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Central & eastern EuropeSeptember 2 2007

Bridge building in the Balkans

Société Générale has added to its Balkan synergies with the purchase of Macedonia’s Ohridska Banka – but local banks are efficient and profits are by no means a certainty. Eric Jansson reports.
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Balkan bank acquisitions are no longer novel, following the flurry of takeovers by major European banks seen in the region since 2000. But the way Société Générale has just swept into the Republic of Macedonia, a new Balkan market for Europe’s biggest institutions, says much about how fast operations in the region are maturing.

The French bank arrived not as a newcomer to the Balkans, but rather with a veteran’s experience, gained through both its long-standing subsidiary in Serbia and its ownership since 2001 of SKB Banka in Slovenia.

Bernard Koenig, the new general manager of Ohridska Banka, the mid-tier Macedonian bank purchased earlier this year by Société Générale, arrived not via Paris, but Ljubljana. Having managed SKB for the past five years, he is primed to identify overlaps in the Slovenian and Macedonian markets and others in the region.

“Société Générale is finding synergies in the region. For example, here we are finding we can use our Serbian experience in marketing and capital markets very effectively,” he says from his office in Skopje, the Macedonian capital.

If Mr Koenig’s plans are completed, Ohridska Banka, currently the country’s fourth largest bank by assets but a mostly regional institution with limited presence in Skopje, will be retooled as a top-tier competitor with a strong reach throughout the country.

Mr Koenig promises to “hugely increase the network”, raising the number of staff from 183 to 500. “We want to be very present in Skopje, which with three branches we are not right now, and we want at least one branch in every city of 25,000 individuals,” he says.

Société Générale’s investments in Ohridska could shake up a banking sector which has been dominated by three local majors: Komercijalna Banka, the National Bank of Greece’s Stopanska Banka, and NLB Tutunska Banka, owned by Slovenia’s Nova Ljubljansaka Banka.

But the scope of the French bank’s probable influence is a matter of debate in the sector. Gjorgji Jancevski, first general manager of NLB Tutunska, is among those forecasting thinner margins.

“I personally expect the influence of Société Générale to sharpen competition in terms of products, services and subsequently prices. They will break the concentration of the sector between the three largest banks, which hold 65% of the sector’s assets, 70% of deposits and 68% of loans to the private sector,” says Mr Jancevski.

Others suggest that a bolstered Ohridska will merely ride the waves of powerful existing trends in a booming sector, in which deposits and credits are both rising sharply. Overall household savings are growing faster than 20% annually, yet commercial banks’ credits to the private sector rose last year by 31%, according to the central bank.

“Macedonia is experiencing a trend of significant improvement of quantity and quality of banking operations. This trend started much earlier than the entry of Société Générale as one of the major western banks on the Macedonian banking market, namely in 2003, and has continued,” says Hari Kostov, general manager of Komercijalna Banka.

While a burst of new competition could place new pressure on lending rates – indeed Ohridska Banka marked its launch as a subsidiary of the French bank by cutting rates sharply – Mr Koenig, the manager at Ohridska, hints that local analysts forecasting sudden rate cuts across the sector may be too keen.

“I do not see why so many people are saying there is a huge margin,” he says.

Part of the enthusiasm stems from the aggressive, state-funded “Invest in Macedonia” marketing campaign conceived by the government of Nikola Gruevski, the prime minister. Mr Gruevski’s ministers and other appointees present a highly bullish picture of the economy.

Part of the picture is rapidly falling interest rates, a matter of fact over recent years but still not a certainty through 2007, bankers say. One of Mr Gruevski’s appointees, Viktor Mizo, head of the state agency for foreign investments, asserts that an aggressive bank could cut current interest rates by 3% “without any problem”. Such a move, he says, would “catalyse instant consolidation” in a sector split between 20 banks, in which 14 small banks hold 22 of overall assets.

Mr Jancevski calls Mr Mizo’s analysis “exaggerated”, and most other bankers agree.

“A major bank will more probably [consolidate the market] with a wider and more diversified product and service portfolio than with lower prices, especially with the recent development of the financial markets and Euribor increase. This period last year, three-month Euribor was 2.99. Today it has gone up to 4.21, and I do not expect a big, instant decrease of the interest rates for this year,” says Mr Jancevski.

The de facto peg of Macedonia’s currency, the denar, to the euro ensures that domestic interest rate trends are tied to trends in the eurozone. The tie is tightened by the fact that foreign mother banks of two of the three biggest Macedonian banks, Stopanska and NLB Tutunksa, hail from the eurozone, as does Société Générale.

“The level of credit rates depends on two factors: the level of eurozone rates and magnitude of local risks including instruments for risk mitigation,” says Gligor Bishev, general manager of Stopanska Banka.

Data indicate that local risk is dropping. Banks continue to slash the share of bad loans in the sector’s consolidated portfolio even while dramatically boosting credit volume, with retail credit registering especially brisk growth.

Such results stem in part from the banking sector’s continuing success in luring cash out from ‘under the mattress’ of households and out of the country’s thriving ‘grey economy’ as companies legitimise their businesses. Less than a decade ago, as elsewhere in the Balkans, most households and businesses operated off the books.

Switch to plastic

Convenience is a key driver of this transition, and nowhere can the demand for it be seen more clearly than in the market for credit and debit cards. Into a previously cash-based economy, Stopanska Banka introduced the first credit card fewer than four years ago, in late 2003.

The market “needed some time in order to digest the product”, says Mr Bishev of Stopanska Banka, but other banks followed with cards the following year. Plastic payment volume is now soaring. In January, 2005, the number of plastic transactions was 148,774, but by June 2007 the number had grown sevenfold to 1,006,973, says Mr Jancevski.

Mr Koenig of Ohridska Banka says conveniences are being introduced through other vehicles, as well, such as same-day cash loans and housing loans in under 24 hours, options new to local clients. “Demand is already proving very strong,” he says.

But to catch the locally bigger innovators who have defined Macedonia’s transition to date, even Société Générale, comparatively bigger internationally, will need to swim fast.

INTERVIEW: PETAR GOSHEV, GOVERNOR OF THE CENTRAL BANK OF MACEDONIA

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Nowhere in eastern Europe have a central bank’s inflation controls been more consistently successful than in this southern Balkan country, owing largely to the strict policies of Petar Goshev, governor of the central bank, and his predecessors. Inflation over the past 12 years stands at an annual average of 2.2%.

 

Yet, despite the enviable show of monetary stability, big European banks in recent years have chosen to stay out of Macedonia, even while buying expensively into more changeable Balkan markets such as neighbouring Serbia.

Mr Goshev blames Macedonia’s small size and the “impression of risk” that came in 2001 when ethnic conflict in neighbouring Kosovo briefly spilled across the border, just as banking investment trends picked up in the wider neighbourhood.

However, “even in 2001 there were no withdrawals of investments, and now Macedonia is no less safe than Romania, Bulgaria or Serbia”, the governor says.

Big European banks are now coming around to his view, encouraged both by changing political dynamics in the EU candidate state and by a sustained boom being registered by the local banking sector.

France’s Société Générale acquired medium-sized Ohridska Banka earlier this year, and Italy’s Intesa Group bought a minority share in smaller Makedonska Banka.

Yet with fewer properties up for grabs than western banks have typically found elsewhere in the Balkans, the influence of these new entrants may prove muted in a sector where the three biggest banks currently split most of the existing business: locally owned Komercijalna Banka, the National Bank of Greece’s subsidiary Stopanska Banka and Tutunska Banka, owned by Slovenia’s Nova Ljubljanska Banka.

The conservative Mr Goshev pours cold water on bullish local projections that the entry of Société Générale’s and other major players will stoke competition and push down lending rates sharply.

“That is speculation, but we can follow data. In 2003, interest rates for all kinds of maturity of loans was 15% to 16%. Today they are 10.5%, and the best companies get their loans at 7% to 8%,” he says.

“The central bank’s policy rate, which a few years ago was 16%, is down to 5%. The banks have started to follow, but cautiously.”

Measurable trends less visible than the physical entry of foreign banks may ultimately carry greater importance. The governor notes two. First, Macedonian banks have so far succeeded in cutting the overall percentage of bad loans, despite expanding their lending portfolios rapidly, by 31% in 2006.

Second, in the fourth quarter of 2006, banks for the first time registered faster growth of savings in the local currency, Macedonian denars, than in foreign exchange. Technically, this means little, since the central bank holds the denar in a de facto peg to the euro, but with the trend continuing in 2007, Mr Goshev describes the change as a sign of increasing confidence in the country’s economy.

However, the governor expresses dissatisfaction with an economic growth rate he calls “not high, below that of other transition economies”. Government officials say quarterly gross domestic product surged by 7% during the first quarter of 2007, but International Monetary Fund projections for the year foresee just 4.5% growth.

In a country suffering from high levels of structural unemployment, few policymakers consider such growth rates sufficient. Echoing government ministers, Mr Goshev says new investments will provide the essential growth engine.

“The investment level is increasing step by step. Several years ago, gross investment held a 15% to 16% share of GDP. Now it is 20%. We need to get it up to 25%, and then it will really start to push growth,” he says.

If this occurs, a banking sector already handling record growth will be challenged to absorb more still.

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