Today, we decided to bring you a brief overview of the Croatian banking sector, focusing on the NPLs (non-performing loans), in the last couple of years.
First of all, what is an NPL? NPL refers to a nonperforming loan, i.e. a loan that is in default because the person who borrowed it hasn’t made the scheduled payments for a loan in a specific period. This would refer to loans that did not receive any payments, either for principal or interest. Depending on the agreement or industry, this usually refers to a period of 90 or 180 days. However, according to the IMF (International Monetary Fund), loans that are less than 90 days past due but have a high uncertainty regarding future payments, could also be considered NPLs.
With that out of the way, how does the Croatian banking sector perform in this regard? According to the latest data (end of June 2022), the Croatian banking sector’s NPLs are standing at 3.8%. This would mean that out of the total amount of loans (HRK 436.9bn) issued by the Croatian banking sector, only about HRK 16.7bn are NPLs.
NPLs and % of NPLs in total loans of the Croatian banking sector (June 2016 – June 2022)
In fact, as can be seen from the graph, the trend of the NPLs has been steadily decreasing, only stagnating its decline in 2020 (due to the COVID-19 pandemic). In fact, if we consider that since June 2016, the total amount of loans increased by 37%, while NPLs decreased by 60% then we can see that the Croatian banking sector is doing really well when it comes to NPLs. In fact, compared to the same period last year, NPLs decreased by 18%, while the overall size of the banking sector increased by 9%. Even if we were to compare it to June 2020, the Croatian banking sector increased the number of loans issued by 17%, while the number of NPLs decreased by 18%.
This would mean that consistently over the last couple of years, and even during the pandemic and periods when we were officially in “recession”, the Croatian banking sector continued to issue new loans.
Why did this happen though? Logic would dictate that as we have a higher amount of loans, NPLs should also increase, or at least, stay at stable levels. This has not proven to be the case, and there are multiple reasons for this. First of all, as the economy started expanding after officially leaving the recession in 2015, the number of loans, of course, increased as well. At the same time, the growth in loans was mainly driven by household loans, while corporate loans first decreased, and when the pandemic started, they remained stable and stayed at similar levels. In fact, corporate loans amounted to HRK 98.5bn in June 2016, while in June 2022, they amounted to HRK 97.7bn, again, at very similar levels. This by itself wouldn’t say much if in fact, before March 2022, corporate loans remained below HRK 90bn levels for the majority of the time.
Household loans, on the other hand, increased by 24% to HRK 147.4bn from June 2016 to June 2022. Other loans (of which, loans from the Central Bank and deposits held at the Central Bank are also included), also increased significantly, reaching HRK 140.5bn by June 2022, an increase of 181% compared to June 2016. It should be noted that this increase can be attributed to the fact that during the current times of uncertainty, banks do hold a higher percentage of their assets in the Central Bank, in case those assets are needed for any of the shocks.
Anyway, both the household loans and other loans growing meant that NPLs went down, as the major drivers of NPLs are usually corporate loans, i.e. companies who default on their debt more often. It should also be noted that due to government support in 2020, a lot of companies were able to service their debt and continue operations despite the disruptions to the business, and as such, government support also played a key role in reducing the amount of NPLs.
All of this together would indicate that despite the inflation and the current macroeconomic environment, the Croatian banking sector, as well as households and corporations which are using the issued loans, are still quite healthy.
Composition of NPLs by sector (June 2016 – June 2022, %)