22nd Financial Stability Council session

The Financial Stability Council held its 22nd session on 17 June 2024, chaired by the CNB Governor Boris Vujčić and attended by the Director of the Public Debt Management at the Ministry of Finance Hrvoje Radovanić, the Croatian Financial Services Supervisory Agency Board President Ante Žigman, the Director of the Croatian Deposit Insurance Agency Marija Hrebac and their associates.

The strong expansion of the domestic economy has had a favourable impact on the financial system’s resilience. However, due to uncertainties in the macroeconomic, geopolitical and financial environments, the financial system’s exposure to systemic risk has remained slightly elevated. Like at the previous session, geopolitical tensions and growing geoeconomic fragmentation were highlighted as the main risks to the financial system’s stability, due to their potential adverse impact on global economic and financial developments and indirect impact on the domestic economy.

Optimism in global financial markets resulted in the surge of financial asset prices in 2023 and the first half of 2024. This optimism stems primarily from a better-than-expected economic performance, good business results and continued inflation slowdown, which have given rise to financial markets’ expectations of gradual monetary policy easing. With the growth of some share prices boosted by enthusiasm over artificial intelligence, some global financial markets have been showing signs of potential overvaluation. The valuation increase in the global markets has reflected on the domestic equity market, which recorded record growth in 2023 and is exhibiting similar trends this year. In 2024, CROBEX hit a ten-year high, standing above 2 840 points. The value of domestic shares has increased due to positive business results, dividend payments announced by some enterprises and strong investor demand for the most liquid shares. The value of the shares in mandatory pension funds also increased in 2024.

Croatia’s strong labour market and income growth have supported the increasingly strong household lending, especially when the segment of general-purpose cash loans is concerned, whereas the growth of housing loans has stabilised at moderate levels. However, the increasingly long maturities of housing loans and the growth of the debt service-to-income ratio, against a background of growing residential real estate prices and elevated interest rates, add to consumer vulnerability to potential financial adversities.

Banking system profits were extremely high in 2023 and at the beginning of 2024. The medium-term profitability outlook is somewhat burdened by increased interest rate risk and the expected continued growth of financing costs amidst the gradual shift of funds from transaction accounts to time deposits. In the medium term, bank profits could also be reduced by the potential deterioration of asset quality, signalled by the increased share of stage 2 loans, although non-performing loans are at an all-time low. The high levels of capital and liquid assets make the banking system resilient to unlikely stress conditions, as confirmed by stress test results. Under such conditions, the CNB’s macroprudential policy continues to be focused on maintaining high capital buffer levels in order for the system to remain capable of financing the economy if macroeconomic or financial conditions worsen.