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Quarterly business reports are not mandatory for all banks; some have delisted, some were never listed, and others are not obligated. However, even from the available announcements, some new trends can be clearly read. It is already evident from the announcement of UniCredit Bank, the owner of our Zagrebačka, that both profitability and interest income are increasing.
Namely, UniCredit achieved a net profit of 2.1 billion euros in the first three months of this year, with a return on tangible equity (RoTE) of 20.4 percent and an organically generated capital growth of 3.4 billion euros. Andrea Orcel, the CEO of UniCredit Group, states that this is the ninth consecutive quarter in which UniCredit has achieved excellent financial results, increased profitability, and distribution capacity.
– Our record net profit of 2.1 billion euros was achieved with double-digit growth in net income, primarily driven by very strong net interest income and further cost reductions. The growth of organically generated capital has continued, resulting in an excellent CET1 ratio of 16.05 percent (the ratio already excludes the distribution to shareholders of 5.25 billion euros for 2022 and includes a cash dividend in the first quarter of 0.7 billion euros). Our liquidity is solid, and the quality of our assets is strong.
Improved macroeconomic outlook and interest rate environment, positive business trends, our continued transformation, and strengthened risk position have enabled us to grow key indicators for 2023. We now expect net profit to exceed 6.5 billion euros and a larger distribution to shareholders, at least 5.75 billion euros. The expected low cost of risk of 30-35 basis points for 2023 (with present factors that could lower it) is the result of our solid credit portfolio and high coverage with reserves, says the head of UniCredit.
As the parent company performed well, our Zaba also has good results, with similar trends – the result is based on the growth of interest income! According to unaudited data for the first quarter, profit after tax increased by 31.7 percent (from 82 million euros to 108 million). However, it is significant that interest income increased by as much as 73.4 percent (from 79 to 137 million euros). At first glance, such a jump would seem logical, as interest rates on loans have risen due to the increase in reference rates of the European Central Bank (ECB).
However, if we know that the growth of loan interest rates in Croatia is among the slowest in the EU, moreover, loan rates are lower than, for example, in Germany or Austria, then it is clear that the matter lies elsewhere (for instance, the average interest rates for investments in new business ventures up to one million euros in Croatia are 3.58 percent, in Austria 3.95, Germany 4.73, France 3.60, Italy 4.39, while the Eurozone average is 4.26 percent).
No one is thinking about the macroeconomic consequences
Namely, the growth of interest income primarily stems from the interest that banks earn on liquid assets in their transaction accounts – at the ECB. When the ECB raises key interest rates, it means that it raises them for main refinancing operations, for the possibility of borrowing at the end of the day, and for – cash deposits. This latter interest currently amounts to as much as three percent, and this is the rate at which banks keep their deposits at the ECB. At the same time, for that money invested in the ECB at three percent, they pay savers 0.01 percent for sight deposits or up to one percent for term deposits. The difference is quite noticeable.
As banks have been swimming in liquidity for years – Zaba alone has around six billion euros in excess, which when placed with the ECB generates around 150 to 200 million euros (depending on the amount) – it is evident that it is more profitable for banks to keep money in the ECB than to lend it to clients in these turbulent crisis times. Additionally, the ECB has just raised interest rates for the seventh time, this time by 0.25 basis points, which means it will be even more profitable for banks to ‘term’ their excesses in Frankfurt. The rhetoric of the ECB president suggests that there will be further interest rate hikes.
Banks are, to be fair, behaving rationally, placing money where there is relatively good profit, with no risk. However, no one is currently asking what such a trend will mean for the overall economy. Although loans have not stopped, with rising interest rates, even if slow as in Croatia, companies are slowly faltering in financing investments and postponing them indefinitely.
On one hand, clients are opting out of loans themselves, as they are unsure whether they will be able to repay them; on the other hand, why should banks even engage in their core business, lending, if it is more profitable for them to place funds in the ECB’s transaction account? On the third hand, with such liquidity surpluses on which banks earn well, they have no need to increase interest rates on savings (usually, with the rise of active interest rates, the rise of deposit rates goes hand in hand – but this time it does not. No one is currently thinking about the macroeconomic consequences of these three trends.
Perhaps also because Europe has ultimately proven to be relatively resilient to external shocks. As the head of UniCredit says, ‘to ensure our future results, we at UniCredit have anticipated a difficult macroeconomic scenario and prepared by strengthening our risk position and preventive measures. Although we remain cautious, we are confident that we will consistently continue to achieve high-quality profitable growth in the foreseeable future, with a structurally reduced cost base and reduced risk cost.’ There is no doubt that the risk is immeasurably lower with the ECB than with its own clients and loans.
