Profitability of Croatian Banks increases and NPLs Continue to Fall

Croatia’s banking sector at the end of H1 2019 shows average increase in assets of 0.8% compared to the end of 2018. Increase in loans was above assets growth while deposits are also increasing despite low interest rate environment. NPLs continue to fall and smaller amount of provisions is recorded which has significantly increased banks net profits. Recent decision of Supreme Court has raised questions on potential outstanding liability that Croatian banks could have towards (former) debtors on loans in Swiss francs if they decide to seek compensation from the banks via individual lawsuits. However, it is plausible to expect that the banks will not observe high increases in provisions as ‘tsunami’ of individual lawsuits against banks is not expected in the following period.

In order to see the how Croatian banking sector is performing, we are bringing you an overview of H1 2019 results of Croatian banks. Operating results are improving, and the trend is expected to continue in the following reporting periods. Increase in loans in H1 compared to end of 2018 has amounted to 1.2%, while deposits have increased by 0.5%. L/D ratio of the sector at the end of H1 stood at 88%.

NPLs of banking sector have decreased further to 9.2%, which is their lowest levels since Q1 2010. Breaking NPLs down, corporate loans recorded NPLs of 18.82% (-3.31 p.p. YoY), while retail loans recorded NPLs of 6.13% (-1.68 p.p). Low retail NPLs, while at the same time gradually decreasing each quarter (since H1 2015), make the retail segment even more attractive for further loan growth. The retail segment has been observing strong growth in recent years, due to lower unemployment rate and an increase in wages, while we observed a decrease in loans to corporates in recent years. We expect this trend to continue in the near future, which we assume will lead to lower provisions, as the retail segment has traditionally recorded lower NPLs compared to corporates.

In H1, retail loans amounted to HRK 125.75bn (+5.9% YoY). Of that, the strongest growth was observed in the unsecured loan segment (+11.5% YoY), which accounts for 40.6% of all retail loans. It is worth noting that the NPLs for that segment amounted to 5.18%, while the interest margins for unsecured loans are the highest of all retail loans.

The highest NPLs in the retail segment were recorded in the mortgage loan of 25.13% (-1.3 p.p. YoY), which account for 1.4% of the total retail loans. Note that these loans do not include housing loans and car loans.

NPLs in the Retail Segment (H1 2010 – H1 2019) (%)

Source: Croatian National Bank, InterCapital Research

Threats for the sector come from prolongation of period of low-interest rate environment, which led to the demand deposits ending an all time high (at the end of July 2019) of HRK 99.22bn (+20% YoY). Besides that, threats for the sector include decrease in consumer demand as economic growth slows and a potential increase in expenses for individual lawsuits to (former) debtors on loans in Swiss francs. Concerning the latter issue, Zagrebačka banka and PBZ have both approved these loans while HPB as the bank with most of the State ownership has never issued any. Neither Zagrebačka banka nor PBZ were vocal on the exact amount of loans that they have converted neither on provisions for potential lawsuits they have made. Zagrebačka banka had provisions for litigation at the end of 2018 in the amount of HRK 95m while it is not disclosed to what does it pertain to. Provisions for the conversion of CHF loans were part of reservations for other items HRK 32mn (2017: HRK 35m). PBZ had provisions for litigation at the end of 2018 in the amount of HRK 85m. It remains to be seen if banks will increase any of the provisions in 2019 and if they will shed more light on potentials costs they could incur due to former exposure to loans in Swiss francs. However, it is plausible to expect that the banks will not observe high increases in provisions as ‘tsunami’ of individual lawsuits against banks is not expected in the following period.

Financial Results of Banks in H1 2019

Zagrebačka banka posted growth in net banking income (operating income) of 5.2% that has amounted to HRK 2.9b. The rise was supported by growth in all banking operations segments. Net interest income (+2.7 YoY) grew faster than net fee income (+1% YoY) which is an opposite dynamic compared to Q1 when fee and commission income has depicted double digit growth rate (+16.5% YoY). Operating expenses have amounted to HRK 1.3bn, growing by 2.8% YoY – at a lower rate than operating income growth. This is implying that the bank is keeping expenses under tight control, a wide-spread trend among banks in this consolidating industry sector. Going further down the P&L, impairments and other provisions decreased by 61% driven by lower expected credit losses and have amounted to HRK 85m. This is a widespread trend as NPLs on the level of the banking sector have decreased further to 9.2%. Net profit of the Zagrebačka banka has amounted to HRK 1.3bn growing by 18% YoY. Growth is derived from an accelerated loan placement where consumer loans grew faster than corporate loans. Zagrebačka banka net loans increased 1.1% compared to the end of 2018, while deposits from customers increased even higher by 3.4%. Loan to deposit ratio (L/D) stood at 78% which is below the average of the whole banking sector in Croatia that has amounted to 88% at the end of H1 2019.

Zagrebačka banka Performance (H1 2019 vs H1 2018)

In H1, PBZ observed net interest income of HRK 1.3b, growing by 0.7% YoY in the environment of declining interest rates. Net fee and commission income observed an increase of 2.4% YoY, amounting to HRK 783m. Meanwhile gains from trading and other income increased for 61% amounting to HRK 334m. In H1, net banking income amounted to HRK 1.25bn, which represents an increase of 4.5%. Operating expenses decreased by 1.8% bringing down cost/income ratio to 49.6%, while in the same period in 2018 it has amounted to 53.8% showing that bank is becoming ever more cost conscious. Unlike with majority of sector constituents, provisions increased for 70% YoY to 232m. Therefore, net income on a group level amounted to HRK 412m, representing an increase of 5%. When observing the company’s balance sheet total assets remained flattish amounting to HRK 111.1bn. Loans and advances account for 71.7% of the total assets and have amounted to HRK 80.9m while decreasing 2.1% compared to the end of 2018. On the other hand, deposits make up for 81.6% of the liabilities and equity. Deposits have also decreased by 0.5%, amounting to HRK 91.5bn. L/D ratio stood at 88% which is exactly the average for the whole banking sector in Croatia for H1 2019.

PBZ Performance (H1 2019 vs H1 2018)

HPB in showed good set of results which can partially be explained by the acquisition of Jadranska banka that was consolidated with HPB from July 2018 so two period are not comparable on a like-to-like basis. HPB recorded an increase in net interest income of 3.5% YoY, amounting to HRK 263.5m. The rise in net interest was a result of faster decline in interest expense (-34.2% YoY) than decrease in interest revenue (-3.4% YoY). Further, net fee and commission income increased by 2.7%, amounting to HRK 101.3.6m. Net trading and other income was 2.5x higher than in the same period last year so net banking income increased 12% to HRK 418m. Operating expenses increased 5.8% YoY which is less than increase of net banking income, so CIR decreased to 59.5% (-3.5 pp YoY). Provisioning in the period was 42.3% lower which is in line with the sector trend so net income increased by 34.5% to HRK 126.7m.

Turning our attention to loans and deposits, HPB observed a strong increase in loans to customers of 5.8% compared to the end of 2018 which amounted to HRK 14.3bn. Deposits to customers, on the other hand, decrease by 0.6%, amounting to HRK 20.6bn. Consequently, the company observed an increase in L/D ratio of 4.2 p.p. compared to the end of 2018 and on H1 2019 it stood at 69%, which is way below the sector average of 88%. The total assets of the company amounted to HRK 23.4bn, which represents an increase of 1.3% compared to the end of 2018 which is solely organic growth. Therefore, the bank grew faster than the banking sector that has increased for 0.8% compared to the end of 2018.

HPB Performance (H1 2019 vs H1 2018)

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