Despite the swift consolidation of the last few years, Croatia is still overbanked, with 35 banks for 4.4 million inhabitants. In the past five years, the number of Croatian banks fell from 60 to 35. In 2004 alone, five banks merged into larger groups or went into liquidation. This January, the merger of Privredna banka-Laguna banka into PBZ marked the continuation of the process, and the expected sale of Dresdner Bank Croatia may bring the number of banks down further.
Dramatic changes
The banking system’s ownership has also changed dramatically. In 1997 foreign-owned banks controlled only 4% of the market; today their share exceeds 91%. The 18 private banks owned by domestic investors control less than 6% of assets and the two state-owned banks have a 3.4% market share.
As a legacy of a system based on strong regional banks, 20 of 35 Croatian banks are still registered outside the capital. Most of these mainly small players have already lost their independence, becoming members of larger groups, and it is likely that this tendency will continue in 2005.
Despite the relatively large number of banks, Croatian banking business is rather concentrated. The top six banks control 81% of banking assets.
The two largest banks, Zagrebacka banka (a member of the UniCredit Group of Italy) and Privredna banka Zagreb (part of Italy’s Gruppo Intesa) have a combined 44% market share. Three Austrian-owned groups compete for third place, each having about 10% of the market: Raiffeisen had €2994m in total assets at the end of September 2004, followed by Erste & Steirmärkische banka with €2936.2m, and Hypo Alpe-Adria+Slavonska banka with €2936m. HVB Splitska banka followed them closely with €2602m in assets.
The big six’s closest competitors, the state-owned Hrvatska postanska banka and Nova banka, recently bought by Hungarian OTP, are much smaller with a market share of less than 3%.
After the privatisation of most state-owned banks, the Croatian state’s main agent in the financial sector has become the Croatian Bank for Reconstruction and Development (HBOR).
Originally set up to finance post-war reconstruction, the bank today combines the functions of a state development agency, an export-import bank and an export credit insurance agency. Through its loans, grouped into 18 programmes, HBOR finances infrastructure projects, supports small and medium-sized enterprise (SME) development and environmental protection initiatives, and promotes Croatian exports. In the future, the bank plans active participation in the implementation of the use of EU pre-accession funds. In 2004, HBOR provided $120m export financing and $110m export credit insurance and its total assets grew by 21% to €1636m.
Since the crisis of 1998-99, the Croatian banking industry has experienced a period of quick growth. In five years, aggregated total assets have grown 2.4 times to €29.4bn. Growth peaked in 2001-2002 and calmed down to 17.5% in 2003. 2004 saw further slowdown with 8.7% growth of total assets in the first nine months.
Crucial measures
Measures by the Croatian National Bank (CNB) played a crucial role in cooling down domestic banks’ expansion supported by foreign funding. In 2003, it established a 16% ceiling for credit growth, above which banks had to put away non-interest bearing reserves (this requirement has since been abolished). In March 2004, a 24% reserve requirement on increase of foreign funding of banks was introduced which was raised to 30% last month. Additionally, banks have to keep 32% of all their foreign currencies liabilities in highly liquid form. This ratio was reduced from 35% last month to create excess liquidity that may be used for the purchase of government debt instruments issued on the local market, in line with the government’s policy to shift to domestic funding of government debt.
Despite quick growth, Croatian banks have maintained high capital adequacy ratios (CAR), good asset quality and they favourably compare to their central European peers. At end-September 2004, the banking system’s average CAR was 14.5% and the share of substandard loans decreased from 5.1% to 4.9%.
Profitable 2004
The banking system remained highly profitable in 2004, which is considered the best year in the history of the modern Croatian banking system. In the first nine months, Croatian banks’ average after tax return on equity reached 17.8%, while pre-tax return on assets stood at 1.7%.
The structure of the banks’ assets and liabilities reflect a conservative pattern: lending represents 52.3% and highly liquid assets account for another 28.7% of total assets. Deposits, accounting for 74.3% of total liabilities, provide a 129.8% coverage for loans, offering good opportunities for further organic growth.
“After the introduction of the EU-conform Banking Law in 2002 and further improvements in the legal environment, in 2005-2006 more changes in the Croatian banking regulation are to be expected,” says Martina Drvar, director of the off-site supervision department at CNB. “Changes in IFRS [International Financial Reporting Standards] should be translated into local rules; new reporting forms and a new classification of financial instruments will be introduced”.
According to Ms Drvar, in 2004, the banking supervision was reorganised to meet new challenges and now consists of five specialised divisions. Supervisors are increasingly covering complex issues such as internal control procedures, risk management systems and corporate governance, in preparation for the Basel II environment.
According to the CNB’s projection Croatian banks should comply fully with Basel II requirements by 2010 and 88% of large banks – with assets over Hrk5bn ($868m) – have already started preparations, notes Ms Drvar.
Although they might have different strategies, nearly all large Croatian banks had a good year in 2004. Most smaller banks continued to grow at a slower rate.
Despite strong competition, Zagrebacka banka has retained its leading position in Croatia and even increased its market share in several segments, says Milivoj Goldstajn, a board member of the bank. “Although no audited results are yet available, we may say that in 2004 our bank attained very good business results again. Thanks to the introduction of new sophisticated products and development of electronic distribution channels, the bank is now able to provide more efficient services, which is the main guarantee of being successful in an extremely competitive market,” he says.
Privredna banka Zagreb (PBZ), Croatia’s second largest bank, firmly keeps its place at the peak of Croatian banking with 18.15% of total assets, 17.68% of total deposits and 17.66% of loans to legal entities. In 2004, the bank increased its market share in deposits of legal entities (to 18.63%) and of retail clients (to 20.79%) at the expense of its less efficient competitors.
The bank raised its total assets by 11%, loans by 8% and deposits by 5% in a year, largely thanks to its extensive distribution network and sophisticated product range. On the capital markets, it participated in a number of benchmark deals, including oil and gas company INA’s $400m multicurrency revolving credit facility (the largest ever syndicated loan for a Croatian company), the issue of five tranches of state bonds for more than E1bn, floating shares of the Croatia insurance company and bonds of Agrokor on the Zagreb Stock Exchange.
In 2005, PBZ’s strategy will again focus on three main business areas: retail, corporate and finance. It plans to introduce innovative banking products, and offer them along with an increased level of customer service.
“Raiffeisenbank managed again to increase its market share in 2004 and now controls 10.6% of the banking system’s total assets, compared with 9.1% a year before,” says Anton Starcevic, director of Raiffeisen’s risk management division.“The focus now is on completing Raiffeisen’s network and having a branch in each Croatian town with a population of over 20,000. We will use the network to obtain more clients with primary accounts and offer the full scale of the bank’s product range,” he adds.
“After the merger with Rijecka banka, 2004 was the first year for our bank with fully integrated operations,” says Sava Dalbokov, a member of the management board of Erste & Steirmarckische bank. “Having the merger behind us, last year the bank demonstrated its growth potential with total assets increasing by 30%, lending by 35%. Customers’ deposits increased by more than 20% and the bank established itself as number three in Croatia in customer loans, branch network and equity,” he says.
“For HVB Splitska banka, 2004 was a year of consolidation,” notes Goran Gazivoda, deputy chairman of the board. According to preliminary figures, the bank – formed in 2003 by a merger between HVB Croatia and Splitska banka – closed last year with total assets of €3.27bn and pre-tax profit of €31m. It made a big step forward in creating a nationwide network by opening 32 branches in the former offices of Fina, a state-owned specialist financial company. “2005 will be the year of creativity in Croatian banking and the most innovative banks will be the most successful,” says Mr Gazivoda.
Leasing opportunities
“Hypo Alpe-Adria Group [which comprises Hypo Alpe-Adria-Bank (HAAB), Slavonska banka Osijek, a leasing company and other financial services providers] by now has become the third largest financial group in Croatia,” says Igor Kodzoman, a member of HAAB’s management board. Besides commercial banking business, in which HAAB and Slavonska increasingly focus on the retail and SME segment, the group sees very good opportunities in the leasing business where it reached a 35%-40% market share.
