Number 702, September 21, 2020

Quality of exposures stable for the time being ................................. .1

Weekly overview ............................................................................... 2

Statistics ........................................................................................... 3

Quality of exposures stable for the time being

The central bank’s data on the movements of non-

performing exposures of banks indicate that their share

at the end of the second quarter was only sligthly above

the share recorded in March (+0.1 p.p.) amounting to

5.5%, resulting from a 0.2 p.p. higher share in non-

financial companies (at 13.2%) accompanied by a

somewhat more explicit increase of 0.7 p.p. in the

household portfolio (to 6.5%). The latter was mostly

induced by a deterioration of the quality of cash loans

(+1.2 p.p. to 6.7% ), which was expected since these loans have for several quarters been recording a negative

trend, as well as due to the fact that a considerable share of these loans was placed without collaterals.

Simultaneously the growth of share in housing loans amounted to a moderate 0.3 p.p. (at 4.1%), and in

overdrafts 0.6 p.p. (at 6.2%). Breakdown of non-performing exposures to non-financial companies by activity

indicates that the quality of placements has noticeably deteriorated in manufacturing that registered a leap in

the share of 0.9 p.p. to 19.0%, amid unfavourable trends that have been encountered in the said industry for

quite some time and a particularly sharp blow sustained by manufacturing during lockdown. In terms of level

of the share of 24.2% construction that generated an increase of 0.5 p.p. is still at the forefront, and not at all

surprisingly, due to a drastically weaker tourist pre-season and a thinner tourist season, the growth of share is

persistent also in accommodation and food service activities (+0.5 p.p. to 7.0%). Trade simultaneously

recorded a slight decline of share 0.1 p.p. to 10.8%. Sale of receivables in the second quarter amounted to a

negligible 60 million kuna approximately, which almost fully refers to receivables from non-financial companies.

While the indicator of total share of NPEs is stable for the time being, deteriorated economic develoments and

their expected unfavourable effect on the portfolio quality generated a profound negative impact on operations

of credit institutions over this year’s first six months (notably in the second quarter). Interest income in the first

half of the year was thus reduced by 5.7% compared with the same period last year, fee and commission

income by 10.8%, dividend income was about ten times lower, and exchange rate loss soared by around 170

million kuna. Gross operating income thus dropped by 11.4%, which in addition to a mildly 2.8% lower

operating costs, resulted in a reduction of the net operating income by 20.0%, to 3.3 billion kuna. As impairment

costs recorded a four-fold rise reaching 1.3 billion kuna, net profit in the first half of the year plummeted by

47.9% yoy.

Predicting as to what awaits us until the end of the year is always ungrateful, and especially while facing large

uncertanties, when the movements of a considerable number of variables may unfold unexpectedly. However,

based on the July monetary statistics showing steady growth rates of loans to the private sector and data on

moratoria revealing a substantial share of ‘frozen’ placements, it is already apparent that a sharper growth of

non-performing exposures was only postponed owing to the moratoria (especially in the case of non-financial

companies), while a continuation of rising impairment costs in the second half of the year is quite certain, but

the growth rate might still decelerate amid a gradual economic upturn and the tourist season that exceeded

expectations, and extension of individual measures and subsidies.

Weekly overview

• In August the Consumer Price Index dropped by 0.1% yoy, primarily due to 5.2% lower prices in Transport

(of which fuels and lubricants for personal transport equipment -9.5%). Over this year's first eight months

consumer prices posted an average increase of 0.3% yoy.

• The credit rating agency Standard & Poor's (S&P) on Friday confirmed the investment level of credit rating

for Croatia (BBB- with stable outlook), judging that this year's economic downturn will amount to 8%, while

the growth in 2021 might amount to 5.6%.

• We observed a quiet week behind us with small EUR/HRK trading volumes and a stable exchange rate

around 7.54. Kuna weakened against the euro by 0.1% wow, hence on Friday the exchange rate

amounted to 7.5373 kuna to the euro, while against the dollar it weakened by 0.3% to 6.3606 kuna to the

dollar. This week we do not expect any major changes.

• Last week excess liquidity was maintained at around 42 billion kuna, interest rates continued to stagnate,

and there were no placements at the CNB's regular repo auction.

• The Crobex Indeks closed on Friday at 1,612.09 points, up by 0.1% wow, while Crobis closed the week

at 112.20 points, resulting almost unchanged in wow terms. As concerns sector indices, CROBEXtourist

posted an increase of 1.1% yoy (to 2,968.33 points), and CROBEXindustry of 1.2% (to 882.17 points),

while CROBEXconstruct fell by 5.2% (to 724.11 points). Last week the total ZSE turnover reached 89.7

million kuna, down by 67.0% wow, amid a 70.2% lower turnover in bonds (of 70.9 million kuna) and 45.5%

lower turnover in shares (of 18.8 million kuna).

Statistics

RESEARCH OFFICE

Ivana Jović

Ana Lokin

Ivan Odrčić

TREASURY

Eugen Bulat

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