The complicated geographical and political make-up of Bosnia-Herzegovina, combined with its struggling economy and low purchasing power, makes life difficult for its overcrowded banking market. However, hope is on the horizon as economic growth picks up and looming elections bring promise of a more investor-friendly financial system.
Bosnia-Herzegovina is out of recession – that is the good news. But growth is still slow and struggling to improve on the back of a very high unemployment rate of more than 25%. The population’s purchasing power is low, with average earnings of €400 a month and pension payments of between €150 and €170.
The banking sector also suffered in 2013, largely due to a clear out of the balance sheets of two banks. Return on equity fell to -0.2%. Still, Intesa Sanpaolo, the fifth largest bank in the country by assets, expects growth in the major banking business of loans and deposits.
“We expect to see an increase of 15% to 20% in our total assets over the next three to four years,” says Dario Grassani, chief financial officer of Intesa Sanpaolo Banka BiH. “Our expansion strategy is relatively prudent; not based on an aggressive approach, but in line with the forecast growth of GDP [gross domestic product] of the general economy or slightly higher.” This should also mean an improvement on Intesa’s return-on-equity ratio from 9% to 10%, says Mr Grassani.
Growth forecast
Bosnia-Herzegovina’s GDP is expected to grow by 1.5% in 2014 and 3.5% in 2015, according to research by Raiffeisen Bank International. This development is mainly driven by infrastructure investments and exports into the eurozone, says Michael Georg Mueller, chief executive of Raiffeisen Bank BiH.
“Bigger infrastructure projects, including roadworks, are bringing money into the country and the investment cycle for electric power plants is starting,” says Mr Mueller. “We also feel an impact from the economic recovery in the eurozone. Last year we had growth in the export-oriented production industry of 7%.”
Bosnia-Herzegovina is especially strong in the wood manufacturing and automotive industries, and is an exporter of hydro-energy, thanks to its abundance of rivers.
Remittances from abroad also play a large role in Bosnia-Herzegovina, where the diaspora accounted for some 15% of GDP in 2013. This figure has been and is expected to stay stable due to the fact that most emigrants are working in countries less affected by the eurozone crisis. Growth could also come from the Bosnian population. Forecasts show that private consumption is set to rise, according to Mr Mueller, if only by 0.5%.
An overbanked market
Raiffeisen, the second largest bank in the country by assets, is the only one operating as a single group across the country’s two political entities: the Federation of Bosnia and Herzegovina, and Republika Srpska. In 2013, Raiffeisen posted net profits of Km42m (€21.5m), representing an 8.4% return on equity. The bank serves some 500,000 clients across retail and corporate with a split of 55% to 45%.
“With provisions for losses, we still have good room for profitability,” says Mr Mueller. “It’s a very solid position to be in and savings by our private individuals are steadily growing, even though we don’t need to pay the highest interest rates.”
The banking sector in Bosnia-Herzegovina is very competitive, with 27 banks vying for the attention of some 3.8 million inhabitants. With all these banks competing for a total loan portfolio of Km16.6bn and deposits of Km14.4bn, according to data from the Central Bank of Bosnia and Herzegovina as of March 2014, room for profitability is limited.
“A certain degree of consolidation would make sense,” says Gunter Deuber, head of research for central and eastern Europe at Raiffeisen Bank International. “But the question is: who is interested in acquiring another bank at the moment? Perhaps it would make sense for players with experience in the market, such as the EBRD [European Bank for Reconstruction and Development], to enter and maybe in two or three years there would be more interest in an acquisition among the banks.”
The EBRD has put a total of €306m into the banking sector in Bosnia-Herzegovina in the form of equity and credit lines. It says it remains keen to support the entry of new strategic investors and spur further consolidation, and foster the reform of the financial sector to ensure its stability.
Foreign owned
Bosnia-Herzegovina’s banking sector is foreign-dominated, with 90% of all assets held by banks from abroad. UniCredit has the largest share of assets at 20.8%, according to research from Raiffeisen, when combining the two entities – UniCredit Bank dd in the federation and UniCredit Bank ad Banja Luka in Srpska.
When it comes to loan volumes, UniCredit in the federation is slightly weighted towards retail clients because it “had better opportunities in the retail business in the past years”, says Ivan Vlaho, chief executive at UniCredit dd. He sees scope to improve the bank’s presence in corporate banking, especially through lending to the larger businesses, and expects to end 2014 with roughly equal loan volumes for retail and corporate clients.
“Our advantage is that we can approve large loans and cover large transactions, which some smaller banks cannot,” says Mr Vlaho. “In the mid-sized and small-sized businesses, all other 26 banks are competing, which is why for us the large projects are more interesting.”
SME focus
The Bosnian arm of Sberbank is one player focused on small and medium-sized enterprises (SMEs), signing a €10m loan with the EBRD in December 2013 to further bolster its SME lending. Edin Karabeg, chief executive of Sberbank BH, says: “For us, this is also a sign of approval that these supranational agencies would like to work with us and know that we are a reliable partner.”
The Russian bank bought most of the ailing Austrian Volksbank International in early 2012 and revamped it as Sberbank Europe in February 2013. One of its main goals is to be a game-changing innovator, says Mr Karabeg, which includes providing modern branches and client services, as well as being fast.
“In December, we launched the three-hour cash loan for retail clients, which was completely new for the market. It normally takes 24 hours to get a credit decision here,” says Mr Karabeg.
Loan growth
Sberbank BH, the sixth largest bank in the country by assets, has a high loan-to-deposit ratio of 140%, but is working towards a goal of 100%. That would be a significant reduction from the 170% seen in the bank’s Volksbank years.
Loan-to-deposit ratios for UniCredit, Raiffeisen and Intesa are at or below 100%, while the average loan-to-deposit ratio across the banking sector in Bosnia-Herzegovina fell from a high of 122% in 2008 to 115% in 2013.
“There was a phase of strong growth when banks didn’t have enough local resources to finance the expansion,” says Raiffeisen’s Mr Deuber. “It’s usually a sign of a market that is growing too quickly when credits are heavily outweighing deposits.”
That is exactly what happened: loan volumes grew an average of 20% almost every year between 2002 and 2008, according to data from Raiffeisen.
Non-performing loans (NPLs) in this period fell from 17.9% in 2001 to 3% in 2007, but increased loan portfolios can cover up lower quality assets. NPLs have risen drastically since then, however, to 15.1% at the end of 2013, the highest level since 2001. The rise is blamed largely on pressure on SMEs.
UniCredit, Raiffeisen, Intesa and Sberbank are below market average for NPLs. Hypo Alpe Adria, the country's third largest bank by assets, took some write-downs in 2013 and is one of the reasons why the market’s return on equity turned to a loss. To get the Bosnian part of its business ready for the planned sale of its operations in south-eastern Europe, it transferred some of its portfolio to the newly created Victor Retail I, which will wind down the assets.
Hypo Alpe Adria stated in its 2013 annual report that further portfolio adjustments will be made in mid-2014 to improve the saleability of its south-eastern Europe network, which it hopes to see as early as this year.
Hope for reform
Politically, Bosnia-Herzegovina is in a deadlock, but there is hope that elections in October could ease difficulties. Still, there are no new faces or radical ideas being discussed, leaving expectations low. At least party political propaganda against International Monetary Fund requirements is likely to be retracted post-election, but there is concern over the time it will take to build a new government. Some worry it could take as long as in 2010, when the new government wasn’t in place until 15 months after the elections.
There are hopes for an easier and more investor-friendly financial system, with the creation of a single banking authority and financial market, and less conservative regulatory requirements for the liquidity of banks.
“If you harmonised our framework with that of the EU or neighbouring countries such as Serbia or Croatia, it would release Km2bn of long-term financing sources for local clients,” says UniCredit’s Mr Vlaho. “This would bring another chance to speed up the recovery if the money is being used in reasonable projects, which would increase employment, for instance.”
Macroeconomic forecasts, with high unemployment and only moderate GDP growth, do not make it easy to be optimistic for Bosnia-Herzegovina's future, adds Mr Vlaho, but “somehow we managed to be successful in each of the past 15 years”.
“Being in a small economy you can find yourself in a bad position easily but things can also improve much quicker,” says Mr Vlaho. “We have to be optimistic and fight for the best possible results while waiting for progress, especially from infrastructure projects, which could help our local economy speed up.”
