As for the reduction of profitability, the latest data released by the Croatian National Bank (HNB) show that at the end of September, the gross profit of commercial banks operating in Croatia fell by over 30% year on year, which means that it went down by nearly one billion kuna.
According to figures released by the Croatian Banking Association (HUB), the net profit plunged by 47%, the gravest fall in banks' profit since 2001, and even higher than declines in their profits in 2009 and 2010, upon the onset of the crisis, when their profit was reduced by 27%. Of 30 banks operating in the first nine months of this year, 17 operated at a gain, and 13 registered a loss.
Furthermore, a record low was reached in return on average assets (ROAA), 0.49%, and in return on capital (ROC), 3.86%.
At the same time, the share of non-performing loans kept rising, and bad loans pegged to kuna made up 17.35% of all loans in that currency, while bad loans indexed to the Swiss franc accounted for nearly 15%.
Recently HNB Vice Governor Damir Odak has warned about a worrisome trend, a growing number of loans with installment payments late more than 90 days.
Currently, they account for 25% of the total banking assets, according to Odak.
Nevertheless, the central bank and lending institutions point out that Croatia's banking system is still stable, with the highest capital adequacy ratio in Europe, given that the median capital adequacy ratio of commercial lenders is 21.26%, and they can also boast of a high provision coverage rate for bad loans reaching 43%.
Another pressure on lenders' profitability may be caused by the enforcement of the amended Consumer Credit Act, which takes effect on 1 January 2014, and the central bank assesses that the implementation of this legislation will produce costs of a half billion kuna for banks.
Also, it remains to be seen what effects will be made on the banking system if a first-instance Commercial Court ruling in favour of a consumer group in the case of Swiss-pegged loans is upheld.
On July 4, the Zagreb Commercial Court delivered a ruling in favour of the Consumer Protection Association that sued eight banks over the Swiss franc foreign currency clause and their unilateral decision to increase interest rates. This was a class action against Zagrebacka Banka, Privredna Banka, Erste Bank, Raiffesenbank, Hypo Alpe-Adria-Bank, OTP, Splitska Banka, and Sberbank.
The court found that the banks had violated consumers' rights when they failed to fully inform them about all parameters necessary to decide on taking the loans. It also found the unilateral decision to increase interest rates as an act of violating collective interests and ordered the banks to convert the loans' capital sum into the kuna according to its exchange rate on the day of the conclusion of the loans, with fixed interest rates. However, loan-takers can ask for refunds only by launching individual proceedings for this purpose.
According to the Franak nongovernmental organisation, more than 100,000 clients have loans pegged to the Swiss franc, of which 75,000 are housing loans, and in some cases repayment rates have increased from 35% to 100%.
As for small banks, they were faced with increasing problems in 2013, when 12 out of 13 banks operating at a loss were small lenders, with the assets of each being below one percent in the banking total assets.
One of the gravest cases was Centar Banka, that reported a loss of 66.4 million kuna in mid-2013. Although in 2012, HRK 130 million of fresh capital was injected in Centar Banka, it did not suffice. Another attempt to reinforce the capital of this financial institution actually triggered off bankruptcy proceedings. The Czech J&T bank expressed an interest to recapitalise this Croatian commercial bank, however, a day after it was given the green light from the HNB to inject fresh capital in Centar Banka as a strategic partner, J&T backed out of the offer. Thus, Centar Banka went into official receivership in early October.
As for the segment of large banks, the end of 2013 will be remembered by a failed attempt to privatise Hrvatska Postanska Banka.
Erste & Steiermaerkische Bank (ESB), the third biggest bank in Croatia, after Zagrebacka Banka and Privredna Banka Zagreb (PBZ), accounting for 15% of the banking market, was the only one to submit a binding bid for the acquisition of 99.13% of HPB. In previous stages of the process, the Hungarian OTP and Splitska Banka also expressed interest but they gave up in the meantime.
On 12 December, the Croatian government turned down the bid from ESB, with the explanation that the offered price was too low. ESB lowered the price per HPB share by HRK 232.29 kuna from HRK 1,138 in the non-binding bid to 905.71 kuna per share in the binding offer.