June 2, 2016 / 3:55 PM / a year ago

Political risks hold back lending in Croatia

ZAGREB (Reuters) - Political risk and a demanding regulatory framework are major challenges for Croatia’s banking sector, the head of Erste Bank’s (ERST.VI) Croatian unit, Christoph Schoefboeck, told Reuters on Thursday.

“The state still has a considerable impact on the economy which makes political risk an important factor. Also, we have a sound banking system but the regulatory framework is not always coherent and well coordinated, which limits our business,” Schoefboeck said in an interview at Reuters Eastern Europe Investment Summit.

Parent banks from EU countries hold more than 90 percent of Croatia’s banking sector.

Croatia, which joined the European Union in 2013, was in recession for six years to 2014. The government has promised changes to reduce bureaucracy and encourage investors.

But a row between coalition partners means the less than five-month-old government is in danger of collapse.

“It just adds to the political risk. However, we hope the economy will continue improving and I see space for profitability for banks in the coming years, but the banks will have to be flexible, especially as competition from fintech is looming also in Croatia,” Schoefboeck said.

Fintech companies use technology to try to improve financial efficiency.

Croatia’s Erste unit, which is the third biggest local bank with a market share of 15 percent, posted a 769 million kuna ($115 million) net loss in 2015 after a 412 million kuna net profit a year before.

The loss was due to forced conversion of Swiss franc loans into euros imposed by the previous government, costing the banking system about a billion euros ($1.1 billion). Some banks have filed a suit with the Constitutional Court and indicated they could seek international arbitration.

“We’re ready to talk to the government about finding a solution to what we see as the legal aspects of the problem. We think that some kind of settlement would be better than seeking a solution at the court,” Schoefboeck said.

While local businesses complain about high interest rates and lack of capital, banks are wary of extending loans, especially to small- and medium-sized firms.

“The banks, and with Erste it is certainly the case, are looking forward to giving loans, but they need to be pretty sure that the loans can be repaid - especially as the level of bad loans is still rather high,” Schoefboeck said. Croatia’s bad loan rate is 16 percent.

Schoefboeck said reforms to help business and boost investments as well as fiscal consolidation are vital to allow lower interest rates and stronger credit activity.

“We want to finance viable business projects. Local banks are quite exposed to the state and to some extent the banks will be able to finance the needs of the state, but the space is limited. That is why we think fiscal consolidation is important,” he said.

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Reporting by Igor Ilic; editing by Giles Elgood/Ruth Pitchford

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