Serbia’s banking sector remained one of the most profitable in the region during the first quarter of 2026, supported by interest income, loan expansion and low credit-loss charges. The profitability cycle is beginning to normalise, however, while faster lending is gradually reducing capital and liquidity ratios.
Return on equity stood at 18.1%, down from 20.6% in 2025 and 20.3% in 2024. Return on assets declined from 2.8% to 2.5%. These remain strong returns, particularly for a market in which NPLs are only 2.1% of gross loans.
Net interest income generated approximately 61% of gross banking income, compared with 59.6% in 2025. The sector remains heavily dependent on the interest margin created by the difference between loan and deposit rates.
That model delivered exceptional earnings while central-bank and market rates were elevated. It becomes less certain as monetary conditions ease. Lower euro and dinar interest rates should improve borrower affordability and stimulate loan demand, but they may compress spreads as loan portfolios reprice.
Operating costs are already rising relative to income. Non-interest expenses reached 55.1% of gross income, up from 52.8% in 2025, while employee expenditure represented 32.1% of non-interest costs. Digitalisation has not removed wage, technology, cybersecurity and compliance pressure.
Capital remains substantial, but its ratios are declining. Regulatory capital fell to 19.5% of risk-weighted assets, while Tier 1 capital declined to 18%. Total regulatory capital represented 11.5% of balance-sheet assets.
This is consistent with rapid balance-sheet expansion. Banks can remain profitable and strongly capitalised while reporting declining capital ratios when loans grow faster than retained earnings.
The NBS’s positive countercyclical capital buffer reflects this phase of the cycle. The measure is designed to ensure that banks build additional loss-absorbing capacity during periods of accelerating credit rather than waiting for asset-quality deterioration to appear.
Funding remains predominantly deposit-based. Deposits equalled 120.3% of loans, meaning the banking system continued to hold a substantial funding surplus. The ratio nevertheless declined from 136.3% in 2024 and 122.4% at the end of 2025.
Liquidity followed the same trajectory. Liquid assets represented 35.3% of total assets, compared with 40.8% in 2024and 36.1% in 2025. The narrower measure fell to 28.5%.
Liquid assets covered 44.4% of short-term liabilities, while the narrower liquidity category covered 35.8%. The liquidity coverage ratio remained around twice the minimum requirement, so the decline reflects balance-sheet deployment rather than stress.
Asset quality provides banks with significant room to expand. NPLs remained at 2.1%, and total allowances exceeded the gross impaired-loan stock. The risk lies in the performance of newly originated lending rather than the legacy portfolio.
Corporate concentration deserves attention. Mining and manufacturing represented 25.7% of corporate claims, trade 22.8%, real estate 13.2%, transport 11.5%, construction 10.9%, and electricity and energy 10.1%.
Real estate and construction together accounted for more than 24% of corporate exposure. Adding housing loans creates an even broader connection between bank balance sheets and property values.
Currency risk remains largely outside banks’ direct positions. The net open foreign-exchange position was only 1.6% of regulatory capital, but 56.1% of loans and 56.6% of liabilities were denominated in or indexed to foreign currencies. Banks are matched, while borrowers carry much of the economic exposure.
The profitability outlook remains positive, but the quality of earnings will change. Margin expansion will contribute less, placing greater importance on credit growth, fees, cost control and digital services. Banks that expand fastest will also need to retain enough earnings to protect capital and liquidity from gradual dilution.
