The luck of the bankers, however, is spoiled by the intensive growth of interest rates and the growing recessionary pressures. They could very easily bring high provisions and credit losses that are currently not visible in the balance sheets of domestic banks.
Banks in Serbia finished the first half of the year with results that their shareholders and managers could only wish for. The constant growth of the reference rate encouraged a strong increase in net interest income, the trend of exceptionally good income from fees and commissions from the second half of last year continued, while the end result brought a double-digit rate of return on capital for the first time in the post-pandemic period.
In the period January-June of the current year, banks recorded a total net interest income of almost 70 billion dinars, which represents an annual increase of 12.9 percent. It is already certain that last year’s result from this main business segment will be significantly exceeded in 2022 as well, given that the central bank continued to increase the reference rate with even greater intensity in the second half of the year. Net fee and commission income continues to contribute significantly to bank profits, despite public outcry over the many unreasonable fees that have become part of banking policy in times of low profitability. Net income from fees and commissions reached RSD 33.3 billion in the first half of the year and grew at a rate of 59.3 percent on an annual basis.
Profitability, on the other hand, was negatively affected by the movement of the euro exchange rate, while there were no significant changes in the field of provisions for credit losses or the release of reserves compared to last year. The net profit of the banking sector in the period January-June reached 36.2 billion dinars and was 38.6 percent higher compared to the same period last year. The return on capital, which is a key measure of shareholder satisfaction, has exceeded the level of 10 percent after a long time, after achieving 7.4 percent in the past year and 6.5 percent in the year of the pandemic.
Loans are growing, but so is their price
When looking at the regularity of loan repayments, at the end of June of the current year, banks were in the best situation in this regard since the last global financial crisis. According to the data of the Association of Banks, the total delay in the repayment of bank loans was below three percent at the end of June, while this indicator for the population was traditionally even better and amounted to 2.3 percent. According to data from the central bank, the share of non-performing loans at the end of June fell to 3.3 percent, which is the lowest level since the fight to reduce accumulated bad loans began with the outbreak of the global financial crisis.
The growth of the credit activity of the banking sector at the end of June was 13.1 percent and to a greater extent was the result of approved loans to the economy than to the population. Loans to the economy recorded a growth rate of 15.8 percent and at the end of June reached the amount of 1.6 thousand billion dinars, which still accounts for less than a quarter of GDP. Loans to households increased by 9.8 percent in June, and the nominal balance of these loans at the end of the quarter amounted to RSD 1,425 billion, or 21.4 percent of GDP.
Along with the decision of the NBS to gradually tighten the monetary policy, the price of loans started to rise, but in the first half of the year the rates were still quite acceptable. Interest rates on newly approved loans for the economy and the population were on average 3.8 and 9.1 percent, respectively, that is, when it comes to loans indexed in euros, they were 2.6 and 3.6 percent, respectively.
In the July NBS survey, bankers confirmed that they continue to tighten the criteria for approving loans to the economy, primarily for loans indexed in euros, especially for large companies. This was influenced by the higher costs of financing sources, as well as the uncertainty regarding the general economic situation, which was further aggravated in the following quarter. In the population segment, the tightening mostly related to dinar cash loans and loans for refinancing, and housing loans with a foreign currency clause. Banks expect that in the coming period there will be a decline in demand, primarily for housing and dinar cash loans, due to less purchases of real estate and durable consumer goods, as well as the assessment that citizens will use part of the previously accumulated funds in savings accounts for current consumption and investments.
Pending market consolidation
The wave of mergers and acquisitions in the domestic banking sector seems to have been temporarily stopped, although two more banks (Raiffeisen and AIK banka) have not formally implemented the consolidation of the subsidiary banks they took over. The first ten banks by the amount of assets occupy almost 93 percent of the market, so it is obvious that some important movements in the market almost cannot be bypassed by these market participants.
Bank Intesa remained the largest bank with a market share of less than 15 percent, while four other banks (OTP banka, Raiffeisen, NLB Komercijalna banka and Unicredit banka) had a market share of more than ten percent at the end of June. Among these strongest players in the domestic banking sector, foreign capital dominates, while representatives of domestic capital are AIK banka, with minority capital Eurobank Direktna, and the state-owned Poštanska štedionica.
Of the remaining ten banks on the market, none has a market share greater than two percent, and it is possible that among them in the near future there will be candidates for merging into one of the larger banks. This is certainly not true for market participants with a specific market niche, such as Bank of China and Mirabank, and probably also for some banks in narrowly specialized businesses such as Mobi Bank and 3 BANK.
When it comes to banks’ profitability, most banks performed positively in the first half of the year, with the exception of Mirabank and Mobi Bank, which recorded negative results for a longer period. The largest profit in absolute terms was achieved by OTP banka, which, by taking over Vojvođanska and Societe Generale banks, certainly brought about the biggest changes in the domestic market.
With its aggressive performance, the bank with Hungarian capital achieved a profit of 7.7 billion dinars in the first half of the year, thus displacing Bank Intesa, which had been indisputable for many years, from the first place, which achieved a final result of 6.2 billion dinars. In third place, if Credit Agricole’s profit were attributed to it, is Raiffeisen banka with a final result of 5.4 billion dinars. Unicredit banka, which, apart from Intesa, was the only one among the leading banks to stay away from takeovers of other banks over the past years, recorded a profit of 4.2 billion dinars, while NLB Komercijalna banka, which completed the takeover last spring, made a profit of 3.4 billion dinars. billion dinars.
It is quite certain that banks will make solid profits in the second half of the year as well, because it is difficult to expect that in this short period, even if the macroeconomic situation worsens, banks will promptly accumulate larger provisions for bad loans. Experiences from past crises show that domestic banks are much slower to approach provisioning in the face of upcoming crises than their counterparts in Western markets, which are mostly listed on stock exchanges. It remains to be seen how painful the slowdown in economic activity will be for the banking sector, and as in past unstable times, the critical points for the business success of the banking sector will be the state of the labor market and the issue of the exchange rate, which has been working in favor of debtors for a long time, Kamatica writes.