Today, we decided to bring you a risk of investment overview of the CROBEX constituents, with data from the last 3 years, i.e. before COVID-19.
To calculate the risk, we calculated the standard deviation of the daily price changes of CROBEX constituents. This can be considered an indicator of risk, as the standard deviation implies the dispersion of the price from some mean. In other words, the higher the standard deviation, the higher the volatility in the price of a stock compared to a mean price point. This means that companies with the highest standard deviations are also the companies that experience the highest volatility and thus risk. So, the standard deviation can be used to measure the riskiness of investment in a stock.
When looking at the Croatian equity market, it is important to note that it is quite small. Additionally, we are looking at both some of the most liquid stocks on the ZSE and some of the less liquid stocks. This means that companies with less liquidity will inherently be riskier, as not only are their bid/ask spreads larger, but it takes less money to impact their price movements, in either direction. These issues can be reduced by increasing the number of people investing in a particular stock, and by reducing the bid/ask spread, which can be done by hiring a market maker.
Standard deviation (risk) of CROBEX constituents (end of 2019 – 2023 YTD, %)
Source: Bloomberg, InterCapital Research
The largest standard deviation in the price changes was recorded by Jadroplov, at 4.8%. They recorded an average bid/ask spread of 3.6% in the observed period and an average daily turnover of EUR 6.2k. However, only considering the trading data would not be informative, as Jadroplov is a real company with business results, both positive and negative. Jadroplov operates in the shipping industry, which has been on a roller coaster ride in recent years. (of which you can read more here). Next up, we have Ingra, which recorded a standard deviation of 3.7%, with an average bid/ask spread of 3.3% during this period, and an average daily turnover of EUR 12.3k. Following them, we have Brodogradilište Viktor Lenac, with a standard deviation of 3.3%, an average bid/ask spread of 2.5%, as well as an average turnover of EUR 7.2k.
What can this data tell us? Outside the events influencing companies themselves and their business results, companies that have wider bid/ask spreads automatically require (higher) capital to buy the same amounts of shares compared to companies with smaller bid/ask spreads. The reason is quite simple; companies with higher spreads are usually companies with low amounts of shares offered by investors at the current bid/ask prices, meaning that a relatively small amount of shares bought/sold can influence the price movement. This basically means that as an investor even if you believe one of these companies has potential if you decide to buy, then you will move the price up more than if the spread was smaller, and the number of shares offered was larger. A similar situation is present if you believe that a company is no longer investible and you want to sell your position. This is also evident if we look at the average turnover of the shares, the ones with the highest standard deviation also have on average a lower daily turnover, again implying that it does not require a lot of money to get the share price moving. Of course, one last point should not be forgotten here, the price of the company’s share also has its influence, as investing in a share worth EUR 10 or EUR 100 makes a difference, both for the number of people investing as well as the number of shares on offer, especially for retail investors.
On the other hand, of the companies with the lowest standard deviation, we have HT, with 0.9%, followed by Adris (pref.) share, at 1.2%, and Zagrebačka banka, and Atlantic Grupa, both at 1.3%. HT’s average bid/ask spread during this period amounted to 0.87%, with an average turnover of EUR 167.6k. HT also has a market maker which reduces the bid/ask spread. A similar story is present with Adris and Atlantic Grupa, while ZABA, even though it does not have a market maker, also has a really small free float of shares, meaning that even if all the available shares were traded at once, the change would not be that significant.
All of this can show us that risk is inherently tied to the liquidity of a stock, the price, and especially the price premium one has to pay on larger bid/ask spreads. A low number of investors in stock are also influencing the risk, but the largest risk is just the sheer price movements that can happen if someone decides to buy/sell a large amount of lower liquidity and lower average turnover shares. As such, besides all the issues facing companies such as the business and macroeconomic environment, as well as the companies’ results, the investors in Croatia are also facing increased risk in investing in stocks due to the above-mentioned reasons.
Here we actually come to a paradox; the thing that would really reduce the risk of investment in ZSE would be a larger number of investors, especially retail investors. And retail investors are hard to attract when the risk is high.
At the end of November 2022, the loans of Croatian Financial Institutions amounted to EUR 40.2bn, representing an increase of 8.3% YoY, but a decrease of 0.45% MoM.
Recently, the Croatian National Bank, HNB, published the latest report on the changes recorded by the Croatian financial institutions, for the month of November 2022. According to the report, the total loans of Croatian financial institutions increased by 8.3% YoY and amounted to EUR 40.24bn. On a monthly basis, however, we do see a slight decrease of 0.45%, marking the first decrease since January 2022. This could be an indicator of the slowdown in loan issuance, as high inflation rates and the deterioration in the cost of living are having their influence. However, several more consecutive months of loan decreases are required to truly establish a trend.
Looking at the loan growth drivers, both household and corporate loans are continuing their growth. In fact, household loans amounted to EUR 19.8bn, representing an increase of 5.2% YoY or EUR 976m, while on a monthly basis, they increased by 0.35%, or EUR 70m. At the same time, corporate loans amounted to EUR 13.7bn, representing an increase of 21.9% YoY (or EUR 2.47bn), while on an MoM basis, they increased by 0.34%, or EUR 47m. If we were to look at the corporate loans more closely, we can see that investment loans remain the largest category, at EUR 5.51bn, (or 40.2%), representing an increase of 19% YoY (or HRK 866m), and 1.5% MoM (or EUR 83.6m). Following them, we have other loans, which increased by 27%, or EUR 833.7m, and amounted to EUR 3.87bn, or 28.2% of the total. On a monthly basis, they decreased by 0.7%, or EUR 26.4m. Finally, Working capital loans amounted to EUR 4.34bn, or 31.7% of the total, representing an increase of 21%, or EUR 767.8m YoY, but a decrease of 0.2%, or EUR 10.3m MoM.
The data from corporate loans is still quite encouraging, especially the data for investment loans, meaning that despite the current situation of high costs and inflation growth, companies are still continuing to invest in their operations. Even though the monthly data is less of a representation of companies’ operations, as requirements for new loans vary by industry and the current time/season, the decrease in working capital loans and other loans could be pointing towards two things: requirements for operations aren’t as high as they seemed to be, which could again be tied to the stabilization of energy prices; or companies are reducing their operations (albeit slightly) due to the recession fear.
Corporate and household loans growth rate (January 2015 – November 2022, %)
Source: HNB, InterCapital Research
Moving onto the household loans, the largest category is still the housing loans, at EUR 9.83bn, representing an increase of 9.81% YoY (or EUR 878.6m), and 0.68% MoM (or EUR 66.3m). Following them, we have consumer loans, at EUR 7.22bn, representing an increase of 2.1% YoY (or EUR 147.7m). On an MoM basis, they increased by 0.26%, or EUR 18.9m.
Composition of Croatian loans to households (October 2011 – November 2022, EURm)
Source: HNB, InterCapital Research
Even though Croatia is now part of the Eurozone, and as such looking at the loans issued in HRK will not make much sense when the data catch up, due to the c. 2-month delay in data delivery by the HNB, we can still see how the new loans and as such, the effective interest rates on those loans developed.
In November 2022, consumer loans in HRK issued to households had an effective interest rate of 6.46%, representing an increase of 1.11 p.p. YoY, but a decrease of 0.40 p.p. MoM. Housing loans issued in HRK had an effective interest rate of 3.79%, representing an increase of 0.53 p.p. YoY, and 0.14 p.p. MoM. Meanwhile, housing loans issued in EUR had an effective interest rate of 4%, representing an increase of 0.95 p.p. YoY, and 0.82 p.p. MoM. Consumer loans issued in EUR had an effective interest rate of 5.98%, which is an increase of 0.1 p.p. YoY, and 0.02 p.p. MoM.
Looking at the corporate clients, loans issued in EUR with the size of EUR 7.5m or lower, had an effective interest rate of 2.69%, representing an increase of 1.21 p.p. YoY, and 0.69 p.p. MoM. For loans that are larger than EUR 7.5m, the effective interest rate amounted to 2.42%, an increase of 1.64 p.p. YoY, and a decrease of 0.32 p.p. MoM.
Corporate and housing loans in EUR effective interest rates (January 2012 – November 2022, %)
Source: HNB, InterCapital Research
What all of this data can tell us, is that the loans being issued are still not slowing down, despite the macroeconomic situation. Furthermore, one should expect an increase in the interest rates, especially for new loans issued, as Croatia now being part of the Eurozone means that the reference interest rates are set up by the ECB, and as they were already increased and are expected to be increased even further, banks will have to issue loans at higher interest rates in order to maintain their margins.