Three elections in two years and an inflation overshoot are compounding the uncertainty for Serbia’s banks, but foreign players still see great potential. Nick Saywell reports from Belgrade.

“I think we are by far the most competitive market in the region,” is how Vladimir Cupic, CEO of Hypo Alpe-Adria Bank in Belgrade, describes the Serbian banking scene.

Since the fall of former president Slobodan Milosevic in 2000, the ­Serbian banking sector has changed dramatically, with a flood of foreign banks entering the market, most initially through acquisition. Banks from Austria, Italy, France, Greece, Germany and Hungary are all competing with each other for market share and profitability. In May, the National Bank of Serbia approved a licence for the Bank of Moscow to join the fray.

Goran Pitic, president of Société Générale Srbija, which has operated in Belgrade since 1977, says that Serbia suffered from a massive banking crisis in the 1990s but that the sector has since turned around. “Now we are having a huge increase in deposits; people trust the banks again,” says Mr Pitic.

“We are also having a large development of business loans,” he says. “It’s a market of huge potential, with eight million people, excluding Kosovo.” He estimates consumer loans (excluding housing loans) are only 8% to 9% of gross domestic product (GDP) per capita and corporate loans are around 25% to 30% of GDP. “When you look at the level of services, we are about two or three services per customer whereas in the EU it is about seven or eight, so we still have a way to [go to] be developed. That’s why the foreign banks wanted to enter this market,” he says.

Strong performance

Mr Pitic is happy with the performance of his own bank, too: “We have had a very, very strong commercial performance. Our retail customer base has increased 3.5 times in four years, and in those four years on the corporate loans side, we have increased 15 times and commercial deposits increased three times – that’s organic growth,” he enthuses.

Raiffeisen Bank was the first of the post-Milosevic wave of foreign banks to enter Serbia and its 2007 results illustrate the attractiveness of the market. It posted record profits of €55.7m and increased its client base by 20% to 513,000 clients.

  Raiffeisen CEO Oliver Roegl is “very satisfied” with the results but also points out that the competition is intensifying. As an early mover, entering Serbia as a greenfield investment, Raiffeisen has been able to control costs and maintain its corporate culture from the start. Later arrivals entered the market by acquisition and took over banks with higher overheads and a different culture.

But with these banks restructuring and implementing cost reduction programmes, Mr Roegl now notices “definite increased competition, sometimes increased competition that moves to increase market share almost at any price with certain dumping activities”.

Challenging arena

Competition is not the only hurdle, Mr Roegl points out. “The banking environment is more and more challenging,” he says. “You have an environment that is marked by a very restrictive monetary policy, which is the response to the inflation pressures going up.”

The central bank’s monetary policy is a big talking point among all Serbia’s bankers, and in particular the mandatory reserve requirement that was raised to 40% in 2006, mainly in response to the rapid growth in consumer loans and its effect on inflation. Inflation is still very much a topical concern for the National Bank of ­Serbia’s governor, Radovan Jelasic. The National Bank’s core inflation target for the end of 2008 is a band of 3% to 6% but, with year-on-year core inflation standing well above the top of that range at 8% at the end of April, it is clear that Mr Jelasic will not be letting up on monetary policy.

“We expected core inflation to go outside of the corridor during the second quarter and we are sure that by the end of the year it will again be between 3% and 6%; this is why we are taking so many unpopular measures,” says Mr Jelasic.

One result of the tough monetary policy in the past two years is the widespread use of cross-border loans on the corporate side, whereby the ­foreign-owned bank’s parent or associated company makes loans directly to Serbian businesses, thus avoiding the higher costs of finance associated with the mandatory reserves. “This is a very specific feature of banking in Serbia because of the mandatory reserve requirement,” says Mr Roegl, who cites a 200 to 300 basis point (bp) ­difference in the costs of such loans. Bankers think this mechanism is essential to allow Serbian business access to loans at rates comparable with those that their competitors enjoy in other countries in the region.

Sympathetic bankers

Unpopular though his measures are, there is some sympathy among bankers for Mr Jelasic because of the lack of support he is receiving from government fiscal policy, which has remained loose while Serbia has had three major elections in less than two years.

“It is not only monetary policy that should be responsible for maintaining inflation at a certain level but an optimal combination of fiscal and monetary policy,” says Mr Cupic.

Commenting on his own bank’s performance, Mr Cupic says that Hypo Alpe-Adria, like its fellow Austrian bank Raiffeisen, benefited from moving into the market early and winning quick market share, which it wishes to maintain. “We have reached a number of 100,000 clients in our retail business and in the corporate segment roughly 50% of companies have accounts with us – that’s not market share, of course. Our strategy is clear: we are not fighting for position, we are trying to keep a stable market share and trying to be as profitable as possible.” The bank’s profits in 2007 were a record €21m.

The last local banker

Facing up to the dominance of foreign-owned banks is Komercijalna Banka, Serbia’s last remaining significant domestic bank. Goran Milicevic, Komercijalna’s executive director for marketing and new banking products development, believes that his bank’s in-place infrastructure gives it a competitive advantage. “We are the leading bank measured by network – we have 270 branches all over Serbia. Another of our competitive advantages is that we have the biggest volume of hard currency savings and this means that people come to Komercijalna Banka because they believe in us.

“We have a history of 38 years in this market compared with others that have a history of three, four or five years. It is a very big advantage,” says Mr Milicevic.

An extensive branch network is one asset that the foreign-owned banks lacked when they entered the Serbian market but they have fast taken steps to address this. Raiffeisen had 91 branches at the end of 2007 and plans to have 100 to 110 at the end of 2008; Société Générale has almost 100 branches, up from 21 in 2003; Hypo Alpe-Adria is lagging somewhat behind with 40 branches but intends to have 80 to 90 by 2012.

Komercijalna has no foreign parent to provide cross-border loans, but Mr Milicevic believes that this does not disadvantage the bank. “We can compete because we are more efficient than they are,” he says. “If they engage in cross-border possibilities, their procedure lasts up to two months. All domestic Serbian customers and clients need faster credit, they ask for an immediate and definite answer to use the credit. It is now a fast-growing market, especially in mortgage activities, and they need very, very fast decisions.”

Mr Milicevic, too, says he is satisfied with his bank’s results. “We have expanded all our activities more than 50%. Our profit for this year is €35m, 10 times more than three years ago and 3.5 times more than last year,” he says.

Ownership changes are in the offing for Komercijalna, which is due to be privatised. However, Mr Milicevic is adamant that it will not be sold to a foreign bank. “We want to stay a domestic bank,” he says. “It is a very important element in our marketing activities that we are a Serbian bank: we have this advantage – to be their bank, to be the bank of our people.” He argues that the most likely privatisation scenario will be an initial public offering in two years’ time.

Central bank governor Mr Jelasic is rather more positive about the influx of foreign-owned banks. He believes that the know-how and business practices that they have brought with them have helped the Serbian banking sector towards EU harmonisation. “If you look at the banking sector, it is already in the EU – 80% of the balance sheet of the banking sector of Serbia is owned by banks from the EU,” he says. “Also regulations are up to date and we are working very fast on harmonisation of regulations.”

Dinar concerns

One area of concern for Mr Jelasic is the high level of non-dinar-denominated loans and deposits. He has taken measures to try to stimulate the use of the dinar. “It is very sad that a small city like Belgrade in Serbia probably has more currency traders than the entire city of London and Frankfurt together, meaning that people are getting loans that expose them to foreign currency risk just because the perception is that a lower interest rate in foreign currency means a lower cost,” he says.

However, this is not a view that finds much support from the bankers, especially as Serbia is a highly ‘euroised’ economy, despite the understanding that greater use of the dinar would help maintain a stable currency and make interest rate moves more effective.

Pointing out that Serbia’s reference rate (the two-week repo rate) increased by 300bp in March to 14.5% (followed by two further hikes in April and May to 15.75%), Mr Pitic at Société Générale says: “If we knew in advance the range within which the reference rate will go – not in two weeks but for one year at least – if we had that signal then we could play with dinar rates. But to give a fixed loan in dinars you have to know where the reference rate is, and that’s difficult to predict today.”

On the deposit side, Mr Milicevic says that Serbs have traditionally saved in hard currency, first the German mark and now the euro. More than 90% of savings accounts at Komercijalna are denominated in euros and Mr Milicevic does not think his customers are likely to change their habits. ­“Tradition is a very strong thing and it is very hard to change the daily behaviour and minds of people,” he says.

One other important factor is the political risk in Serbia, which Mr Cupic estimates currently adds 150bp to the local cost of financing. This factor has come to the fore recently, with Kosovo’s declaration of independence in February and the resultant collapse of the government and snap election held on May 11.

Sovereign rating

Standard & Poor’s (S&P), which assigns Serbia a sovereign rating of BB- (three notches below investment grade), revised its outlook from ‘positive’ to ‘stable’ in July 2007 as a result of concerns about the country’s expansionary budget policy, and from stable to negative in March this year following the fall of the government and the resultant potential harm to the country’s EU integration process.

However, the elections produced a surprise result, with president Boris Tadic’s pro-European coalition polling 38.4%, which was 9% more than the nationalist Serbian Radical Party, whereas opinion polls had shown the two parties to be neck and neck. “This is a very positive result,” says Mr Cupic. “Better than even Tadic’s party expected.”

Mr Tadic campaigned on a strongly pro-EU platform, which was boosted by the EU signing a Stabilisation and Association Agreement (SAA) with ­Serbia mid-campaign. On the other hand, current prime minister Vojislav Kostunica, who focused on Kosovo as the main election issue, has threatened to annul the SAA. Although Mr Tadic was the relative winner with 102 seats in the 250-seat parliament, Mr ­Kostunica’s group and the Radicals together have 108 seats. At the time of writing, Mr Tadic and the Socialist Party appeared close to forming a coalition, but there is doubt about its likely stability.

Reflecting this, Mr Cupic is cautious in the short-term. “The impression I have is that Serbia is strongly divided, basically 50-50, and it may take another round of elections before we get a stable government,” he says. But he does believe that the election results prove that Serbia is, in the long-term, firmly on the path to Europe and he expects the Kosovo issue to become a less important factor as time passes.

Policy focus

However, the election results will not lead to a quick improvement in the ­ratings on Serbia, according to Sladana Tepic, sovereign analyst for the country at S&P. “It is not the identity of the government but its actual policies that interest us,” she says. “Therefore we will not be reassessing our rating or outlook until the government is formed and we can see what its policies are, in particular those related to economic reforms and EU integration.”

The effect of Serbia’s political instability on its rating can be judged when comparing its rating with that of some other former Yugoslav countries. “The reason that Serbia has a lower rating than, for example, Macedonia [BB+ ­foreign currency] or Montenegro [BB+] is more or less political. Economically, Serbia is at least as developed as these two countries while its export base is far more diversified,” says Ms Tepic.

Mr Cupic is optimistic, however: “The trend is positive. I’m an investor and I can tell you that when the expected trend is good, that’s when you earn more money.”

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter