Tamara Perko (HUB): Banks Have Been ‘Covertly Taxed’ for Almost a Decade

Money from the National Recovery and Resilience Plan will not flow forever. Specifically, it will dry up in two years. However, this will not halt the investment cycle of domestic companies, judging by the data on the growth of investment loans. How to approach banks was the topic of the presentation by the director of the Croatian Banking Association (HUB), Tamara Perko, at the Lider Financial and Investment Forum held on June 5 and 6 in Zagreb. In an interview for Lider, Perko also provided a broader assessment of the banking sector’s performance, which boasted record profits last year.

Domestic banks concluded last year with record assets of 78.6 billion euros and doubled profits of 1.4 billion euros. What does HUB expect this year regarding the performance of banks?

The continuation of economic growth and, particularly, employee wages, create a favorable environment for continued good business. Loans to households are growing at a rate of around 10 percent per year, loans to companies at slightly lower rates, but it is encouraging to maintain the growth rate of investment loans, so overall, good business will continue this year. It should be noted that the large cycle of rising interest rates, which was prompted by changes in the ECB’s monetary policy, has ended, so business performance no longer derives from further interest rate increases but from the growth of business volume related to economic growth.

Last year, the largest contribution to profitability came from interest income on excess liquidity that banks ‘store’ with the central bank. Data from the Croatian National Bank (HNB) shows that banks deposited 21 percent of total assets last year. Given the lowering of the ECB’s key interest rates, do you expect a significant decline in this type of income for banks this year?

High interest rates in the Eurozone also marked the first half of 2024. As a result, the effect of high money market interest rates will remain present throughout the year, although a decline in ECB interest rates is likely in the second half of this year. However, a rapid and sharp decline is not expected for now, as the EU economy has begun to gradually move away from the brink of recession even before the ECB’s interest rate cuts. In a scenario of gradual rate reductions, a noticeable decrease in this type of income will only occur in 2025.

The governor of the Austrian central bank, Robert Holzmann, stated in April that the ECB should stop ‘subsidizing’ commercial banks by paying such high interest on overnight deposits as was the case during 2023. Do you expect the ECB to pay special attention to this type of interest rate in the upcoming period?

We can also reverse the thesis and say that banks have been “covertly taxed” for almost a decade when the interest rate on overnight deposits was negative before 2022. It should be noted that banks are only part of the monetary transmission mechanism, at the end of which are the clients. A huge number of clients today pay a lower interest rate on housing and corporate loans than the interest rate that the ECB pays on excess liquidity.

In the context of the effects of monetary policy, it is not productive to think in terms of fiscal policy, using concepts of taxation and subsidies. Monetary policy has some other goals and instruments, and given that all interest rates in Croatia have risen significantly slower than the ECB’s interest rates, we can conclude that we have successfully amortized the interest shock and prevented the rise in interest rates from stifling economic growth.

The return on equity (ROE) of the domestic banking system last year was nearly 15.5 percent. Is such profitability, after a decade of modest returns, now satisfactory for the owners of Croatian banks?

The results were indeed good, but no one sees such a return on equity as permanent. It is the result of a series of unusual circumstances. In the short term, three things that rarely coincide at the same time have overlapped: high central bank interest rates, rapid economic growth, and competitive pressures and technological advances leading to cost optimization. It can be expected that banks will continue to support the Croatian economy, as they have done in different, less favorable circumstances over the past nearly two and a half decades since our banks have been deeply integrated into the European banking system, which has brought us much-needed financial stability.

Where does the profitability of Croatian banks stand compared to Central and Eastern European countries? How do you interpret the fact that the public is still particularly sensitive to the profitability of banks, considering it as excess profit?

All factors affecting profitability here also affect other countries because we are part of a single market. Unfortunately, conclusions are often drawn out of context in such necessary comparisons. And the data for Croatia does not deviate from the average. On the contrary, it is slightly below the average for Central and Eastern Europe. For example, if we look at the mentioned return on equity according to the data from the European Banking Authority, Croatia had a lower return on equity engaged in banks last year than Hungary, Romania, Bulgaria, the three Baltic states, Poland, and Slovenia.

Only banks in the Czech Republic and Slovakia had a lower return, but those countries grew much slower than Croatia, with the Czech Republic even experiencing a slight recession. The negative perception of bank profitability is partly due to a lack of information like this, and partly due to the perception that finance is a zero-sum game where one party’s profit means another’s loss.

Croatia was specific during the cycle of rising interest rates within the eurozone due to the slow transmission of that growth to interest rates on time deposits. Accordingly, we should also witness a slower effect of lowering rates. Can interest rates on time deposits still rise this year?

I would not speculate or make predictions. The market is so dynamic and difficult to predict that we always think in terms of scenarios and some rough probability relationships, and business skill is the readiness to react in various scenarios. For now, it seems that we should not expect major changes in interest rates. This is in line with the expectations of the ECB’s monetary policy that I described earlier.

The new government has announced the continuation of issuing state debt securities to citizens. Could this significantly disrupt the deposit base of domestic banks? Are banks considering savings products that would be competitive with the yield on government bonds?

We always repeat that treasury bills and bank deposits are not immediate competitors, although it may seem so at first glance. Banks supported the project of the Government of the Republic of Croatia precisely because of a broader view of liquidity and the supply and demand of financial instruments in the money market, but also to raise financial inclusion and literacy among citizens. According to HNB data, it is evident that during the periods of issuing treasury bills and government bonds, there was an outflow of deposits from banks, but it was limited and does not significantly affect the stable deposit base.

Also, if the state raises funds by issuing treasury bills with the aim of, for example, spending that money for public purposes, that money circulates back into the system and appears in the accounts of citizens or companies. In this liquidity circle, it is useful to expand the range of offered financial instruments that offer various expected return and risk relationships.

The largest part of the banks’ credit activity in 2023 was achieved in the household segment, particularly in housing and cash lending. Do you expect a subdued growth of housing lending this year?

Data so far do not indicate a slowdown. The annual growth rate of around 10% has been exceptionally stable for a long time, and we do not expect significant changes this year.

Corporate lending in March recorded the first acceleration of the annual growth rate since November last year of 3.7 percent. At the same time, the growth of investment loans accelerated from 7.4 to 7.7 percent. Do you consider such growth in lending sustainable in the long term?

Absolutely. Banks have enough capital and liquidity to support a faster expansion of loans to companies. Although some larger corporations have been in an investment cycle for some time, we would like to see even more well-prepared investment projects with a technological component. Companies best feel the market pulse, and from this bird’s-eye perspective, it seems to us that it is a good time for long-term investment plans, especially in the context of exports and the internationalization of the economy, as it appears that the EU economy is beginning to recover. If this trend becomes clearer, we can expect an increase in demand for the export of goods and services.

Since 2022, companies have felt the rise in interest rates the most. Can they expect more favorable loans in the next few years?

It would be irresponsible to promise anything because no one can predict monetary policy several years in advance. Speculating is not good, and entrepreneurs know best that a good project depends much more on the quality of execution, the team, the product and service, and the market than on whether the interest rate is half a percentage point higher or lower.

How do you assess the current level of financial literacy? Has there been an improvement compared to a few years ago, and what is HUB doing about it?

Financial literacy among citizens is a key factor for personal financial stability and generally for the economic progress of the country. While results show that we are, for example, above the average of OECD member countries in terms of overall financial literacy, there are areas where we can make additional strides. First and foremost, I mean the component of financial behavior that encompasses conscientiousness and methodicalness in managing one’s finances. Here at HUB, this has become one of the strategic topics since 2006.

Since then, various activities have been continuously carried out for all age groups to improve the level of financial literacy and personal finance management. This year, in collaboration with the EIB, we launched a two-year initiative ‘Finance for New Generations’, which includes not only high school students and teachers but also young entrepreneurs who are at the beginning of their business ventures. For high school students and teachers, we organize workshops across Croatia in collaboration with Štedopis, and we are developing an innovative online educational manual ‘My Money, My Business, My Future’ tailored to the high school curriculum and civic education.

For young entrepreneurs, we have prepared specialized free workshops, and throughout the year, within 13 modules, recognized experts provide workshop participants access to valuable knowledge and tools necessary for success in the entrepreneurial world. All workshops are recorded and published on HUB’s YouTube channel so that the materials remain permanently available to all interested parties. At HUB, we will continue with programs aimed at different age groups, especially the youth, and encourage lifelong learning and adaptation of financial education to new economic trends and technologies.