Serbian banks: the end is not near

Serbia’s
banking sector could face plenty of hardships in the coming year, from
rising loan defaults to Greek and Italian trade fallout. Yet severe
deleveraging by mother banks in the eurozone – the grim scenario
contemplated repeatedly in the Balkans since 2009 – is unlikely to come
to pass, local bankers say.

“The banking sector here is very sound, very liquid,” said Aleksandra
Vukosavljevic, head of research at Raiffeisen, an Austrian bank in
Serbia. “All banks, locally, are very sound and well capitalised.”

And if any foreign bank were to pull out because of problems in its
home market, others would be ready to step in “within days” to take over
its business, she added.

Vukosavljevic, like other Serbian banking experts, appeared to
dismiss the fears raised by London-based analysts at Nomura, who last
week mentioned Serbia among non-euro countries most vulnerable to bank
deleveraging.

While big markets like Poland, Russia and Turkey would be fine,
smaller markets – where one’s bank’s fortunes can make a noticeable
difference – could be seriously shaken by eurozone turbulence. Nomura’s
report on November 4 pointed to:

a more worrying effect on South Eastern Emerging Europe
(particularly Bulgaria, Serbia and Romania) as well as Hungary given
both the sizes of assets involved and the more stressed market dynamic.

According to Nomura’s deleveraging scenario, Serbia’s risks look
similar in many ways to Hungary’s. In fact (as the table from Nomura
below shows), Serbia stands to lose more, especially in per capita
terms, if deleveraging actually happens. But it is more profitable and
attractive than Hungary as a banking market for now.

Most of the ex-Yugoslav state’s problems pre-date the global crisis,
which dashed hopes for double-digit growth for years to come. While
countries like Hungary went through a boom in the 1990s, Serbia was
decaying amid wars and economic sanctions.

Now, the Nomura report suggests, Serbia could lose €700m in bank
assets to deleveraging, as EU-based banks pull back to shore-up their
domestic operations. The Balkan country of around 7.5m people is highly
exposed to both Greek and Italian economic fall-out.

Greek banks, which make up 15-20 per cent of the sector in Serbia in
terms of assets, loans or deposits, face increasing capital constraints
from headquarters in Athens and cannot withdraw funds as easily from
other banks. Perception problems have also become apparent locally.

During Savings Week, the first week of November, when the industry
traditionally tries to drum up more retail business, Greek banks
witnessed withdrawals of deposits, which could in turn cause liquidity
problems, Vukosavljevic said.

But those banks, like others in Serbia, are well provisioned. “Even
if some Greek bank’s head offices go bust, nobody here is frightened
about the local assets, because there are guarantees on deposits,” she
added.

Debt levels in Serbia remain low in comparison to more developed
markets, including neighbouring Croatia and Hungary. Public debt,
although growing too fast to be sustainable in the long run, is still
only around 45 per cent of gross domestic product.

Agreements with the International Monetary Fund (IMF) have kept up
confidence in the economy and the banking system. Serbia this year
signed a precautionary loan deal with the IMF, following an earlier
two-year standby agreement from which the government withdrew under half
of the available money.

Improved sovereign ratings – in contrast to worsening ratings for most countries – and the success of a Serbian euro-bond issue point to favourable investor sentiment, despite obvious fiscal problems and high (at least in European terms) political instability.

The latest gloomy growth forecasts from the Eurozone are not going to help.

Over 60 per cent of Serbia’s exports are to the EU.

Even so, Dejan Soskic, central bank governor, suggests that banks have become over-cautious about lending.

“The banking system now is liquid, in local currency and in foreign currency,” Soskic said. “No one is stopping banks from using their liquidity to extend lines of credit to corporates or citizens of Serbia.”

“What we need is to unleash this liquidity to go to households and, much more importantly, to the corporate sector,” Soskic said.