Croatian banks face €1bn losses on court order

By bne IntelliNews July 5, 2013

bne -

Three days into Croatia's EU membership, Brussels is likely to be alarmed by a court order to several Eurozone-owned banks to swap Swiss franc mortgage loans into kuna. Analysts suggest the move could cost the banks close to €1bn, and also worry about the large volume of euro debt in the country.

The Zagreb commercial court ruled against eight foreign-owned bank subsidiaries in a case brought by Potrosac, a consumer protection group, on behalf of 100,000 citizens who had in the past decade taken loans - either denominated or indexed in Swiss francs - according to Reuters. The banks were found guilty of failing to explicitly inform clients of all the risks associated with borrowing in foreign currency and variable interest rates.

If the ruling is confirmed - the lenders have the chance to appeal - the banks will have to recalculate the principal for each loan in kuna and offer it to the client with a fixed interest rate. Neither the exchange rate to be used, nor the fixed interest rate, has been set, but will reportedly be agreed on a client-by-client basis.

That clearly opens up huge risks for the banks involved, which includes Zagrebacka Banka and Privredna Banka - units of Italy's Unicredit and Intesa Sanpaolo, respectively; Austrian lenders Erste, Raiffeisen and Hypo Bank; Hungary's OTP; Splitska Banka - owned by France's Societe Generale; and the local subsidiary of Russian state giant Sberbank. None offered comment - a stance also taken by the regulator, the Croatian National Bank.

Delivering the ruling, Judge Radovan Dobronic said the banks had violated the interest of their clients by "changing the interest rates in an untransparent manner," reports Reuters. "This was against the law on consumer protection ... such behaviour of banks is forbidden in the future," he added.

The story is a familiar one across CEE, with the likes of Poland and Hungary also facing significant issues over foreign currency mortgages taken out in the boom years ahead of the crisis. Swiss franc-denominated or -indexed loans in Croatia are currently worth about HRK25bn (€3.3bn) according to IHS Global Insight - equivalent to just over 10% of total banking-sector credit. That share was closer to 20% in 2007-08, as households rushed to take advantage of the sagging value of the Swiss currency and boom in emerging market currencies.

However, once the crisis hit, the Swiss france developed as a haven, and between 2008 and 2011 the kuna lost about 40% of its value against the franc. Citing higher costs of capital and interest rates on money markets, the banks also raised interest rates. That saw the monthly installments of unhedged Croatian borrowers surging - by 50% on average - leading to many defaults.

Little wonder that the local press has heralded the ruling. However, the giant Eurozone groups that own many of the banks will inevitably rush to point out to EU policymakers the similarities to the harsh treatment handed out to them across the northern border in Hungary, where they were forced to shoulder huge losses in a similar scheme to convert foreign currency debt pushed through by the government. Budapest has also inflicted high taxes on the banks, which has seen it in almost constant conflict with Brussels over the past two years. Meanwhile, lending has almost dried up as the banks cut exposure in a market they complain is beset by the risks of erratic policy.

That is a risk Croatia clearly faces should they suffer similar damage there. "Despite the lack of detail on how the new rates will be set, one possibility is that these loans will be repaid at their original exchange rate," warns Oliveira da Silva at IHS Global Insight. "If so, then the lenders involved in the case would face considerable losses - we estimate these could be worth up to about HRK7bn (€933m), equivalent to around 1.7% of total sector assets. The situation would be significantly costlier for the sector if this case leads to other similar actions on lending denominated or indexed in euro."

Related Articles

UK demands for EU reform provoke fury in Visegrad

bne IntelliNews - The Visegrad states raised a chorus of objection on November 10 as the UK prime minister demanded his country's welfare system be allowed to discriminate between EU citizens. The ... more

Erste claims Hungary is breaking peace deal with banks

bne IntelliNews - Hungary will breach its February agreement with Erste Group if it makes the planned reduction in the bank tax conditional on increased lending, the Austrian lender's CEO ... more

Austria's Erste rides CEE recovery to swing to profit in Jan-Sep

bne IntelliNews - Erste Group Bank saw the continuing economic recovery across Central and Eastern Europe push its January-September financial results back into net profit of €764.2mn, the ... more

Register here to continue reading this article and 2 more for free or 12 months full access inc. Magazine and Weekly Newspaper for just $119/year.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

IntelliNews Pro subscribers click here

Thank you. Please complete your registration by confirming your email address. A confirmation email has been sent to the email address you provided.

Thank you for purchasing a bne IntelliNews subscription. We look forward to serving you as one of our paid subscribers. An email confirmation will be sent to the email address you have provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

If you have any questions please contact us at

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

IntelliNews Pro subscribers click here

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

Thank you. Please complete your registration by confirming your email address. The confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.