The banking system of the Republic of Croatia (foreign currency, BBB/Stable/A-3; local currency, BBB+/Stable/A-2) is strengthening, and is now relatively settled, following the recent period of economic stability and investment by foreign banks, Standard & Poor's Ratings Services noted in a report published today entitled "Bank Industry Risk Analysis: Croatia (Republic of)".
"The economic and industry risks in the system, caused by regional political turbulence and bank failures, have reduced, but are still higher than average, and comparable with several new EU member countries," said Standard & Poor's credit analyst Alwin Greder. "The industry has been profoundly rehabilitated, restructured, and privatized," she added.
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 reduced in 2004, as the pace of increases has slowed.
"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," said Standard & Poor's credit analyst Magar Kouyoumdjian. Assets increased by an average 30% per year in 1999-2003, but slowed to about 10% in 2004.
The government demonstrated its willingness to support the banking system in the 1990s, as well as more recently, when it provided liquidity to Rijecka banka in 2002. The EU policy anchor encouraged reforms in banking regulation and supervision in Croatia in 2001-2003, bringing the legal environment more in line with EU guidelines and Basel Committee on Banking Supervision recommendations. Despite this progress, Standard & Poor's considers the degree and timeliness of Croatian banking sector disclosure and transparency lags that of more westerly banking sectors.
Privatization is virtually complete, with strategic investors accounting for 91% of the system's total assets. Foreign investors--primarily large Italian and Austrian sound investment-grade banking groups--have imported managerial and operational expertise as well as provided financial support. Nevertheless, with 37 banks, the system is overbanked and further consolidation is expected.