In 9M 2023, ZABA recorded net interest income growth of 74% YoY, net fee and commission income increase of 1%, net banking income growth of 70%, and net income of EUR 404m, an increase of 67% YoY.

Yesterday, Zagrebačka banka (ZABA) published its 9M 2023 results. According to the report, the current interest rate environment has benefited the largest bank in Croatia significantly. Starting off with the net interest income, it amounted to EUR 503m, representing an increase of 74% YoY. Inside this category, interest income grew by 79% to EUR 584m, while interest expense increased by 119% to EUR 81m. This of course is related to two factors: interest income to mostly loans and loan interest rates, and interest expense to mostly deposits and deposit interest rates. On a YTD basis, loan growth amounted to 5.2%, while deposit growth amounted to 5.6%. On a YoY basis, loans actually decreased by 1%, while deposits increased by 10%. This is in line with the data that can be seen in the Croatian banking sector, and more broadly, Europe. One thing has to be noted here. The fact that the loan amount decreased by 1% doesn’t have to have that large of an effect on interest income, and that is something that can be seen here. This is due to several reasons: firstly, the new loan production has higher interest rates. Secondly, most of the older variable interest rate loans also experienced a decrease in interest rates. Lastly, even older fixed-interest rate loans get transferred to variable interest rates after a certain period of time. As such, even with a similar loan amount ZABA has been able to increase its interest income.

Because of this, it could be said that the interest rate increase is by far the primary driver of higher profitability. On the other hand, interest expense, which recorded a significant relative growth was still a lot lower than interest income in absolute terms. This could be a sign that the spread between the interest rates on loans and on deposits is widening, and if we were to look at the news, then this is surely the case. Moving on, the net fee and commission income has remained roughly the same, increasing by 1% YoY to EUR 162m. On the other hand, net trading and other income and expenses amounted to EUR 45m, decreasing by 36% YoY due to lower trading result. Combined, this led to a net banking income of EUR 484m, representing an increase of 70% YoY.

In terms of operating expenses, they grew by 7% YoY to EUR 244m. The largest category of op. expenses, administrative expenses increased by 4% YoY, to EUR 199m. However, if we were to look at Q3 numbers only, then the administrative expenses remained roughly the same at EUR 65m, implying that there weren’t massive changes in Q3 but the leftover effect from 6M 2023. As employee expenses are the largest part of admin expenses, this would mean that no increase in this category was recorded on a Q3 YoY basis. Depreciation increased by 19% to EUR 45m. On the other hand, ZABA recorded a reduction in provisions to EUR 12.7m (-33% YoY), as well as a reversal of impairment of financial assets not measured at FV through P&L, which increased by 50% to EUR -37m. It should be noted that when this category is negative it has a positive effect on the P&L. Also, a 33% reduction in provisions also implies that the loans currently issued are quite healthy, as this means that ZABA had to reserve less cash for potential NPLs.

All of this taken together led to a net income of EUR 404m, which is an increase of 67% YoY.

ZABA key financials (9M 2023 vs. 9M 2022, EURm)

Source: ZABA, InterCapital Research

Taking a quick look at the balance sheet, ZABA’s total assets amounted to EUR 24.7bn, increasing by 9.7%, or EUR 2.2bn YoY. The largest contributor to this increase came from the increase in cash balances at central banks, which grew by 55%, or EUR 2.15bn to EUR 6.08bn. Here we can see one of the main reasons for the lower deposit interest rates currently being offered. ZABA as the largest bank in Croatia is usually the one that drives the decisions of other banks to increase/decrease interest rates on loans and deposits. However, the current interest rates offered on deposits at the ECB range from 4.0% to 4.75% depending on the type of deposit. Given that the deposit amount still continues to increase in ZABA’s case, there isn’t that much of an incentive to offer higher deposit rates and the excess liquidity is being transferred to ECB, where it currently achieves solid returns. Debt securities also recorded an increase, growing by 45%, or EUR 474m to EUR 1.54bn.

On the other hand, liabilities increased by 12% YoY, to EUR 22.2bn. This was primarily driven by the deposit growth, which grew by 10%, or EUR 1.93bn YoY to EUR 20.9bn. Finally, the total equity amounted to EUR 2.55bn, decreasing by 4% YoY, mainly driven by the decrease in retained earnings (-26%, or EUR -291.3m YoY), as a result of the dividend payment in 2023 which was also partially paid from the retained earnings.

ZABA share price performance vs. select regional banks (2020 – 2023 YTD, %)

Source: Bloomberg, InterCapital Research

On a YTD basis, ZABA was the 2nd best-performing bank, right after HPB with a 48% return. The same situation is present when compared to 2020 when ZABA’s 54% return is 2nd only to HPB’s 132%. Still, both of these banks far outperformed the remaining banks in this group.