CNB Council: Exposure to systemic imbalances remains moderate

Published: 11/7/2023

The CNB Council was at its meeting today briefed on current economic, monetary and financial developments in the euro area and Croatia. The members of the Council discussed financial risks and the banking system and adopted several decisions on matters falling within their competence.

Risks in the financial system of the Republic of Croatia did not change much in the first half of 2023 and the exposure to systemic imbalances remained moderate. In addition to adverse geopolitical situation, the main risks to financial stability are the slowdown of the Croatian and euro area economy and persistent core inflation, which would require maintaining a restrictive monetary policy over a longer horizon. Consumers with long-term floating rate loans are most exposed to the rise in interest rate risk. In the short run, this risk has been cushioned by the broad use of the national reference rate (NRR) as a reference parameter, the legal cap on floating interest rates and the measures taken by the consumers to protect themselves.

Residential real estate prices continued to rise, while the number of transactions went down. Coupled with the deterioration in financing conditions, this might trigger a reversal of the cycle in the residential real estate market, especially in the case of a significant slowdown in economic activity. Even though such adverse scenario might increase credit risk and reduce the value of collateral on banks’ balance sheets, the banking system has remained resilient to such risks owing to high capitalisation and liquidity and the growth of profitability. In the light of elevated cyclical risks, largely reflected in the strong growth of bank loans to the non-financial private sector and the rise in residential real estate prices, the CNB increased the countercyclical capital buffer rate, thus contributing to the strengthening of bank resilience.

Having risen for six years, total banking system assets decreased by 5.2% in the first quarter of 2023 from the quarter before (as at 31 December 2022), and stood at EUR 72bn. The largest decrease was recorded in household deposits as the key source of funding, which is associated with the investments in government retail bonds, and in deposits of non-financial corporations.

Loan quality, measured by the share of NPLs, deteriorated slightly. Even though the amount of NPLs continued to decrease, their share went up from 3.0% to 3.2%, due to the impact of the drop in assets on the decrease in the base. However, a slight positive trend has been recorded in Stage 2 loans, which have been decreasing both in absolute terms and as the share in total loans (from 14.2% to 13.1%).

A marginal fall in total capital ratio, from 24.8% to 23.6%, was due to the decrease in own funds, largely driven by dividend payments.

The CNB Council granted approval to the Supervisory Board of Agram banka d.d. to appoint Veselko Čepo as Member of the Management Board, and also gave its approval to the Supervisory Board of Kentbank d.d. to appoint Hasan Ecesoy as Chairman of the Management Board and to the Supervisory Board of Samoborska banka d.d. to appoint Verica Ljubičić as Member of the Management Board.