In the first nine months of 2023, Serbian banks recorded a profit that was 865 million euros higher compared to the entire year of 2022. This news was reported by the Danas website.
After several years of record-low interest rates globally and in Serbia, which resulted in low profits for banks, the past year was exceptionally lucrative. Banks managed to earn considerably, prompting some governments worldwide to consider introducing taxes on excess profits earned by banks in various forms.
The National Bank of Serbia (NBS) and the government, however, did not opt for such measures. Still, the central bank did restrict the interest rates on housing loans indexed in euros, which, according to the NBS assessment, could cost around 10% of the estimated profit of the banking sector.
According to economist Đorđe Đukić, the rise in bank profits last year was due to the increase in loan interest rates, substantially surpassing the growth of savings rates.
“The source of bank profits lies in the fact that savings interest rates lag behind inflation and the rate of growth, while the active loan interest rates that banks charge are increasing much faster. In other words, banking margins, the difference between passive and active interest rates, are growing. Regulators in some countries have responded with a tax on excess profits,” stated Đukić.
He added that this year could also be promising for bankers if the policy of high interest rates by the European Central Bank (ECB) continues.
“If we see a new wave of interest rate hikes starting in March, bank profits could be even higher. Banks in Central and Eastern Europe achieve a return on capital higher than 12%, which is unimaginable in the old EU member states. Many groups here aim for a 12% return on capital as their strategic goal in this region,” Đukić noted.
Đukić emphasized that savers were, in fact, indirectly taxed by the very slow increase in savings interest rates.
“Those with substantial savings are shifting towards real estate or gold, but both are unproductive investments. In Serbia, this is a kind of blackmail of savers because they have nowhere to invest. Although, I’m not concerned about the wealthiest individuals; there are many investment funds globally to which they can allocate their funds. However, small and medium savers are suffering as their substance is gradually eroded over the years. Savings interest rates are almost equal to those in the EU, even though Serbia is nowhere near the EU,” Đukić assessed.
He also pointed out the fear effect, due to which citizens keep their money in banks on a sight deposit basis. This allows them immediate access to their funds in case of an emergency, although they receive hardly any return on them. According to Đukić, this setup enables even more significant profits for banks by reducing their interest expenses. The cost of most loans in Serbia is, in fact, influenced by the ECB policy and the height of its interest rate. Most long-term loans are tied to the Euribor, which is affected by the ECB’s policy.
For instance, the Euribor started at 2.7% early last year and rose to 3.9% by the year’s end. From mid-September to the end of the year, it remained above four percent.
Interest Rates and Inflation
The height of the interest rate is directly correlated to the inflation rate. The higher the inflation rate, the more the central bank must increase and maintain the interest rate at that elevated level.
According to the ECB’s projections from their last meeting in December last year, the average inflation in 2023 is projected to be at 5.4%, expected to decrease to 2.7% in 2024, further dropping to 2.1% in 2025, and reducing to 1.9% in 2026. It’s important to note that the ECB’s target is a two percent inflation rate. Even though inflation in Europe is declining, the ECB Governing Council still assessed it as “too high for too long.”
Vladimir Vasić, former Secretary-General of the Association of Serbian Banks, mentioned that inflation in Serbia could be around five percent next year, dropping to around 2.6-2.7% by 2025.
“In the EU, it is expected that inflation might drop below two percent only in 2026. Central bank measures depend on inflation levels. Both the ECB and the NBS (National Bank of Serbia) have skipped raising interest rates in their latest meetings, but they haven’t decreased them either. They are waiting to see how their existing monetary policies will impact inflation,” Vasić stated.
He pointed out that the Euribor is slightly below four percent, and both the three-month and six-month Euribor are very similar, indicating that bankers do not anticipate significant decreases in interest rates for now.
“I expect some easing in interest rates only by 2025,” Vasić concluded.
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