The economic and industry risks in the system, caused by regional political turbulence and bank failures, have been reduced, but are still higher than average, and comparable with several new EU member countries. The banking industry has been profoundly rehabilitated, restructured, and privatised, S&P analysts said in the report.
The financial profile of the banking system is satisfactory, and trends are positive. Risks evident in 2002 and 2003 pertaining to rapid expansion of total credit are abating, although retail lending expansion remains high. Risks relating to rising net external liabilities also decreased in 2004, as the pace of increases has slowed, the report read.
"The Croatian banking system is benefiting from healthy economic growth as well as structural economic reforms driven by sustained foreign investment in anticipation of EU membership," reads the report.
The report also notes the government's willingness to support the banking system in the 1990s, as well as more recently, when it provided liquidity to Rijecka Banka in 2002, and the reforms in banking regulation and supervision in Croatia in 2001-2003.
However, despite this progress, Standard & Poor's considers that Croatian banking sector disclosure and transparency should be further adjusted to western banking standards.