Croatian Banks’ Resilience to Pandemic Depends on Government Measures

Lauren Simmonds

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As Ana Blaskovic/Poslovni Dnevnik writes, Croatian banks and banks across the country’s region entered the coronavirus crisis in relatively good health as they were fairly adequately protected by capital and were engulfed in a trend of declining bad loans. However, the effects of the pandemic will continue to be profound, especially when it comes to the quality of bank portfolios, which will depend deeply on national measures put in place to try to mitigate the effects of the pandemic.

“The outlook for the quality of Croatian banks’ assets in the coming period largely depends on a combination of economic recovery and state aid. Since the beginning of the pandemic, state measures to help businesses have played a key role in stabilising the quality of bank assets.

However, even an early cessation of state aid could lead to a sharp increase in contract default rates in the coming period,’’ they warned from Deloitte in the third edition of the Study on Mergers and Acquisitions in the Banking Sector in Central and Eastern Europe.

The body noted that lawmakers are encouraging the early detection of bad loans and securing provisions, and measures to mitigate the effects of the pandemic, such as a moratorium and selective relief for Croatian banks and others, could, at least to some extent, work to mask the real economic damage. Nevertheless, “huge future negative effects on the quality of bank portfolios and the profits of banks” are expected.

“The coming period will reveal the real extent of the damage caused by the material deterioration of certain clients, which is likely to further encourage consolidation in the banking market of Central and Eastern Europe,” said Vedrana Jelusic Kasic, a partner in Deloitte’s financial advisory department.

The real damage to Croatian banks in those throughout the region can be seen from the financial results for 2020 and “there is no doubt that coronavirus will leave a strong mark on the results of CEE banks over the next year as well”.

Among the key findings is that regional creditors entered the crisis with a strong capital position, averaging about 20 percent in 2019, up 0.2 points from a year earlier. The average profitability with a return on equity of 12.7 percent with a simultaneous return on assets of 1.5 percent was also stable.

“High levels of profitability due to further pressure on interest rates and provisions for credit placements will not be able to be maintained,” the study said.

Nearly 60 percent of total assets are owned by the 15 largest regional groups. In terms of assets, the largest is still the Erste Group with 8.7 percent market share and a presence in 8 countries.

Erste is followed by the KBC Group (with a market share of 7.8%, presence in 4 countries) and the Italian UniCredit (with a market share of 6.5% and presence in 9 countries). The Hungarian OTP achieved the highest asset growth thanks to boasting an active M&A strategy.

The banking sector of Central and Eastern Europe entered a pandemic with only 7.2 percent of bad loans. Compared to 2018, this marks three-quarters of a percentage point less, which reflects many years of positive economic trends, portfolio cleansing and regulatory incentives.

“Overall, the shares of non-performing loans in the CEE at the end of 2019 were at their lowest levels ever, which put the regional banking sector in a relatively favourable position to face the economic challenges and consequences caused by the pandemic,” said Deloitte.

As the good years have reflected on them, Croatian banks and those in the region cannot avoid the spillover effects of the ongoing pandemic, and the extent to which the sector will feel this will greatly depend on the range and scope of government measures.

Deloitte concludes that banks in the CEE region have recorded remarkable results in recent years thanks to a stable macro-environment that was interrupted by a pandemic in the first half of last year to the detriment of return on capital.

Resilience is crucial in times of economic shocks, and the banking sector in Central and Eastern Europe is still fragmented, with a significant number of smaller banks whose market share is virtually negligible.

“Small, less efficient and less resilient players may not be able to overcome the shock of capital and minimum acceptable profitability on their own, and we expect the consolidation trend to continue in the coming years and even accelerate due to the crisis caused by the pandemic,” Deloitte said.

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