REPUBLIC OF CROATIA
Housing Saving Bank-Contractual Saving Scheme
WORLD BANK MISSION
Aide-Mémoire
August 2013
A. Introduction
1. A mission led by Mr. Alfonso Garcia Mora (Lead Financial Sector Specialist) and comprising
Ms. Sanja Zivkovic (Consultant) visited Zagreb during July 11-12, 2013 at the invitation of the
Ministry of Finance. Ms. Aurora Ferrari (Sector Manager), and Mr. Isfandyar Khan (Sector
Coordinator) joined key meetings. The purpose of the Mission was to:
(1) Discuss with the Ministry of Finance the situation of the Housing Saving Banks-Contractual
Saving Scheme (HSB-CSC),
(2) Initiate the dialogue on the design of an action plan and road map to work with the Ministry
in finding solutions for these institutions, and
(3) Explore options for a Reimbursable Advisory Service in this area.
The World Bank delegation wishes to express sincere appreciation for the hospitality provided
and productive discussions with the members of the Ministry of Finance and private sector
professionals.
B. Key findings
2. Total housing loans1 in Croatia represent 19% of GDP and 20% of banks’ balance sheet,
still very far from their European partners (in EU27 it represents 57% of GDP). Housing
finance activity is predominantly dominated by foreign commercial banks (more than 95% of
total activity). Most of the housing loans granted by them are indexed to the euro and Swiss franc,
and based on variable interest rates. Only housing savings banks grant loans at fixed interest
rates, based on the stability of household term deposits which benefit from state incentives
(premiums). Even though the analysis of total number of housing units, households and
population might lead to the conclusion that there is no lack of housing, overcrowding, shortage
of housing in large centers/towns, low housing standards, and strong demand for social housing,
explain a significant demand for home financing.
3. Housing Saving Banks (HSB) in Croatia were established in 2002 with the main objective of
facilitating access to housing finance in the country. Currently there are five HSB in Croatia
with HRK 7.3bn of assets at the end of 20122, representing 1.8% of the total banking sector. Out
of the 5 HSB only one is domestically owned -representing 4% of total HBS assets-, the other
four are direct or indirect majority owned by foreign shareholders (international banking groups).
4. HSB have a small market share both in housing loans and deposits. HSB home loans stood at
HRK 3.3bn, accounting for 5.5% of total home loans in Croatia, which represent 45% of the HSB
total balance sheet. The rest of the asset side of the balance sheet is mainly composed of
Government Bonds, Treasury Bills and Deposits with banking institutions (see table 1 for more
details).
Table 1: HBS main financial indicators
11
As of June 2013, housing loans represented HRK 61.5bn. Assuming an exchange rate 0.175USD=1HRK, the
equivalent in USD would be USD 10.7bn.
2
The equivalent in USD would be USD 1.2bn.
Loans
- Housing
Deposits with banking institutions
MoF Treasury Bills and CNB Bills
Securities and other FI -tradingSecurities and other FI -AFSSecurities and other FI -Held to Mat.Securities and other FI -Fair valueOthers
Total Assets
June 2012
(mill. HRK)
4406.4 Deposits
3300.0 - Time deposits
738.1 Other loans
866.2 Hybrid instruments
204.0 Others
206.9 Total capital
640.7
18.8
215.6
7296.7 Total Liabilities and Capital
June 2012
(mill. HRK)
6296.1
6188.9
93.9
97.5
277.1
532.1
7296.7
Source: Banks Bulletin 25
5. However, the quality of HSB loan portfolio is better than the average of the system. The
NPL ratio in HSB stood at 1.2%, which compares to 6.17% in the banking sector3. Funding is
basically based on deposits (HRK 6.2bn, of which 98% are time deposits), representing 85% of
total liabilities and capital and 2.2% of the total deposits existent in the banking sector.
6. The business model relies on a contractual saving scheme which benefits from a
Government premium on deposits. Customers can get a housing loan in competitive conditions
after saving in these financial institutions for five years. To attract deposits and keep them during
the five years period, customers benefit from a premium given by the Government. In the early
stages, this premium was established at 25% of the deposit amount (with a cap of 5,000 Kunas a
year), though it was reduced to 15% in 2005 and to 10% in 20134. After five years of saving,
depositors have the possibility (and not the obligation) of obtaining a housing loan at a fixed
rate5. However, if depositors do not want to exercise the option of acquiring the loan, they do not
have to give back the premium earned on deposits. Only if they decide to withdraw the money
before the end of the saving period (5 years), they lose the premium.
7. Even though the existence of time deposits allows HBS to fund fixed interest rate loans
without increasing significantly the interest rate risk of the balance sheet, they face a
considerable liquidity risk. HBS are almost exclusively funded with time deposits, which gives
them a stable medium-term deposits base for interest rate risk management. However, these
deposits are highly dependent on the premium obtained. Since loans have 15 years maturity at
inception, any significant decrease in deposits could eventually lead to liquidity problems in these
institutions.
3
The high NPL ratio in the banking sector could be related to the currency exposure. Loans denominated in CHF
(represent 38% of the total portfolio in the banking sector) have a 9.15% NPL, whereas loans denominated in Euros
(40% of the total) have a 3.67% NPL. Though given current rates and market conditions, regulation on interest
rates is not relevant, it must be noted that the spread between loans and deposits can’t be larger than 3
percentage points.
4
Average deposit interest rates stood at 2.5%. However, when including the premium, the average equivalent rate
goes up to 4.5%, which differs significantly from other commercial bank deposits offering an average 2-2.5%
interest rate on time deposits. All deposits are insured by the Deposit Guarantee Fund.
5
Housing loan interest rates fluctuate depending on the downpayment done by the customer, ranging from 2.99%
(for a 60% LTV), to 5.25% (for a 90% LTV). In most cases, the LTV is 80% and the interest rate 4.99% for a 15 years
loan. Underwriting criteria is very similar to any other commercial bank. It targets only customers with formal
income, monthly payment can’t exceed one third of the income and life insurance is mandatory. A mortgage is
required for loans over 20,000 Kunas.
2
8. The margin spread and the fees and commissions for entering and exiting the system are the
main drivers of their profitability. HBS generate a Net Interest Income of 1.8% over total
assets and a 1% of Net Operating Income (after including Non-Interest Income and deducting
Operating Expenses). Since loss provisions were significantly low during 2012, the ratio of Net
Income on total assets was very similar. Even though the efficiency ratio improved significantly
compared to previous years, it still stood at 64% (vs. 49% in commercial banks), due to higher
operating costs and lower productivity ratios. Capital Adequacy Ratio (CAR) stood at 19.7%.
9. Premiums on deposits allow HSB to attract a significant number of depositors. However,
only a small fraction of customers ask for a housing loan after the saving period. Home loans
launched by HSB represented only 55.6% of the deposits, which compared to other international
experiences represent a very small percentage6. Currently there are 900,000 saving accounts, half
of which have a subsidy. However HBS have only launched 28,000 loans since inception, for a
total of 3,200 million Kunas, with a significant reduction in the number of new loans issued in
recent years (see table 2 for more details). As a result, it seems evident that most customers use
the mechanism as a saving scheme to obtain the government premium and not as a way of saving
and demonstrate capacity of payment prior to obtaining a loan. Among the reasons explaining this
low demand, the shorter maturity of the loans, compared to mortgage loans launched by
commercial banks, is often quoted as the main reason7.
Table 2: HBS performance
2005
2006
2007
2008
2009
2010
2011
Total
Number of
saving
accounts
625,581
703,959
741,341
852,509
857,426
891,154
912,095
Volume of
savings
(mill.)
4,031
4,698
4,521
5,741
5,252
4,813
4,833
Number of
Volume of
Premium Number of Volume of
accounts with
savings with
paid by Gov. housing
housing
premium
premium (mill.)
(mill.)
loans
loans (mill.)
409,368
1,597
216
3,436
24
419,366
1,686
213
6,049
555
434,590
1,787
220
5,889
935
450,378
1,785
221
3,352
779
418,035
1,509
198
1,870
300
410,719
1,466
195
1,313
209
415,475
1,527
198
2,368
577
2,108
28,620
3,379
Source: Ministry of Finance
10. The Ministry of Finance is analyzing the effectiveness and efficiency of the premium scheme
and the impact that different alternatives to reduce it (partially or totally), could have in the
viability of the HBS model. The Premium paid by the Government represent around 200 million
Kunas a year (see table 2 for details). In the context of a necessary public deficit reduction, and
given the performance and use of the premium in recent years, the Ministry of Finance is
analyzing different alternatives. For that purpose, the Institute of Public Finance is doing a
specific study analyzing the economic impact of the deposit premium and its relevance for the
stability of the system. This study is expected to be finalized by the end of August.
6
Even though this is the highest percentage since HSB started operating, it must be noted that in most international
experiences the ratio of loans to deposits stands at 1.2x - 1.5x.
7
For a given monthly payment capacity, longer maturities allow customers to obtain a larger loan. This is something
that happens in many other countries and is often managed by using a second mortgage launched by another
financial institution. As a result, customers often use two loans to buy a house.
3
11. The elimination of the premium on deposits could eventually have a negative impact on the
volume of deposits, and therefore on the sustainability of these institutions. HSB consider
that an eventual removal of the premium paid on deposits would reduce the comparative
advantage of these institutions, making them less attractive for savers. As a result, and given the
longer maturity of their assets, a reduction in the volume of deposits could originate liquidity and
profitability problems, making the system unsustainable.
4