With a population of seven million and a GDP per capita below USD 7,000, Serbia has 26 banks currently operating in its market – five are state-owned, the other 21 are private. Once the OTP Group’s acquisition of Société Générale Serbia* closes later this year, the OTP Group will have two Serbian banks under its roof (the other being Vojvođanska Banka, acquired in 20171), becoming the second largest banking group in Serbia in terms of assets, lagging behind Banca Intesa only.

Do these basic parameters suggest that the Serbian banking market is oversaturated? According to some reports, this was indeed one of the reasons Société Générale decided to pull out from the market. In the following paragraphs, we consider this question, the effects of consolidation of the market and its connection to competition.

OTP’s acquisitions of Société Générale Serbia and Vojvođanska Banka add to several tumultuous years for the Serbian banking sector, which has been characterised by a number of takeovers and mergers – Direktna Banka acquired Piraues Banka and Findomestic Banka, Jubanka and Alpha Bank were acquired by and merged into AIK Banka, and Addiko Bank AG entered the market by acquiring Hypo Alpe Adria Banka, to name a few. Organic market entry was, naturally, less common, with Bank of China and Mirabank as the only examples; however, these banks do not seem to have expansion aspirations and are rather focused on investors from their countries of origin.

This trend is expected to continue as the biggest state-owned and third largest bank – Komercijalna Banka, is also up for sale this year. The tender process initiated in June this year attracted statements of interest from both PEFs and the banking sector, including some of the banking groups already present on the Serbian market meaning that the market could be further consolidated as a result of the sale.

What are the reasons behind this trend?

The state of play in the Serbian banking market is, to a degree, a legacy of the transitional nature of the Serbian economy: at the beginning of the 2000s, when the liberalisation of the market began, there were 86 banks on the market – this number was halved by 2006 and the number of state-owned banks has been in constant decline ever since. This, however, does not explain the numerous takeovers among privately owned banks. Exceptional circumstances aside (the demise of Hypo Alpe Adria Bank at the European level, the difficulties experienced by the Greek banks following the Greek bailout), is the number of banks on the Serbian market still significantly disproportionate to its needs – are some of the banks simply too small to survive?

Out of 26 banks, approx. 71% of the market2 is held by seven different banks/banking groups, which are at the same time the only players with market shares above 5%3. Eight banks have market shares of 0.5% or less which leads to low levels of market concentration (HHI below 1000). In what seems to be a constant trend, only four to five banks share over 60% of total sector profits.4The number of banks operating with losses has declined in recent years,5 which could also be linked with the disappearance of some players from the market.

Unlike small banks, their bigger counterparts can benefit from a scale that dilutes fixed costs and allows the effective diversification of assets and liabilities that bridges the fluctuations of a business cycle. The problem of asymmetric information is also diminished in case of big banks, which better enables them to allocate capital and thus risk as well. The presence of stronger banks has also been beneficial for developing economies in terms of attracting foreign investment. Many countries record better results with consolidated banking markets and even attribute the stability of their financial systems to consolidation.6 Admittedly, consolidated markets are more vulnerable to collusive outcomes, but with fewer players on the market control and monitoring by the regulators is easier.

Small banks with limited branch networks and a low level of brand awareness also struggle to attract new clients who are in any case not prone to switching. In addition, they are burdened by the growing costs of aligning their operations with regulatory innovations. For example, the National Bank of Serbia introduced the obligatory instant payments system and online face-recognition system in the last year alone – these novelties are tied to significant costs and IT system optimisation that even bigger Serbian banks found challenging.

It is axiomatic that the number of competitors is considered proportional to the level of competition in a market and so market consolidation is a negative thing per se. Experience shows that this does not necessarily hold true for the banking sector and that consolidation should be welcomed as a catalyst for competition and consumer welfare rather than be stigmatized.

The Serbian example offers a relatively simple indicator that consolidation is having positive effects on competition – in the last several years the interest rate margin has been narrowing constantly.7 Consumers are also benefitting from the adoption of new technologies and digital distribution channels shared by the merging banks.

While these could be treated as positive outcomes of consolidation in the Serbian banking market, the full effects of consolidation should be felt in the coming years, after the privatisation of Komercijalna Banka and further absorption of smaller and inefficient banks by the bigger ones. The effects of consolidation should also be felt on other financial and neighbouring markets (e.g. leasing services, insurance services) due to the vertical integration of some market players and the similar role efficiencies play in these markets.A regulated market can, however, only do so much alone. This amplifies the role of the regulator and the need for sound accompanying policies that will not stifle competition – importantly, rules should not be designed to protect the incumbents but should allow for new technologies and innovative providers that can shake up the market and challenge traditional banks.