On 13 November the International Monetary Fund published a staff report on
recent economic developments and policies in Croatia 2 October 2012 . The report
includes the following discussion regarding the banking sector in Croatia
C. Preserving Financial Stability
23. Despite the slow deterioration in asset quality, the largely foreign-owned
banking sector is stable, well-capitalized, and resilient to shocks. The
ongoing recession is affecting the nonperforming loan (NPL) ratio, which
reached 13 percent in June 2012, with corporate NPLs at 23 percent. Profitability
has started to decline from relatively high levels, in part owing to a pick-up in
specific NPL provisions, which still remain low relative to neighbors and
history (text table and Table 8). Nevertheless, high capital adequacy and
liquidity ratios–even if somewhat flattered by low provisions–indicate
sufficient buffers to ensure the system’s stability. Notably, the CNB stress
tests suggest that most banks could absorb the effects of an increase in the
NPL ratio to 20 percent (34 percent for corporates), and only a few banks would
need additional capital totaling about 0.6 percent of GDP. Liability
deleveraging has been proceeding gradually, averaging about 3 percent of the
outstanding stock per quarter in 2011 Q3–2012 Q2.
24. Nevertheless, staff argued that risks to systemic financial
stability remain, mainly from external spillovers. The low coverage of NPLs by
specific loan-loss provisions may adversely impact capital adequacy in case of
further deterioration of the loan portfolio. The large exposure of borrowers to
currency and interest rate risk creates significant credit risk for banks. In
addition, the strong dependence of subsidiaries on euro area parent banks for
funding exposes them to the risk of contagion, with potentially substantial
impact on growth.
25. In this context, staff stressed the importance of safeguarding
financial stability through strong regulation and enhanced supervision, including
close cooperation with home supervisors. Staff advised the CNB to maintain high
statutory capital buffers, to continue close monitoring of liquidity and credit
developments, and call for raising banks’ capital if needed. Staff also
recommended ensuring realistic loan classification and valuation of collateral
as well as adequate provisioning for NPLs. Staff strongly encouraged
coordination with home supervisors to foresee and limit deleveraging pressures.
In this regard, the recently launched Host Country Cross Border Forum under the
auspices of the Vienna
26. Staff also urged the authorities to ensure swift resolution of NPLs.
If not addressed, the high level of NPLs is likely to drag economic growth down
by limiting credit supply. Fast NPL resolution requires cooperation between
creditors and debtors as well as elimination of regulatory, tax, and legal
obstacles. In particular, speeding up the bankruptcy process, removing the
difficulties to foreclose collateral, and resorting more to out of-court
restructuring should help.
Authorities’ views
27. Both the authorities and banks pointed out that bank liability
deleveraging was prompted by Croatian banks taking advantage of rising domestic
deposits to reduce external credit lines in view of stagnating credit demand. They
acknowledged that real estate market illiquidity hampered collateral valuation.
The CNB stated, however, that the required general provisions of 0.85-1.2
percent of performing loans to cover latent losses provided an additional buffer
against capital losses.
28. Concerning the impact of new regulations, the authorities explained
that the new law on financial operations intends to speed up the resolution of
NPLs by increased reliance on out of court settlements and restructuring. A key
objective is to resolve the long standing corporate illiquidity problem and
thus spur lending to companies with viable projects. The authorities explained
that Basel III requirements could be easily met by the major banks. In fact, Basel
III would allow lower capital adequacy rates than the current Croatian
requirements; however, the CNB intends to explore the option of requiring more
capital if needed from individual banks.
Source: The
Republic of Croatia: Staff Report for the 2012 Article IV Consultation.
(2012-11-13)
Mark Pleas
[contact]
