What Does the Banking Sector Offer in Croatia & Slovenia?

For this week’s blog, we decided to bring you an overview of the Croatian and Slovenian banking sector and companies which are representatives of their respective market – ZABA, PBZ and NLB.

wdt_ID Croatian Banking System Indicators 2016 2017 2018

Source: Croatian National Bank, InterCapital Research

Croatian banking sector ended 2018 with EUR 55.1bn of assets and total assets grew 4.4% annually. At the end of 2018, the total banking sector has consisted of 21 banks, while top five banks have amounted to 80.3% of total assets, which shows that the Croatian banking sector is highly concentrated. EBT for all banks has amounted to EUR 760.4m and four banks posted negative EBT. Consolidation of banks was one of the main trends in the sector. In December, Splitska bank was merged with OTP bank Croatia making it the 4th largest bank on the market. OTP bank Croatia assets have amounted to EUR 5.7bn at the end of 2018 and it grew faster than the market at 7.4% YoY. Also, one of the smaller banks, Veneto bank, was taken over by the second largest on the market, PBZ bank, which grew annually 9.4% YoY. Further consolidation efforts in 2018 were also seen from the 6th largest bank, HPB, which subscribed EUR 14.8m capital increase of Jadranska Banka, 16th largest bank by assets. The transaction will be completed in 2019.

The required rate of regulatory capital is 8% while the average rate of total regulatory capital at the end of 2018 has amounted to 22.9%. This shows that Croatian banks are highly capitalized.

2018 Top 5 Croatian Banks by Assets & Net Income (EURm)

Source: Croatian National Bank, InterCapital Research

Source: Croatian National Bank, InterCapital Research

Loans & Deposits

Credit activity of the Croatian banking market has increased in 2018 as loans have grown 2.2% YoY which is a turnaround compared to previous four years when loans were decreasing. The highest decrease in loans was exhibited in 2016 when total loans have decreased by 6% YoY. Pick-up in loan placement activity has further incentivized in January 2019 when loans have increased 3.7% YoY.  In 2018 loans to citizens have grown 4.6% while loans to corporates have decreased 2.5%.

Deposits on the level of the sector have grown 5.7% YoY, which is a strong increase and represents growth levels last seen in 2015 (5.2% YoY growth). Despite the decrease of passive interest rate, deposits have been increasing since the majority of deposits comes from households (70%) which are risk averse and do not invest in other forms of financial assets.

Croatia Loan & Deposit Growth (2014 – 2018) (%)

Source: Croatian National Bank, InterCapital Research


Top two banks, ZABA and PBZ, are listed on the Zagreb Stock Exchange and both have increased their assets higher than the average of the market. The factor of economies of scale is working well and the absence of an increase in risk provisions has resulted in strong increase of net income, 95.5%, and 28% YoY.  All Croatian banks are offering their services mostly on the local market, so their future results are dependent on the local economy which is expected to achieve continuation of expansion in 2019. With picking up of credit activity and continuation of an environment of low interest rates, we expect two top banks to continue above-average growth of assets. The decrease of NPL rates is expected to continue due to a stable environment. Expected pressure on net interest margin will continue due to strong competition pressure in the retail segment which is where the majority of loans growth will be created in 2019. ZABA & PBZ are both dividend stocks and they pay-out the majority of net income via dividends so dividend yield on these levels is expected in the future. The downside is that both companies have a relatively low free float (3.8% and 2.2%, respectively) so their liquidity is quite low compared to some regional competitors.

ZABA & PBZ Dividend Yield (2013 – 2019) (%)*

*compared to the share price a day before the dividend proposal

Source: InterCapital Research

wdt_ID Slovenian Banking System Indicators 2016 2017 2018

Source: The Bank of Slovenia, InterCapital Research

Slovenian banking sector ended 2018 with EUR 38.8bn of assets, which represents an increase by EUR 831m (+2.2% YoY). Compared to the Croatian banking sector, it is 30% smaller (by EUR 16.3bn). The banking sector consists of 12 banks, of which NLB holds the highest market share of 22.7% (by total assets).

In 2018, Slovenian banking sector recorded net interest income amounted to EUR 671.7m, which represents an increase of 3%. Meanwhile net fees and commission amounted to EUR 315.4m, which remained relatively flat (+0.6% YoY).

When observing the operating costs of the whole sector, they amounted to EUR 669.5, representing a decrease of 0.6%. All banks were profitable in 2018, recording EBT of EUR 532m and a net income of EUR 496.3m.

Slovenian Banking Sector Performance (2016 – 2018) (EUR m)

Source: The Bank of Slovenia, InterCapital Research

Loans & Deposits

In 2018, loan growth has amounted to 3.3% which notes a slowdown in growth compared to 2017. The slowdown could be attributed to a decline in loans to customers and a base effect.  Growth in household loans remained stable, increasing by EUR 659 million (7% YoY).  As a comparison, NLB observed a similar loan growth of 3.1% to EUR 7.1bn. It is notable that besides in Slovenia, NLB operates also in Macedonia, Kosovo, Bosnia & Herzegovina and Serbia where loan growth in 2018 was significantly higher than in Slovenia. In 2018, NLB recorded L/D ratio of 68.3%, which shows that the bank has a strong deposit base on their core market which was, until now, unused due to commitment with the European Commission. This shows a potential for the Group to grow their loans on the above-mentioned foreign markets where the yields are more favourable.

When observing deposits to customers, they have increased by 5.3% YoY. As a comparison, NLB recorded an increase of 6%, amounting to EUR 10.5bn. In Slovenia, growth in deposits by customers slowed last year and was lower than the growth in household deposits which increased by 6.8%, amounting to EUR 18.7bn. When it comes to the structure of deposits, in 2018, they shifted to sight deposits, accounting for 72.4% of total deposits by customers and 75.2% of total household deposits.

Slovenia Loan & Deposit Growth (2014 – 2018) (%)*

*NFC + Households

Source: NLB, InterCapital Research

NPE ratio

Turning our attention to non-performing exposures, the banks have reduced them in all segments of the credit portfolio in 2018. The NPE ratio in the whole banking sector has declined to 4%.  When observing NLB, their NPE ratio dropped 2 p.p. the level of 4.7%.

Nova Ljubljanska Banka

In November 2018, the shares of NLB were listed on Ljubljana Stock Exchange and also on London Stock Exchange where NLB is traded in form of GDRs (5 GDRs representing 1 ordinary share). State, the selling shareholder, sold 59% of its shares at EUR 51.50 per share (collecting EUR 609m) at a P/B of 0.67x. The sale of state ownership was conducted as Slovenia had to comply with the European Commission (EC) decision related to state aid proceedings involving NLB capital increases in 2011, 2012 and 2013. State currently holds 35% of shares, and according to the same EC decision it should reduce its share towards 25% + 1 share in a set timeframe. Note that NLB has a high free float of 52.1% and is currently traded at P/B of 0.76 and P/E of 5.96.

Market Cap vs Free Float (EUR m)

Source: InterCapital Research

P/E & P/B of Selected Companies

Source: InterCapital Research

When observing NLB’s dividend for 2017, they paid out EUR 270.6m, which translates into EUR 13.53 dividend per share and a dividend yield of 22%. EUR 189m was paid out from the companies net income and EUR 82m was paid out from previous years’ retained earnings. This would make the dividend pay-out for 2017 amount to 84%. However, if we only take into consideration the part paid out from NLB’s 2017 net income, the dividend per share would amount to EUR 9.45, while the dividend yield would amount to 15%. As the dividend was paid out prior to the IPO, the Slovenian state was entitled to the full dividend.

Note that NLB’s potential future dividend pay-out seems attractive. The company’s management has set a target of a dividend pay-out around 70% for the years 2019 – 2023.

Dino Durrigl
Category : Blog

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