THE BATTLE LINES are being drawn up in Belgrade this spring. Like ranks of lances each adorned with the badge of its liege lord, rows of lampposts all around the city are decorated with the logos of Serbias competing financial institutions. The battle of the banks is about to begin in earnest.
At stake is a share in one of Europes fastest-growing banking industries. Measured in euros, banking assets in Serbia grew by 44% last year, following 22% growth in 2004. However, in absolute terms, at 8.9 billion, total assets were the equivalent of only 44% of GDP at the end of 2005.
The overall size is still very limited, says Oliver Roegl, chairman of the managing board at Raiffeisen in Belgrade. The banking sector is still in its starting phase. And with an economy that is growing 4%, 5%, 6%, the long-term potential for the banking sector is very strong.
Damir Novotny, managing director of T&MC in Zagreb and a consultant to Serbian banks, agrees. The market will for sure grow by 20% annually for the next five years, he says. In particular, he expects growth in the retail sector, which is underweight in Serbia compared with other countries in the region.
With the exception of Banca Intesa, which purchased the privately owned Delta Banka, giving the Italian bank a little over 10% of banking assets, the foreign newcomers lack significant market share. And opportunities to buy their way into it are rapidly dwindling. Vojvodjanska Banka, Serbias sixth-largest bank, is being privatized and this year there have been further foreign purchases of the remaining minor banks.
Recently arrived foreign banks will have to fight hard to seize as much of the growing market as possible. We will see actions that are not very logical, even pricing below break-even just to gain market share at any cost, foresees Roegl, who reckons that the competition has tripled in size in the past year.
However, not all banks are fighting to increase market share. Raiffeisen is Serbias largest, with assets of 1.4 billion, a 15.4% market share, at the end of 2005 and it is seeking to defend its position. Raiffeisen has achieved this purely by organic growth, exploiting its first-mover advantage and following a clear growth strategy. Roegl acknowledges that in some segments Raiffeisens share has peaked and will slide a little. For example, although at present the bank has an 18% market share of retail loans, he will be happy if it can maintain a 15% share.
Raiffeisens organic growth has helped it to keep costs down. Roegl comments: When you look at the banks that have been purchased, you have branches that are bigger than our head office, which is amazing, especially in the difficult environment we are in now. Raiffeisen plans to increase the number of its own branches from 47 to about 100 by the end of 2008.
Another Austrian bank determined to remain above the fray is Hypo Alpe-Adria-Bank. We are not going to go for this fast-moving consumer lending, its simply not our strategy, says main board member Vladimir Cupic. However at the same time, we need a large number of retail clients but we will use more of a cross-selling strategy to get them, from the corporate to the retail business and from the retail to the corporate. So, in reality we will try to exploit our client base.
Cupic says that he has not yet felt competitive pressures from the newcomers to the Serbian banking scene as they are still integrating their acquisitions; he expects competition to intensify later this year and in 2007.
Hypo Alpe-Adria-Bank opened in Serbia after acquiring a small bank in late 2002. Its growth has been organic since then and it holds an 8.8% market share, with assets of 797 million in December 2005. Serbias fourth-largest bank, Hypo Alpe-Adria-Bank wants to retain its top-five ranking, but Cupic says it will not seek to do this at the expense of client quality. The bank plans to increase its branch network from 22 to about 65 by the end of 2008.
The largest domestic bank and the third largest overall is Komercijalna Banka. The government has decided that Komercijalna will not be sold to a foreign institution, although it is currently negotiating the sale of 25% of the bank to the European Bank for Reconstruction and Development for what is expected to be about 70 million. This sale will provide some extra capital for the bank, while the EBRDs involvement will also help it to restructure.
Predrag Mihajlovic, Komercijalnas CEO, points to his bank as proof that Serbian consumers have returned much of the trust that was so badly betrayed in the 1980s to domestic banks: Komercijalna is Serbias leading bank for retail foreign currency deposits, which stand at some 470 million.
Komercijalnas strategy for growth emphasizes the retail sector. The explanation is very simple, says Mihajlovic. You have risk diversification in place we have many customers and the margins are better than in corporate lending activities. We see that there are not many companies that are risk free but the Serbian citizen is a very patient customer, the default rate is less than 3% and at this moment we think its a good idea to go to retail.
This strategy also plays to Komercijalnas main strengths, which Mihajlovic says include its network of 254 branches, Serbias largest, and its status as the countrys only significant domestically owned bank after the impending sale of Vojvodjanska.
The governor of the National Bank of Serbia, Radovan Jelasic, welcomes the increased competition in banking and is seeking to increase it further. One of the ways the NBS hopes to achieve this is by pushing hard for more price transparency. Jelasic is critical of what he perceives to be foot-dragging on this issue. I personally find it very surprising that some majority foreign-owned banks supposedly do not understand what an APR type of regulation means, which they know probably much better than us from their experience in their own country, he says. I just want them to bring today whatever they have in their own country and not what they had over 10 or 15 years ago.
Jelasic is also determined that no one bank will dominate the market. In the course of the privatization, we are trying to convince the government that they should let in new players and not only already existing investors, he says. We are in a very favourable position. In Serbia, as far as assets on the balance sheet are concerned, no bank has more than 15% and we want it to remain that way.
Disputes over credit growth
A more serious bone of contention between the NBS and commercial banks is monetary policy in particular the level of the mandatory reserves requirement. This was raised to 38% in December 2005 and then again to 40% in March. This has been done to dampen the continuing surge in retail loans, which the NBS fears is fuelling inflation. Private sector loans doubled last year and we definitely cannot allow an additional doubling this year, says Jelasic. Annual inflation was 14.4% in March; the NBS target is 9.3% at the end of this year.
The commercial banks argue that these measures are ineffective and that the slowdown in credit growth will hit the economy. Monetary policy has used its resources, it cannot contribute any more to the reduction of inflation. I think that the basic reasons for inflation are predominantly public spending and slow structural reforms, says Hypo Alpe-Adria-Banks Cupic. Of course, this is not so easy to tackle. Komercijalnas Mihajlovic says that the measures mean that the central bank is directly interfering in our commercial lending activities.
Jelasic agrees that fiscal policy should contribute to bringing down inflation as well, Im the first to admit that. However, he points out that he can only urge the government; he has no fiscal levers of his own to pull so he uses the tools he has available. But he also defends himself against the banks anger. He argues that the fact that the increased reserve requirement has resulted in lower margins for the banks rather than higher interest rates is proof that the margins were too high in the first place.
A new banking law, passed by parliament last year, will be implemented this year. As well as regulating banks, the NBS has over the past two years been given regulatory powers over insurance companies, leasing companies and voluntary pension funds. One of Jelasics priorities is therefore to consolidate the central banks activities to look at financial institutions rather than banks on their own. The new law helps him do this. On the one hand it allows us to look at the banks on a consolidated basis, he says. Secondly, it provides us with much more power as far as the issue of ownership is concerned. The law requires NBS approval for individuals taking stakes of 5% in any bank; previously the figure was 15%.
I think definitely the law is the right step in the right direction, says Raiffeisens Roegl. Certain things need to be added by by-laws; this is now being prepared, so we also hope that the central bank will involve the commercial banks. We have been also involved in the draft of the banking law so, in that respect, unlike the monetary restrictions, here communication has worked. It is not perfect but it is a clear step forward in the right direction. Roegl cites provisioning rules that are not in accordance with Basle II requirements as his main concern about the law.
Komercijalnas Mihajlovic also welcomes the law overall, because we have been waiting for this law for a couple of years and it brings us closer to EU rules. However, he is critical of the same measure of NBS approval for lower thresholds of bank ownership that Jelasic praises and particularly the 60-day period allowed for making a decision on any approval, which he considers too long a time to hold up a commercial decision