Who’s leaving and who’s expanding?

Société Générale’s most likely departure from Serbia is not going to be the only major news on the Serbian banking market this year. The answer to the question who will stay and who will expand its business depends on the business conditions in Serbia. Yet, in view of the market’s size, this is one is not the sole reason in determining the global strategies of international banking groups.

The news that Société Générale is leaving Serbia marked the first half of 2018. This begged the question: what the reasons for such a decision are? To have a better perspective on the Serbian market, one must see the bigger picture. Out of the ten biggest banks in the world, the only one currently present in the Serbian market is the Bank of China. When it comes to the ten biggest banks in Europe, the only two that operate in Serbia are Crédit Agricole and Société Générale.

For a clearer view on the size of the Serbian market, it is important to be aware of the data below:

Top 10 global banking groups, by assets (billions of $)

Top 10 European banking groups, by assets (billions of $)

Top 10 Serbian banking groups, by assets and market share (millions of EUR)

Source: National Bank of Serbia

The Serbian market cannot compete with the profitability of many other regions in the world. We see this as the main reason for Société Générale’s announced departure from Serbia, Albania, Montenegro, Macedonia, and Moldova. The same banking group has also pulled out of the Croatian market last year.

The reason for the presence of foreign banks in the domestic market is profit. Others are: political, economic and to some extent historical relations with the banks’ countries of origin. Among the European banks, the Austrian and Italian ones have the greatest presence in Serbia. Significant interest are showing also Hungarian OTP and Turkish Halk bank. These two both possess an understanding of the Serbian market’s idiosyncrasies. The position of Société Générale and Crédit Agricole on the Serbian market is not relevant considering their influence on the global market. Société Générale’s good performance in Serbia is not material in the context of its global business.

There are often major discrepancies between the performance of foreign banks in Serbia and abroad. Raiffeisen is achieving excellent results in Serbia despite the considerable losses that its group suffered in other markets in previous years. Intesa also provides an interesting example. Being the top bank in Serbia despite operating in complicated economic conditions at home. Indeed, Italy finds itself at the tail end of the EU’s projected GDP growth rates for 2018 (1.5%). At the end of 2017 Italy had the largest consolidated public debt in the EU, the highest amount of non-performing loans in the Eurozone (approx.200 billion euros), less than 60% of Italians support the euro, and their newly-formed government’s stance on their future within the EU is less than clear. In contrast, analysts expect a strengthening of the French economy. But, the electoral victory of Emmanuel Macron over the populists is just a beginning.

The results of foreign banks in Serbia cannot be substantial to their global business operations. Yet, this does not diminish the significance of the banking sector’s output for Serbian industry and economic development.

The Serbian banking market, in which a total of 29 banks operate, remains fragmented. At the end of 2017, the ten biggest banks held 78.4% of the total market share, with only six holding a share over 5%. According to this index, Société Générale made the greatest stride. It increased its market share from 7.3% in 2016 to 8.5% in 2017, overtaking Raiffeisen bank’ fourth place. A change in the market also occurred in the seventh position, where Erste bank (4.8%) outran Eurobank (4.7%).

In 2017 the total assets of the banking sector increased from EUR 26.2 billion in 2016 to EUR 28.4 billion. Net loans grew from EUR 15.9 billion to EUR 17.8 billion. Deposits also advanced, albeit at a slower rate – from EUR 17.8 billion to EUR 18.8 billion. The number of employees grew from 23,832 to 24,745 (with Intesa employing the greatest number at the end of 2017 the total of 2,937).

The Serbian banking sector’s profitability is satisfactory and shows a positive trend. In 2017 sector-wide pre-tax profit was EUR 566.1 million, compared to EUR 173 million for the same period in 2016. The main reason for this difference are loan loss provisions – EUR 61.3 million in 2017 vs. EUR 329.7 million in 2016.

The market for non-performing loans of legal entities was particularly dynamic in the last two years. It triggered a new wave of activity in financial markets. Price of secured receivables is around 10% -15% of their nominal value and price of unsecured receivables around 5%. Still, some cases significantly deviate from these average values.

The net interest income fell in 2016 vs. 2017, but the result for both periods was approximately the same: EUR 1 billion vs. EUR 997 million. The continuing trend of low-interest rates was partially compensated by revenues from commissions. These grew noticeably on the year-to-year level from EUR 286,5 million in 2016 to EUR 310.2 million in 2017. Intesa is by far most successful (EUR 54.2 million) in this category, followed by Komercijalna bank (EUR 41.9 million) and Raiffeisen (EUR 31.4 million).

Annual operating expenses increased for the whole banking sector by approx. EUR 10 million, but the difference in employee-related expenses is minor. It is noteworthy that the cost/income ratio (CIR) at the sector-level dropped from 64.8% (2016) to 59.9% (2017). AIK bank has by far the lowest CIR in the sector (24.6%).

Major challenges affecting the global banking industry are clients’ increased expectations of the service quality, regulatory changes, and technological progress. These equally impact the operation of banks in the Serbian market. In addition, Serbian market is noticeably fragmented. For these reasons, future developments are very hard to predict.

Industry leaders are creating client’ needs. Industry followers set clients’ needs as a top priority in their business strategies. Banks are adjusting to this trend a bit slower. Yet, pressure from new technologies is pushing banks to recognize this inevitable trend. There is less and less guaranteed market share for banks with the conventional approach.

Regulatory changes in 2018 are significant for banking in Europe. The most important will be the adoption and implementation of new rules required by IFRS 9, Basel 4 and MiFID 2. Preparations have begun on schedule for IFRS 9. In short, it requires from banks to book expected losses earlier. Yet, opinions differ about the effects that Basel 4, whose aim was to round off the reforms envisaged by Basel 3, will have. Some people insist that Basel 4 amounts to a new set of reforms. Requirements for an increase of capital are substantial and that is why some think they shall be treated separately from Basel 3. The application of MiFID 2 began this year and requires from investment banks to present their expenses in a more transparent manner. Serbia got an invitation to prepare negotiation position for chapter 9 – Financial Services as a part of its accession talks with the EU. The opening is expected this year. The anticipated outcome of this harmonization includes a stable and integrated financial system, a greater variety of services on the market and a greater security for users of financial services.

When it comes to technological challenges, the banking sector will face colossal investments. These challenges include artificial intelligence, blockchain technology as well as alternative financial institutions. There is an urgent need to advance in: decision-making processes (risk-taking) in real time, efficient processing of big data, security of information systems and data protection. Serbian banks are at the beginning of these developments and it is too early to give an estimate of the future pace.

Aside from the aforementioned trends, the banking business in Serbia craves for more intensive consolidation. Management changes in Komercijalna bank last year shall push its privatization process forward. Rumor has it that Erste bank and Direktna bank are potentially interested bidders. There is also speculation that OTP bank has shown serious interest in the possible sale of Société Générale in Serbia. In 2017 OTP took over the Croatian Splitska bank as well as the Serbian Vojvodjanska bank. AIK bank, which has already acquired Alpha bank, is determined to expand its activities throughout the region. The main evidence is its purchase of shares in Slovenia’s Gorenjska bank. This process is not finished, but it represents a promising step for the Serbian banking market. Banka Postanska Stedionica (hereinafter: BPS) has taken over the assets of Jugobanka in Kosovska Mitrovica in the 1Q of 2018. In the same period, BPS took over several non-performing loan portfolios. Currently, BPS is in a process of restructuring supported by the World Bank. If this process succeeds, BPS could become one of the most valuable banks in the domestic market. Yet, the state so far did not prove itself as a good manager, but let’s hope for an exception to the rule.

Outside of the top ten banks group in Serbia is also exciting. Unofficial announcements of a possible sale of Addiko bank are gaining ground. The news from Slovenia about the sale of NLB bank are consistent and official. With Deutsche Bank as its privatization advisor, NLB is under a strong pressure from EU to move forward with the process. Following its acquisition of the Findomestic bank, Direktna bank plans to grow through acquisitions. Czech Expo bank entered the Serbian banking market in 2017 by acquiring Marfin bank.

These events might suggest that the Serbian banking market is in full swing. Still many of the important questions remain unanswered. For instance, will Crédit Agricole maintain its current level of business in Serbia, or will expand its business by capitalizing its global position, or alternatively, follow BNP Paribas and possibly Société Générale and decide to leave this market? How will Russian banks, heavily affected by sanctions, manage their business operations in Serbia in the future? To what extent will the Bank of China, Halkbank and Mirabank build up their activity in Serbia? What fate awaits banks with partial state ownership?

The list of questions is endless, but further development and competitiveness of the banking sector in Serbia depend on these and many other answers.