The Croatian economy is not in a robust state. Foreign debt as a percentage of GDP has soared to over 85%. Accession talks with the EU, due to start on March 17, have been postponed until the government delivers a war criminal to the Hague. GDP growth, forecast at 3% for 2005, lags behind comparable economies such as the Czech Republic (4.2%) and Poland (4.6%), and loss-making state industries, such as ship-building, put substantial strain on a fiscal system that is already under pressure.
Such dire straits are belied by a stroll around the healthy and wealthy-looking capital, Zagreb, and by the vigour of the Croatian banking market. “Apart from tourism, banking and financial services are our only successful industries,” a leading Zagreb lawyer told The Banker. “People say we have too many banks, but they’re still profitable.”
Croatian banking is almost exclusively a foreign affair. Italian, German and Austrian players have increased their market share from 7% to more than 90% in less than eight years by capital value – and the march continues. Hungary’s OTP, for example, recently bought Nova banka.
At the top end of the market, six banks dominate: Zagrebacka banka, Privredna banka Zagreb, HVB Splitska banka, Erste banka, Hypo Alpe-Adria-Bank, and Raiffeisenbank, which between them own more than 80% of Croatian banking assets. The two pack leaders, Zagrebacka banka (part of Italy’s Unicredit Group) and Privredna banka Zagreb (in the Grupo Intesa stable) account for more than 40% of the market.
The clear ascendancy of foreign entrants has not yet disposed of the role for smaller regional Croatian banks (such as Imex Banka, Jadranska banka, Banka Brod, Banka Sonic or the state-owned Hvratska postanka banka). As the market continues to consolidate, though, that role may yet alter: foreign banks have enabled the industry to leap-frog outdated technology in a stride.
Strategic move
Reinhold Ortner, a member of the supervisory board of Erste banka Croatia, says that Croatia has always been regarded as a key plank of a central European strategy that includes Slovenia, Serbia and Hungary. Erste banka bought a minority stake in a Croatian savings bank in 1996; and three years later bought âakovecka banka, Bjelovarska banka and Trgovaãka banka, which it merged into Erste & Steiermärkischen banka in late 1999. This was followed by the acquisition of Rijecka banka in May 2003.
“This has always been a good market for us,” Mr Ortner told The Banker. “Even when the Croatian economy was suffering as a result of a high dependence on tourism [during the Balkans wars in the 1990s], we’ve been profitable every year since we’ve been here. Our typical return on equity after tax has always been between 15% and 20%.” Currently, he says, it is about 18.5%.
Despite its 115 branches in Croatia, Erste banka still has appetite for more. “We need a greater presence on the Dalmatian coast. We recently opened in Dubrovnik and in Split, and we want more branches in Zagreb,” says Mr Ortner.
For Erste banka, as for many foreign entrants to Croatia, the profit driver is the humble householder. “Croatia doesn’t have a great deal of big industry – it’s an economy based on SMEs [small and medium-sized enterprises],” Mr Ortner says. “Where we’ve found solid growth is in household lending. It’s certainly interesting that market penetration of the banking sector is one of the highest in the central European region. Croatians are just more likely to borrow and more likely to save.”
Stable but tight
Recently, the central bank, the National Bank of Croatia, warned that consumer borrowing could reach unmanageable proportions but that does not worry Mr Ortner. “There’s a lot of collateral around, including real estate. We see our risk exposure in Croatia as very stable,” he insists.
The market is undeniably tight. “It’s very competitive. Banks are now offering very sophisticated products, such as SMS banking, and loans at special interest rates,” says Splitska banka managing board member Vedrana Carevic. One recent product development includes Swiss franc loans at a rate of 3.9%.
One analyst said that it is this underlying faith in the dynamism of central European markets such as Croatia that is, at least in some measure, driving the recently announced and impending Gruppo Unicredit acquisition of Austrian HVB, Bank Austria and BPH.
Unicredit already owns the largest bank in Croatia, Zagrebacka banka; HVB owns Splitska banka. Officials from each profess to knowing no more than the man on the Zagreb trolleybus about the repercussions of any possible merger. “It’s in the hands of the central bank. It will decide whether or not to let the merger go through,” says Ms Carevic.
A bank created out of a successful merger would, in the absence of divestments, possess a market share of nearly 35%. This is a concentration that the central bank, as industry regulator, is unlikely to permit.
If the parent bank merger does proceed, and the Croatian bank blocks a merger between Splitska banka and Zagrebacka banka, there is little doubt which would be kept and which sold. “Zagrebacka banka is the jewel in the crown. It’s a money printing machine,” says one analyst.
The jury is out on whose appetite would be whetted if one or other of the two banks were for sale. Some predict that a global player like HSBC or the Royal Bank of Scotland group might seize the chance; others that Croatia “is just too small a market. It will always be regional banks that play in this arena”.
Business grumbles
While banks are firing on all cylinders with their consumer lending and savings products, business lending sits beneath a cloud. The Croatian Bank for Reconstruction and Development (HBRD) plays a part in SME lending in particular sectors such as tourism and agriculture, using commercial banks as distribution centres. But its efforts are not sufficient to kick a sluggish economy into gear.
“The National Bank is not doing enough to support business,” complains a former high-ranking official of the institution.
There are reasons for this: the central bank is extremely anxious not to increase the national debt and has put tight curbs on borrowing, tightening monetary policy three times in 2004 in an attempt to put the brakes on foreign banks’ borrowing from abroad. In 2003, it capped credit growth, limiting the growth rate of loans to 16% per year, and increasing reserve requirements for foreign currency loans.
Low inflation rate
All parties may yet be grateful for these steps, despite some fundamentals being shaky. Unemployment, for example, hovers at about 18%, according to the government’s figures; 13.8%, according to the International Labour Organisation. Others, such as a low rate of inflation, give greater cause for optimism. The government is also seen as having successfully managed the kuna’s float against the euro; and in December 2004, Standard & Poor’s revised Croatia’s LT foreign currency rating for the first time in seven years, from BBB- to BBB.
In the mid term, Croatia’s intrinsic difficulties should not be overlooked; there are very real impediments to EU accession negotiations. One source describes current negotiations as “very tough – it’s going to be harder for Croatia than it was for the last round of new member states”. But banks seem to be voting with their feet.
