As in all other activities, the corona virus pandemic was a key determinant of the banking sector’s operations in the past year. This unusual event, which caused the global recession, affected the operations of banks in two ways: directly, by curbing the demand for banking products and services, and indirectly, causing a two-month moratorium on the repayment of credit obligations.
The previous world recession hardly remained in the fond memories of most banking clients, but also of the bankers themselves, who years later struggled with the ballast of bad placements. The beginning of the global financial crisis in 2008 found the domestic banking sector in considerable expansion, with double-digit growth rates of placements accompanied by a high price of deposits, to the satisfaction of the depositors there. This “honeymoon” of transitional banking did not last long. The collapse of the American mortgage market quickly spread to the real sector, so the question was not whether, but how deep a recession each national economy will suffer.
The decline in economic activity was accompanied by the collapse of the dinar exchange rate, which in a country with absolute indexation of loans meant additional difficulties in their repayment. The poor clinical picture of the domestic banking sector was further marred by its ownership structure, which included a large number of state-owned and parastatal banks that did not boast too high a level of corporate governance.
The years during which banks built provisions for bad placements were replaced by massive write-offs of receivables, while one by one state-owned banks stood out for their candidacy for additional capital. For many of them, it was too late, and the entire banking system was well shaken. At the height of the crisis, problem loans accounted for more than a fifth of total placements, while the banking sector, for the first time since the beginning of the transition, recorded a negative end result in 2013.
Increased provisions “ate” earnings
The hint of a new recession in the domestic economy, caused by the consequences of the pandemic, returned the old fears to the participants in the market, on both sides of the bank counter. However, the current outcome indicates that these fears were not fully justified, both because of the nature of the economic contraction, but even more because of the monetary and fiscal stimuli that all market participants felt, either directly or indirectly.
Although at the beginning of the crisis, banks were faced with the dictates of a moratorium on loan repayment that deprived them of inflows on this basis throughout the quarter, other measures during the pandemic worked in their favor. Government fiscal stimulus, which included state-guaranteed loans, was serviced by banks, while other assistance programs directly assisted local businesses, many of which are users of banking services.
While the fiscal stimulus of local economic policy makers prevented the rapid bankruptcy of many banking clients, the monetary policy of the world’s central banks also effectively influenced the painless outcome of the crisis. Zero interest rates and monetary interventions of the Fed and the ECB, above all, brought down interest rates linearly, even on the domestic market, which meant a low price of deposits, ie cheaper sources of financing. Also, this long-term investment environment of cheap money enabled the local central bank to run an almost fixed dinar exchange rate, which did not falter at any moment during the state of emergency. These two factors, the weakening of the dinar exchange rate and high interest rates on deposits, posed a considerable burden to the banking sector in an attempt to emerge from the previous crisis as soon as possible, while now they were on the side of its stability.
Despite the outcome of the crisis much more favorable than expected, the banking sector suffered solid blows in last year’s recession wave, primarily in terms of profitability. The profit of the banking sector has fallen to its lowest level since 2016, primarily due to stricter provisions for possible non-performing loans. The basic business of banks remained stable – net interest income increased slightly, while net income from fees and commissions was lower by 3.5 percent, primarily due to the period of emergency, when banks, in addition to online services, did not actually perform normal activities.
Expenses based on the reduction of impairment of financial assets jumped 3.7 times, to 26.4 billion dinars, and this item of increased provisions is a key factor in the reduced profitability of banks. Total profit reached 41.3 billion dinars, a decrease of 35.3 percent, while the return on capital fell to 5.7 percent from more than nine percent in the pre-pandemic year.
Four banks hold more than half of the market
The pandemic did not prevent the continuation of the consolidation of the domestic banking market, which has entered its final phase. After several unsuccessful attempts, the state managed to privatize Komercijalna Banka, staying with only one player on the market – the Postal Savings Bank. It is not difficult to notice that the ownership structure of the domestic banking sector, largely devoid of the tentacles of the state, has contributed to a more measured approach and amortization of the crisis in the banking sector.
Also, the consolidation of the market by the Hungarian OTP continued, so at the end of last year, the four leading banks in the market, Intesa, OTP, NLB and UniCredit together held more than half of the market. It is difficult to say that there will be no significant takeovers in the near future, but the reservoir for the purchase of major banks on the market is quite empty, so any subsequent concentration of larger players would be a big surprise.
When it comes to individual participants, after a long time, Intesa is not the bank with the highest absolute profit, given that the leading position was occupied by AIK Bank, primarily due to the fact that it did not have increased provisions for risky placements.
All other leading banks recorded a decline in profitability for this reason, while the decrease in the final result is most drastic for Komercijalna Banka, which can be interpreted as the year of privatization in which “makeup” balance sheet is more than usual activity.
While the effects of the pandemic are gradually receding into the background, the key issue for the banking sector has remained the revival of lending activity, without which there can be no significant jump in the sector’s profitability. To achieve this goal, even greater market concentration will not be enough, but above all a more favorable economic environment in which domestic companies will not hesitate to finance growth from other sources.
