The banking system in the Republic of Serbia (BB-/Stable/B) is considered to be riskier than its neighboring countries, the Republic of Bulgaria (BBB+/Stable/A-2) and the Republic of Croatia (foreign currency, BBB/Stable/A-3; local currency, BBB+/Stable/A-2), due to political and macroeconomic uncertainties, Standard & Poor’s Ratings Services noted in a report published entitled, “Bank Industry Risk Analysis: Serbian Banks Buoyed By Foreign Support, But Economic Risks Remain”.
“The Serbian banking sector has widely benefited from the consolidation process and privatizations of the major banks, which significantly improved creditworthiness of the banking sector. Nevertheless, political uncertainties stemming from a complex near-term agenda pose risk to the economic policymaking in general, more than is the case with other peers in the Balkan region,” said Standard & Poor’s credit analyst Francesca Sacchi.
Supportive of Serbia’s banking system are its good macroeconomic prospects, as reflected by strong GDP growth, buoyant foreign investment inflows, and declining inflation. After a relatively quick turnaround of privatizations since 2004, the Serbian banking system is now mostly foreign owned, as foreign shareholders account for 79% of total banking assets. Going forward, comprehensive economic and political reforms preceding EU accession (which is expected by 2015), should further improve regulatory and supervisory framework, facilitating the modernization of the banking sector and reducing the gap with other Central and Eastern European countries.
The Serbian banking system is lagging behind the EU average, as the level of financial intermediation remains low, with banking assets estimated at 30% of GDP in 2006. Moreover, the banking sector is moderately concentrated, with the top 10 banks controlling about 68% of the system’s assets. The Serbian financial system relies almost completely on banks, as the capital market is underdeveloped and nonsophisticated, concentrating around two stock exchange markets in the capital city of Belgrade.
“In that context, foreign presence will contribute to the modernization of the banking system and strengthen the creditworthiness and the level of sophistication through a transfer of know-how, development of products and services, and financial support,” added Ms. Sacchi.
Serbian banks have become more profitable and efficient as lending opportunities have been robust. The consolidation process, coupled with the growing presence of foreign-owned banks, contributed to improvement in the efficiency of the banking system through expansion and diversification of lending and deposits activities, and the rationalization of operational costs. We expect this trend to continue in the medium term due to both good revenues generation and a gradual achievement of consolidation-related synergies.
Rapid loan growth, in particular retail loans and euro-denominated loans, is a significant risk, however. The robust credit growth is likely to continue in the medium term owing to improved macroeconomic prospects, relatively diversified economy, and robust domestic demand underpinned by rising household income and positive wealth dynamics. The level of euro usage is likely to remain high, given Serbia’s aspirations to join the EU, proximity of EU markets, and strong links with EU parent banks.
The Serbian banking sector’s asset quality is weaker than its peers’, which remains a major concern. This is due to inadequate procedures at the time of credit approval, lack of adequate security or collateral, inefficiency of local courts, and rising households’ debt to disposable income, but more importantly due to the political and economic risks embedded in the Serbian economy. Robust loan growth in an untested economic downturn represents a risk for banks, although mitigated by financial support from foreign shareholders.
