ZAGREB (Croatia), March 22 (SeeNews) – Lending in Croatia’s banking sector is expected to be more or less flat this year with the ratio of non-performing loans (NPLs) in the system seen rising to around 17% by the end of 2013, the head of Erste&Steiermaerkische Bank d.d.’s economic research department said.
“We expect a largely stagnant loan book performance in 2013, due mainly to the expected ongoing deleveraging in the household segment, still subdued demand from private corporates and in anticipation of a more lively performance from the public sector,” Alen Kovac told SeeNews in an emailed interview.
The expert sees NPLs remaining on an upward trajectory in 2013, with most inflow coming from the corporate side due to the new pre-bankruptcy law, where he expects a figure close to the 30% mark.
“The household loan portfolio is expected to maintain a more stable performance. Nevertheless, the labour market should continue to weigh on NPLs here as well. The overall share of NPLs is thus projected to reach around 17% towards the end of 2013.”
The NPLs ratio in Croatia's banking system increased to 13.8% of the 283.9 billion kuna ($48.4 billion/37.4 billion euro) total loan portfolio at the end of 2012 from an audited 12.4% at the end of 2011, central bank data indicated. The share in total loans of partly recoverable and fully irrecoverable corporate loans was 24.68% at the end of 2012, while the same indicator for household loans was 9.45%.
Regarding the outlook for the profitability of the Croatian banking sector, Kovac said risk costs remain by far the biggest burden as the still sluggish macro outlook suggests no reversal in the near term, especially as there is no space to allow for a further drop in the NPL coverage ratio. Taking into consideration the high level of capitalization, he said it is reasonable to expect only modest return on equity in the period ahead.
“Apart from that, the strong focus on efficiency and costs and the introduction of innovative products and services beyond classic banking are seen as the key challenges ahead.”
The expert sees limited immediate implications for the banking sector’s profitability originating from Croatia’s EU entry this July.
“Over the mid-term period, however, competitive pressures are expected to start piling up. Corporates are expected to have easier access to direct cross-border financing. Also, mid-term interest rate convergence is expected to put some pressure on margins. But for the larger banks this would also bring cheaper financing as well from abroad.”
Competitive pressures are also generating a consolidation momentum across the industry, Kovac said, adding that this currently puts pressure chiefly on smaller banks, accompanied by privatization stories for two mid-to-large sized banks. “Therefore, we see consolidation as a trend in the mid-term period.”
He views the pre-bankruptcy settlement option that is now available to debt-laden Croatian companies as a step in the positive direction as it aims to provide companies that otherwise have a viable business model, but have come into trouble given the lengthy recession, with a much-needed breathing space throughout the restructuring process.
“This we see as beneficial for the banks, the companies themselves and the economy as a whole. Still, initial experience also suggests that some companies are seeing pre-bankruptcy procedures as a debt haircut procedure, lacking the crucial restructuring component. With some fine-tuning - we expect some revisions to the rules soon so that the process can work faster and better - and more experience in the implementation phase, we expect to see generally positive effects.”
(1 euro=7.5943 Croatian kuna)