Fitch affirms Croatia’s unit of Erste Bank at A-, outlook stable

"Our view of the parent's ability to provide support to ESB also reflects the group's strong credit profile, the relatively small size of the Croatian subsidiary and the common regulatory authority for parent and subsidiary banks," the credit rating agency said in a press release late on Thursday.

ESB is the third-largest bank in Croatia and operates in a relatively small and highly concentrated banking sector. At the end of the first half of 2023, ESB held an 18% market share in sector loans and 17% in deposits.

Fitch has also affirmed the bank's Viability Rating (VR) at 'bb+'. ESB's VR reflects the bank's solid franchise and quite diversified business profile, but also considers above-average exposure to volatile real estate and tourism sectors. It also considers large exposure to the inherently more risky SME segment and consumer unsecured lending.

ESB's risk profile assessment reflects improving domestic operating environment and direct and indirect exposure to Croatian sovereign, Fitch explained. ESB's loan mix is also gradually changing in favour of lower-risk housing mortgages and larger corporates.

ESB's impaired loan ratio improved to 2.9% at the end of June, driven as in 2022 by low new inflows, continued recoveries and loan growth. Specific coverage was stable and solid at around 67%. "We expect a moderate increase in impaired loans and net loan impairment charges at around 50 basis points of gross loans over the next two years," Fitch added.

Better asset yields and net releases of loan loss allowances supported strong performance in the first half of 2023. "We expect ESB's operating profitability/risk weighted assets to peak in 2023 and then moderate, but remain solid at around 3% over the next two years," according to the credit rating agency.

ESB's capital is primarily in common equity Tier 1 (CET1), with the CET1 ratio at 20.2% at end-of June, providing adequate buffers to absorb moderate shocks considering the bank's risk profile. Dividend payouts resumed in 2022, but ability to generate capital internally improved. "We expect earnings retention to remain sufficient to support growth and maintain comfortable buffers over the regulatory capital requirements," Fitch added.