Waning interest in the western Balkans from emerging Europe’s biggest banking players is creating opportunities for local groups, the chief executive of Slovenia’s NLB tells Euromoney.
Blaz Brodnjak points to NLB’s acquisition of Komercijalna Banka from the Serbian state, which was announced at the end of February, as an example.
The deal was expected to attract interest from western European groups such as Raiffeisen Bank International (RBI) and Erste. In the event, however, NLB emerged as the only serious bidder for Serbia’s fourth-largest lender.
“The Komercijalna Banka privatization was a litmus test,” says Brodnjak, who has led NLB since 2016. “The fact that, apart from ourselves, there was no credible strategic interest in the bank shows there is little appetite for investing in the region.”
He attributes this lack of enthusiasm to the size and complexity of markets such as Kosovo, Montenegro and Bosnia. Even Serbia, by far the largest market in the region, has a population of just seven million and total banking sector assets of €30 billion.
“The big players can’t afford management attention for these small, fragmented markets,” says Brodnjak. “For them it’s a distraction.”
By contrast, NLB’s network is focused solely on the western Balkans. As well as a market-leading franchise in Slovenia, the group has a long-standing presence in five countries in the region.
Some of these subsidiaries have been more successful than others. In North Macedonia, Kosovo and Bosnia and Herzegovina, NLB’s operations have been sizeable, retail-driven and consistently profitable for more than a decade.
A smaller operation in Montenegro has been beefed up recently, and is now among the country’s top three lenders.
This was completely the wrong strategic positioning and doomed the bank to fail- Blaz Brodnjak, NLB
In Serbia, however, NLB made a misstep. The group acquired Continental Banka in 2005 in an earlier privatization round but failed to capitalize on its strong franchise in northern Serbia. Instead, the lender was attached to LHB, NLB’s corporate vehicle in Frankfurt.
“This was completely the wrong strategic positioning and doomed the bank to fail,” says Brodnjak. “If it had been run as our successful subsidiaries were, with a strong banking team focusing on retail and small and medium-sized enterprises, I’m sure NLB would already be in the top three in Serbia.”
By 2013, when NLB itself was overhauled following a banking crisis in its home market, non-performing loans accounted for two-thirds of the group’s total portfolio in Serbia.
The Serbian operation has since been cleaned up. NPLs were hived off into a bad bank and many of the staff replaced. By 2015, the operation was back in the black, and over the last two years has grown its balance sheet by 20% a year.
Nevertheless, it remains a niche player, with less than 2% of the market by total assets and a focus on the agricultural sector.
Up to third
The purchase of Komercijalna will increase NLB’s share of the Serbian market to more than 12%, putting it third place behind long-time market leader Banca Intesa Beograd and Hungary’s OTP, which has made two acquisitions in the country in the last three years.
Komercijalna has itself had a troubled recent history. In late 2015, when restructuring specialist Alexander Picker was brought in to prepare the bank for privatization, large legacy bad debts accounted for more than a quarter of its corporate portfolio, while coverage was very low at under 60%.
A drastic increase in provisioning resulted in two years of heavy losses. Since 2017, however, Komercijalna has been back in the black, and in the last three years has posted returns on equity of around 11%.
Capitalization is also strong, with a local tier-1 ratio of more than 25%.
The lender has Serbia’s largest branch network, with more than 200 outlets.
Albania is a complex market – but none of our markets are easy- Blaz Brodnjak
Brodnjak sees more potential for profitability in exploiting its underpenetrated retail customer base, however, than in cutting costs.
“Komercijalna Banka has access to around 800,000 retail clients in Serbia, with an above-average proportion of younger customers,” he says. “It has a well-known brand, a solid reputation and a very strong savings franchise, but in terms of lending it has not fully utilized its potential.”
At the end of June 2019, the bank’s loan-to-deposit ratio stood at just 56.0%.
NLB has agreed to pay €387 million for an 83.2% stake in Komercijalna Banka, which the group plans to merge with its existing Serbian operations. The deal is expected to close in the fourth quarter of this year.
It marks the first acquisition by NLB since its bailout by the Slovenian government in 2013. Following a radical restructuring, the group’s long-awaited privatization was finally accomplished in November 2018 via an IPO in London and Ljubljana.
Two months later, restrictions on foreign acquisitions imposed by the European Commission at the time of the bailout were lifted, allowing NLB to leverage its profitability and capital base – its common equity tier-1 ratio stood at 15.8% at the end of December – to bulk up its Balkan network.
Longer term, Brodnjak hopes to complete the group’s regional coverage by adding operations in Albania and Croatia.
Expansion into Croatia will have to wait for the resolution of a long-standing dispute between the country’s government and Slovenia over NLB dating back to the break-up of Yugoslavia, but a move into Albania could happen within a couple of years, according to Brodnjak.
The Albanian market has a reputation for opacity and has proved challenging for Western banks. RBI was number one in the country, at one point, but deleveraged sharply after the financial crisis, while Societe Generale sold its Albanian operation in 2018 as part of a wider exit from southeastern Europe.
Brodnjak is confident, however, that NLB can avoid local pitfalls.
“Albania is a complex market – but none of our markets are easy,” he says.
“We already work with Albanian populations in Kosovo and North Macedonia, and we have experience of dealing with local market players through our clients’ cross-border business. Albania is the logical next step for us.”
In this respect, Brodnjak adds, NLB’s tight regional focus gives it an advantage over banking groups from outside SEE.
“We know this region well,” he says. “We speak the languages, we know the mentality, we have shared a common path.
“For a large international group, the returns in North Macedonia or even Serbia are a second-decimal contribution. For us, they are meaningful and accretive to value. They are our bread and butter. This means we can provide a different level of support in these markets.”