PBZ sees big opportunities in Croatia’s euro adoption

The celebrations that began at midnight on 31 December 2022 – as Croatia’s kuna made way for the euro – marked the end of a record-breaking two-year sprint to bring the European Union’s single currency to its 20th member state. 

This was the fastest conversion yet from a national currency to the euro. For Dinko Lucić, CEO of Privredna banka Zagreb (PBZ), the local subsidiary of Intesa Sanpaolo, it represented a triumph for the bank – every part of which contributed to the mammoth task – and for Croatia itself. 

“The project was all-encompassing,” he says. “We created 19 work streams to cover every aspect of the bank’s business processes and transactions, our accounting systems and reporting. 

“Clients had to be informed about the upcoming changes via general and individual announcements. We had to organise customer support services, train the bank’s employees, adapt our processes and prepare brochures and information for our clients.”

Even before Croatia’s formal conversion, the country had close economic and financial links with the eurozone, making eventual adoption of the euro a natural step. 

The eurozone accounts for more than half of Croatia’s foreign trade and around two-thirds of its foreign direct investment. 

The country’s banking system has long been dominated by the local subsidiaries of eurozone financial institutions. More than half of all loans to Croatian borrowers and just under half of the deposits are denominated in euros – more than in any other non-eurozone country. 

Now that it has joined, Croatia is on an equal footing with Europe’s leading economies in the way exchange and interest rates are determined. 

“Becoming a member of the eurozone eliminates foreign currency risk, which has recently been one of the main sources of vulnerability in the Croatian economy,” says Mr Lucić. 

Eurozone membership, he emphasises, also brings Croatia access to “the full set of European Central Bank monetary instruments and operations, as well as to the European Stability Mechanism”.

In the months leading up to “Euro night”, he says, PBZ began distributing Euro notes and coins to commercial customers that required them ahead of the conversion date and answering customers’ questions on topics such redenomination of kuna loans into euros, interest rates and account conversions. 

PBZ was advised on its euro conversion project by Elena Kohutikova, who headed the euro committee of Slovakia’s VUB Bank during the country’s implementation of the euro in 2009. 

With the project complete, Mr Lucić believes the benefits for PBZ’s customers and the bank itself will become increasingly apparent. And those benefits will be boosted by Croatia becoming part of the Schengen area as well as joining the euro, removing the need for border controls between most member states of the EU.

For individuals and companies, euro membership will allow them to spend their local currency anywhere in the single-currency area, with its population of around 350m. Tourism, which accounts for around a fifth of Croatia’s gross domestic product and has staged a strong recovery following the pandemic, should also benefit from the switch to the euro and the removal of border checks. 

Making movements of goods and people easier should lower the cost of doing business with eurozone countries and boost the competitiveness of Croatia’s exporters. 

The Croatian Chamber of Commerce estimates that membership of the Schengen area will bring direct benefits worth around €100m for more than 5,000 Croatian transport companies, while the experience of other countries that have joined the euro suggests that air freight volumes could grow 10% over the first two years of membership. 

The change – which coincided with the 10th anniversary of Croatia joining the European Union – will also bring major benefits for PBZ itself. “With the introduction of the euro, most currency risk and currency-induced credit risk has been removed,” says Mr Lucić. 

“The introduction of the euro cuts the regulatory cost for banks – reducing our reserve requirement from 9% to 1% – and ends our obligation to hold foreign-currency assets to match our foreign-currency liabilities. This will significantly reduce the cost of doing business.” 

Not only that: now it can deposit its excess cash at the ECB, PBZ earns a positive interest rate on most of its reserves, whereas previously its interest rate on excess liquidity was zero. 

Adopting the euro also simplifies many aspects of PBZ’s operations – for example, by removing foreign currency clauses from loan documentation and enabling the bank to do all its local and group reporting in the same currency. 

Further ahead, Mr Lucić sees opportunities to expand the range of services it offers, including hedging instruments, trade and export finance, ESG products and increased access to capital markets. 

He also believes that the change will enable PBZ to collaborate more effectively with its sister banks in the Intesa Sanpaolo Group to offer joint products and services.