year on its website on Wednesday, July 4, while the audit report from Deloitte is dated March 15 of this year.

This morning, the loss of HNB was first pointed out by MP Ivan Lovrinović from the party Change Croatia, who stated that the Croatian National Bank recorded “the historically largest loss since its establishment of 2.554 billion kuna, as determined by the auditing firm Deloitte on March 15 of this year.”

Lovrinović also questioned why this news was hidden for a hundred days, why the loss is so large, and whether it is related to the end of the term of the current leadership of HNB.

MP Ivan Vilibor Sinčić from the Living Wall also warned about this, calling on the Parliament to allow state auditors to enter HNB to finally determine the real financial, staffing, and financial situation.

HNB: This is not an operational loss but negative unrealized exchange rate differences

In response to inquiries about the results from the previous year and the remarks from MPs that the information about the losses was ‘hidden’, HNB stated that the annual report for the previous year was published on HNB’s website and emphasized that this is not an operational loss but negative unrealized exchange rate differences, explaining that last year there was a change in the currency structure of international reserves in favor of the euro and that the strengthening of the kuna against the euro reduced the kuna value of international reserves.

At the end of last year, the share of euros in international reserves was 83.2 percent, while at the end of 2016 it was 78 percent. During the same period, the share of the US dollar, which at the end of 2016 accounted for 19.1 percent of international reserves, decreased to 14.5 percent. The increase in the share of euros was influenced by the change in the currency structure of net reserves and a higher share of euro investments in repo transactions, HNB stated.

– In accordance with the described currency structure and the fact that international reserves constitute almost all of HNB’s assets, while the majority of liabilities are denominated in kuna, HNB, like many central banks in other countries, is significantly exposed to currency risk, and exchange rate differences directly affect the final result of HNB’s profit report, HNB stated.

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This is, they continue, a consequence of the application of International Financial Reporting Standards (IFRS) according to which exchange rate differences are first recognized in the profit or loss report, and only then is the distribution of profit or loss charged to HNB’s general reserves.

– As the euro significantly strengthened against the US dollar in 2017, and there was also a strengthening of the kuna against the euro, there was a reduction in the kuna value of international reserves, and negative unrealized exchange rate differences amounted to 2.641 million kuna. This also determined the overall result of HNB’s profit report which in 2017 amounted to minus 2.554 million kuna, marking the first recorded negative result since 2003. It should be emphasized that this is not an operational loss but negative unrealized exchange rate differences, while HNB achieved an operational profit in 2017, the central bank emphasized.

They also add that in the past 15 years, the majority of HNB’s general reserves were created from positive unrealized exchange rate differences, which as of December 31, 2016, amounted to 13.8 billion kuna and also serve as a protective layer to cover negative unrealized exchange rate differences.

– Unrealized positive exchange rate differences cover unrealized negative exchange rate differences, which will always appear in years when there are stronger changes in the exchange rate of the euro and the US dollar, as was the case last year when the dollar depreciated by 12.54 percent against the kuna, HNB stated.

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From this, they believe in the central bank, “it is clearly seen how wrong the idea was to pay out general reserves based on unrealized exchange rate differences into the state budget, which MP Lovrinović proposed recently.”

HNB also emphasizes that it has so far transferred almost all of its realized profit (more than 7 billion kuna) to the state budget.

– The unrealized negative exchange rate differences in 2017 would have been realized even if HNB’s international reserves had been invested in any other world reserve currency because in the past year the kuna strengthened against all world reserve currencies, which was actually a consequence of the significant strengthening of the euro against those same currencies, the Croatian central bank emphasized.

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They also add that available annual reports for other EU countries show that due to the strengthening of the euro in 2017, almost all central banks recorded negative exchange rate differences, while their negative exchange rate differences were “relatively multiple times larger compared to those recorded by HNB.”

According to the data presented, HNB’s negative exchange rate differences, expressed in euros, amounted to minus 400 million euros in 2017, or minus 2.3 percent of total international reserves, while in the case of the European Central Bank, the exchange rate differences were minus 6.3 billion euros (minus 10.1 percent of reserves), the German central bank minus 6.5 billion euros (minus 3.9 percent of reserves), Spain minus 5.5 billion euros (minus 9.5 percent of reserves), Austria minus 1 billion euros (minus 5.6 percent of reserves), and in the case of Finland minus 700 million euros (minus 8.1 percent of reserves).

HNB also states in its response that it regularly informs the public about HNB’s financial results and activities in the past year as part of its annual reports, along with data on the publication of annual reports over the last six years – July 5, 2017 (for 2016), September 9, 2016 (for 2015), June 3, 2015 (for 2014), August 16, 2014 (for 2013), and July 8, 2012 (for 2011).