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Challenges mount

With falling GDP and possible government regulation, Croatia’s banks must find new growth areas as well as preparing for the competitive shock of EU accession.
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Compared with most transition countries, Croatia is overbanked. With a population of 4.4 million it has 40 commercial banks compared with the 27 banks and foreign bank branches operating in the Czech Republic (population: 10 million) or with Hungary (population: about 10 million), which has 31 banks. In four years, however, the number of Croatian banks has fallen from 60 to 40 and it is widely expected that, through further consolidation, the number may drop to 30 in the next two years.

The banking system’s ownership structure has also changed dramatically. Before 1997, Croatian banking had been dominated by state-owned banks, which in 1996 controlled 78.4% of total banking assets. After the start of the privatisation process, by 1997 their share fell to 41.9%, while privately-owned domestic banks accounted for 54.1%.

In the second wave of privatisation, large foreign banks entered Croatia and in a few years took over the bulk of banking assets. While in 1997, foreign-owned banks had a market share of only 4%, their stake had increased to 39.9% by 1999, 84.1% by 2000 and stood at 90.8% in September 2003. The 21 domestic private banks control only 5.7% of the market and the two state-owned banks have 3.5% market share.

Although their numbers have been decreasing, 23 of the 40 Croatian commercial banks are regional institutions. Except for Erste & Steiermärkische bank (with headquarters in Rijeka) and Splitska banka, they are mainly small banks, but many of them have strong local roots and are therefore competitors for Zagreb-based institutions. However, for the past few years regional banks have been losing their independence step by step and many have already become members of larger banking groups.

The big six

Despite the relatively large number of banks, the Croatian system is rather concentrated – in September 2003, the two largest banks, Zagrebacka banka (owned by UniCredito Italiano) and Privredna banka Zagreb (a member of Italy’s Gruppo Intesa) controlled 43% of total banking assets, while the top four banks had a combined market share of 61%.

In June 2003, the Croatian banks ranked as in the table below. Subsequently, a series of mergers left three Austrian-owned groups (Erste & Steiermärkische Bank, Raiffeisenbank Austria and Splitska banka) competing for third place. At the end of September, Splitska had e2.32bn in assets, followed by Raiffeisen with e2.31bn and Erste with e2.29bn. Erste and Splitska have emerged from recent mergers in which Erste amalgamated Rijecka banka, while Splitska, owned by the Bank Austria-HVB Group, merged with HVB Bank Croatia.

The sixth largest banking group comprises Hypo Alpe-Adria-Banka and Slavonska banka, the leading regional bank of Slavonia (North-East Croatia) both controlled by HAAB Klagenfurt. The two banks’ combined assets are e2.26bn, placing the bank very close to the Splitska-Raiffeisen-Erste trio.

Government presence

Although state-owned commercial banks have a limited role in the Croatian banking industry, the government maintains its presence in the economy through the Croatian Bank for Reconstruction and Development (Hrvatska Bankaza Obnovu i Razvitak – HBOR). HBOR, which was created in 1992, combines the functions of a state development institution, an export-import bank and an export credit insurance agency.

The bank was set up with the technical assistance of the German government-owned Kreditanstalt für Wiederaufbau, and in the early 1990s had a primary focus on reconstruction of war-devastated areas and infrastructure but quickly grew into a general development agency. HBOR is in charge of managing flows of funds to less developed regions (in particular to the Adriatic islands) and operates special loan programmes aimed at small businesses, development of the tourist sector and support of Croatian exports.

Its loans, grouped into 16 programmes, are granted to borrowers either directly or in co-operation with commercial banks, on a bilateral basis or in the form of syndications. After growth of 23.2%, the bank’s assets stood at Hrk10.4bn (e1.33bn) at the end of 2003.

Having recovered from the banking crisis of 1998, for the past few years Croatian banks have enjoyed a period of rapid and profitable growth with aggregated assets more than doubling in four years (from Hrk93.5bn to Hrk192.1bn). In 2001-2002, the expansion was partially fuelled by the euro conversion when e2.5bn was exchanged through bank accounts, of which e2.1bn stayed in the banks. Thanks to these additional cheap funds and an overall growth of deposits, in 2002 retail loans increased by 40% and corporate loans by 26%.

Nevertheless, despite the rapid expansion, Croatian banks managed to maintain strong capitalisation. In 1998, their average Basel ratio fell to 12.7%, but substantial capital injections helped to increase it to 21.3% in 2000. The banking system’s average capital adequacy ratio has been decreasing due to the fast expansion of operations, but it was still 16% at the end of September 2003 (the central bank’s minimum requirement is 10%).

The banking system’s asset quality has been improving despite strong growth in 2002 and 2003. As of September 2003, 94.8% of assets were categorised as “good” according to the central bank’s methodology, compared with 94.1% at the end of 2002 and 92.7% in 2001. Even in 1998, this indicator did not fall to less than 90%, thanks to the good asset quality of the major banks.

Cautious approach

In their assets/liabilities structure, Croatian banks remain rather conservative, mostly focusing on lending, funded by client deposits. At the end of June 2003, loans represented 54% of the banks’ total assets, while most liquid assets (cash and deposits with the central bank) amounted to 12.4%.

Investments in securities had a relatively small share, 6.6%, which reflects the banks’ conservative approach, but is also a proof of the relatively slow development of the financial markets.

Clients’ deposits represent the bulk of the banks’ funding base and have done so for many years, and their relative weight has been growing steadily (they had a 71.5% share in total liabilities at the end of June 2003, compared with 65% in 2000).

While expanding rapidly, Croatian banks have been maintaining good profitability. After 1998, when the banking system had a negative return on equity (RoE) of 16.1%, a recovery took place in 1999 and, in the first nine months of 2003, the banking system achieved a 16.3% ROE ratio.

Banking supervision

“The Banking Law of 2002 was prepared with maximum consideration of the corresponding EU directives and is 99% EU-compatible,” says Martina Drvar, director of off-site supervision department at the Croatian National Bank. “It helped to strengthen banking supervision and create a good basis for the banking system’s development up to the moment of EU accession.

“The structure of banking supervision within the Croatian National Bank is changing, partially to cope with increased tasks related to operational risks and the needs of anti-money laundering control,” says Ms Drvar.

Although the creation of a unified financial supervision body is not on the agenda, the banking supervision has established formal co-operation with other Croatian supervisors which control different market segments (pension funds, insurance companies and securities markets).

One of the main factors resulting in the growing trust in Croatian banks is the well-functioning deposit insurance system. Private depositors are insured by the Agency for Bank Rehabilitation and Deposit Insurance up to the amount of Hkr100,000 which is lower than the EU standard (e20,000) but seems sufficient because the size of the average insured deposits is between Hkr30,000 and Hkr50,000.

“In the main market segments, Zagrebacka banka has been firmly keeping its leading position in Croatia,” says Milivoj Goldstajn, a member of the board at Zagrebacka banka . The bank controls about one-third of all retail deposits, 30% of corporate deposits, has market share of 22% in corporate loans and 26% in retail loans.

Retail banking

“Although no audited figures are yet available, we may say that the bank had a very successful year in 2003,” emphasises Mr Goldstajn.

In the retail area, the bank launched a service package called One For All. The package includes basic banking products (Kuna current account with Maestro card, FX account with Visa Electra card), additional card options (MasterCard, Visa), access to multiple distribution channels, credit options and additional services, such asinsurance/assistance for account holders. These services are grouped into five packages, according to different market segments (managers of companies, students and elderly people) and each has a different price tag. In the first three months after its launch, 50,000 clients signed up for the package. “Another success story for Zagrebacka banka has been the $270m syndicated loan received by the bank, the largest ever syndication for a private financial institution in central and eastern Europe,” notes Mr Goldstajn.

“2003 was an exceptionally good year for the PBZ Group,” says Jadranka Primorac, a board member at PBZ. The bank expects slightly higher profits than in 2002, a ROE of more than 20% and a cost/income ratio of about 50%.

“While further strengthening its positions in corporate lending and financial markets, PBZ has become market leader in retail loans, thanks to interesting products such as its quick loan,” she says. The bank was the first in Croatia to introduce a pre-paid card, which may be purchased by foreign tourists and used to withdraw cash free of charge at ATMs. The cards are also offered as gifts in Croatia and are sold with logos to match various occasions, such as weddings and birthdays.

In 2003, PBZ’s retail lending business grew quicker than its corporate lending. “Last year was marked by a shift to retail in which the bank enjoys higher margins and can spread its risks better,” says Ms Primorac.

“Despite the restrictive measures of the Croatian National Bank, Croatian banks had a good year in 2003, which will be difficult to repeat,” says Goran Gazivoda, deputy chairman of the board of Splitska banka.

Splitska banka in July 2003 merged with HVB Croatia. According to Mr Gazivoda, the two banks’ strategic shareholder, Bank Austria-HVB Group, “decided to continue operations under the well-established Splitska name, while transforming the bank from a strong regional player into a nationwide bank”. Before the merger, Splitska banka was 3.5 times bigger than HVB Croatia. For 2003, he expects a good pre-tax profit of e30m.

“The merger with Rijecka banka was a great success,” says Sava Dalbokov, a management board member at Erste & Steiermärkische bank . “We completed it in 11 months, including the establishment of a uniform IT platform for the two banks. Now the task is to build our market share using the bank’s strength in a number of regions, and become a market leader in product development.”

In 2003, Erste posted a profit in line with expectations and reached an ROE of 14-15%.

“Since 2000, Raiffeisenbank has been continuously increasing its market share in Croatia and by 2003, we reached 9.1% of the banking system’s total assets,” says Raiffeisen’s senior executive director, Anton Starcevic. “First we started with loans, mostly funded by the mother bank, and continued by actively building up our deposit base. The focus is now on increasing the number of core clients with primary accounts.”

While understanding the central bank’s goals, Igor Kodzoman, vice-president of the board of Hypo Alpe-Adria-Bank Croatia, laments the impact of HNB’s restrictions on his bank’s growth rate in 2003 (see overview). “Due to the National Bank’s measures, our bank had an e11m opportunity loss and the bank’s return on average assets fell from 2.11% to 1.70%, as nearly 40% of assets had to be placed at negative margins,” he says.

Nevertheless, the bank managed to reach a profit nearly equal to the previous year’s: it increased total assets by more than 30% and retail loans grew by more than 40%.

Small voices

Although large banks expect a continuous expansion at the expense of their smaller competitors, small banks see it in a different way. “Our strengths are faster service and flexibility. Croatian clients want everything yesterday, and today is already too late. Besides, our customers appreciate being able to talk to the bank’s CEO at short notice, which is impossible in the case of large banks,” says Centar banka’s executive director Ksenija Linaric.

For large and small banks, this year will be challenging. With falling GDP growth rates and possible restrictions by the government, Croatian banks will have to find new growth areas and start preparing for the even more competitive environment that will follow Croatia’s EU accession.

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Read more about:  Central & Eastern Europe , Croatia