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Takeover trend

Serbia’s moribund banking system is getting a new lease of life as international banks go shopping.Eric Jansson reports from Belgrade.
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A Balkan bank such as Niska Banka could scarcely have dreamed of attracting a foreign buyer a few years ago. Headquartered in the modest Serbian city of Nis, the bank’s 24 branches attract clients mostly from the country’s poor south-east. Its recent history is one of close calls and survival techniques. Acquired by the state in a lifesaving debt-for-equity swap in 2002, Niska ranks 34th in Serbia, as measured by assets. Its latest triumph, last November, expanded its operations but is nothing to shout about: the takeover of insolvent Pirotska Banka, based in deepest hill country.

 Foreign bidders

Yet Jordan Velcev, Niska Banka’s director, says four foreign bidders aim to buy the bank in the tender privatisation process currently under way. By the end of this year, the Serbian state’s 100% stake in Niska Banka looks certain to have been swallowed by either Austria’s Erste Bank, Hungary’s OTP, Slovenia’s Nova Ljubljanska Banka or Bulgaria’s Prva Investiciona Banka. “All good banks with long tradition,” Mr Velceve remarks with a glimmer of satisfaction.

But Niska’s good fortune is just the tip of the iceberg. This year is shaping up as a bonanza year for mergers and acquisitions in Serbia’s banking sector. Such is the enthusiasm among European banks that their search for viable Serbian purchases has reached even this quiet corner of the country.

In bustling Belgrade, bigger buyers are already gobbling up some of the country’s leading institutions. Italy’s Banca Intesa in February agreed to buy a controlling stake in Delta Bank, the country’s second largest, paying €277.5 for 75% plus one share, with an option to purchase more. Alpha Bank, the second largest bank in Greece, in January, jumped into the fray by purchasing an 89% stake in Jubanka, Serbia’s seventh largest, for €152m.

Days earlier, Bank Austria Creditanstalt acquired Eksimbanka in a move that analysts say will enable it to form the country’s fourth largest bank.

These deals occurred in the space of 10 weeks, and more are expected soon. Bidding deadlines expire this month as Serbia’s government endeavours to privatise two medium-sized banks, Novosadska and Continental. Niska, Vojvodjanska and Panonska banks are slated for privatisation this year, as well.

It is difficult to overstate the importance of such a sudden shift in ownership and management. Broadly, Serbia’s experience can be expected to echo that of central European countries that passed through equivalent moments almost a decade ago: rapid modernisation and multiplication of banking services, occasioned by new competition and rapid consolidation within the banking sector.

For individual depositors in backwaters such as Pirot, home of Pirotska Banka, the arrival of an internationally minded European bank is likely to invite a new, participatory role in hitherto inaccessible financial markets.

 Consolidation predicted

Radovan Jelasic, Serbia’s central bank governor, predicts a wave of mergers and acquisitions this year will reduce the number of banks in Serbia to 35. He describes this as the beginning of a new era of Serbian bank reforms, driven by the private sector.

“Up until now we’ve had an organic growth strategy. Now everyone has to think how far they can go with organic growth, or whether they should look into acquisitions,” Mr Jelasic says.

For Banca Intesa, the purchase of Delta Bank facilitates substantial expansion into the western Balkans region. The Italian bank already owns a Croatian subsidiary, Privredna Banka, and is in the process of acquiring Bosnia’s ABS Bank, while related operations are already set up in neighbouring Hungary and Slovakia.

Bank Austria’s directors say they intend to build the most comprehensive banking network in central and eastern Europe, a region which in the banks’ strategic plan includes the western Balkans. They moved into Serbia early, establishing a small branch of Bank Austria’s flagship HVB Bank, which this year plans to merge with newly acquired Eksimbanka.

 Profile-raising deal

Like Bank Austria, Alpha Bank lay low in Belgrade for several years. Alpha ran a small operation serving local subsidiaries of Greek companies. Panagiotis Vlassiadis, Jubanka’s new director, says that Alpha, during that time, studied how to expand its role in Serbia and pounced on Jubanka’s privatisation after concluding that “the financial position of Jubanka is one of the better ones in Serbia, with a very strong capital base, within the context of Serbia”. The deal raises Serbia’s profile in a regional network for Alpha Bank that also includes Bulgaria and Macedonia, both neighbours to Greece, plus Romania.

Though prices can be high – Banca Intesa’s purchase price for Delta Bank was based on a 3.2 multiple of shareholders’ equity – several factors contribute to buyers’ eagerness.

First, a series of reforms orchestrated by Serbia’s central bank, bank rehabilitation agency and finance ministry ran their course. Banking officials were left with a mess to clean up after the collapse of Slobodan Milosevic’s Yugoslav regime, in 2000. Disastrously, the regime had frozen depositors’ foreign currency accounts, fed hyperinflation by printing cash, plundered state coffers and treated cash held by state-owned banks as easy credit for troubled industries. In the wake of revolution, central bankers forced doomed banks to close and tried to save those in peril. Their recovery, as exemplified by Niska Banka, makes possible this year’s flurry of bank privatisations.

This was complemented last year by Serbia’s success rescheduling debt payments to the London Club and Paris Club of creditors. The London Club’s 62% write-off last year made the country creditworthy after years in the cold. It was followed by the first-ever listing of Serbian Eurobonds on the Luxembourg Stock Exchange.

“This was a clear signal for investors, especially banks, to embark on the market,” says Budimir Kostic, chairman of the managing board at Raiffeisenbank Belgrade, the subsidiary of Austria’s Raiffeisenbank that last year overtook Delta to become Serbia’s largest bank.

 Second, the market is ripe. “Banks’ balance sheet sum rose by 39% last year. Banks’ lending, excluding the public sector, rose by over 52%, and aggregate citizens’ deposits increased by 48.5% or €348m. Positive growth of all these indicators will continue this year as well,” says Mr Jelasic.

Serbian depositors are regaining confidence in a system they once fled. Although the country’s economy still underperforms, it is not cash-poor. “Mattress” money feeding back into the system combines with remittances from Serbs living abroad, which tally up to an estimated 15% of GDP annually.

Correspondingly, consumer credit is growing “even faster than we like,” says Mr Jelasic. However, Danica Popovic, a prominent Belgrade economist, cites “a huge need for microcredit loans for small businesses”.

Incoming foreign investors riding a tide of real sector privatisation that surged in 2003 require corporate banking services. Gianfranco Fini, Italy’s foreign minister, said approvingly in reaction to Banca Intesa’s acquisition that it will “ease the way” for Italian investment in the region.

Third, banks new to the Serbian market find reasons for confidence when examining the experience of pioneers in the market. Raiffeisenbank, HVB and Alpha Bank all entered early, and all have prospered.

As Bank Austria and Alpha extend their Serbian networks this year, another Greek bank, EFG Eurobank Ergasias, is carrying out a €40m investment plan, having bought Serbia’s Postbanka two years ago.

George Lychnos, managing director of subsidiary EFG Eurobank Belgrade, says the bank will expand its presence to 15 offices by July but “expects to take the leading position in the Serbian market within the next few years not only by size, but also in its product expertise and quality of service”. EFG Eurobank is proving its appetite for more of the Serbian market by placing bids for the tender privatisations of Novosadska Banka – competing against bids from Erste Bank and Italy’s Unicredito – and Continental Banka, in competition with Nova Ljubljanska.

 Timing is crucial

Fourth, bankers say time is of the essence. Competition and consolidation in the sector will shrink the space available for newcomers to this market of 10 million people, two million of whom may break away if the international community backs Kosovo’s independence bid. “The window of opportunity for foreign banks establishing a reasonably strong presence in this country is not going to be open forever, for two reasons. First of all, there are already strong players in the market – Raiffeisen, Intesa, Société Générale, HVB, Hypo Alpe-Adria, ourselves. Second, we have to appreciate, all of us, that the foreign banks that are entering the market are not going to be idle. They are going to expand very dramatically and very quickly,” says Mr Vlassiadis of Jubanka.

Bidders who do not succeed in the three privatisations already launched may seek opportunities to try again in the second half of this year, when Serbia invites bids for Vojvodjanska Banka and Panonska Banka. But they will want to determine whether the banks already in the market have left them sufficient room to move.

In a market growing as swiftly as Serbia’s, there is room for more than one bank to grow. Analysts say the sector’s total assets, worth some €6.5bn at the beginning of 2005, could grow 30% this year.

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Read more about:  Central & Eastern Europe , Serbia