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Banking in South-Eastern Europe
On the move
September 2005
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Published by: Bank Austria Creditanstalt AG
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The authors of this issue: Stefan Bruckbauer, Sándor Gardó, Lisa Perrin
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02
Banking in SEE
Contents
Editorial ................................................................................................................................................................................................................04
Banking in SEE – Bridging the gap .....................................................................................................................................................................06
Albania – Coming to terms with the past ..........................................................................................................................................................14
Bosnia and Herzegovina – Putting two and two together...............................................................................................................................20
Bulgaria – A race to the top ................................................................................................................................................................................27
Croatia – Taming the untamable? ......................................................................................................................................................................34
FYR Macedonia – At a crossroads .......................................................................................................................................................................41
Romania – Knockin’ on EU’s door .......................................................................................................................................................................47
Serbia and Montenegro – Back to the future ....................................................................................................................................................55
Selected Bibliography..........................................................................................................................................................................................70
Banking in SEE
03
Editorial
Marianne Kager
Prosperous times ahead
Financial markets are virtually the heart of modern
Although, for example, Serbia has made substantial progress
market economies. They perform an intermediary function,
in restructuring its banking sector in recent years, bank pri-
ensuring that capital is productively used. In economic theory
vatisation is progressing only slowly.
one would say the task of financial markets is to identify the
A feature common to all countries in the region is that
best opportunities for the efficient employment of capital.
both loans and deposits have in the last five years grown at
A lack of market participants’ confidence in financial markets’
double-digit rates. While the nominal growth rates also
stability will, however, have a negative impact on liquidity,
continue to reflect varying inflation rates across the region,
thereby impeding financial institutions’ ability to act as inter-
the financial deepening observed recently provides a clear
mediaries.
indication of the dynamic growth experienced by the bank-
A common characteristic of the countries of South-Eastern
ing sector. For example, loans to the private sector in
Europe (SEE) is that market participants’ confidence in financial
Croatia have jumped from 36 % of GDP in 2000 to 58 % of
markets’ stability was in most cases obtained later and with
GDP in 2004, and from 11 % to 35 % in Bulgaria.
greater difficulty than in other CEE countries which in the
meantime have become EU Member States. This circumstance
Overall, the banking markets in SEE can today be char-
cannot be viewed independently of the SEE countries’ econom-
acterised as follows:
ic stabilisation, which in general set in later than in the New
◆ Banking sector restructuring (including balance sheet
Member States (NMS). Just as progress in economic transition
restructuring, debt-equity swaps, bank recapitalisation) and
has varied considerably among the countries in SEE, so has the
privatisation are by and large completed. Significant state
stability and development of financial sectors in the region.
involvement remains only in Romania and Serbia.
Croatia, as the region’s wealthiest country, has by far the high-
◆ As privatisation and restructuring progressed, foreign
est level of financial intermediation, followed by Bulgaria.
ownership increased significantly in most of the SEE coun-
Although Romania still has a relatively low degree of financial
tries, reaching over 90 % in Croatia. This is, however, not
intermediation, the country (after Croatia and Bulgaria) has
a homogeneous development.
made much more progress in terms of economic transition and
◆ The legal and regulatory framework has to a significant
banking reform than other countries in the western Balkans.
extent been aligned with international and EU standards,
The banking markets of these three countries have in the
with increased emphasis being put on enforcement.
last few years without doubt been among the most prosper-
◆ Banking markets are still highly concentrated, with large
ous banking markets in SEE. In all three countries the late
(formerly state-owned) banks taking the lead, while a consid-
1990s saw the commencement of the privatisation process
erable number of small private banks with marginal market
and the sale of banks or parts thereof to foreign investors.
share are still operating throughout the region. Consequently,
Today, over 80 % of the banking sector in Bulgaria and Croatia
the banking markets are overbanked, with the branch net-
is controlled by foreign banks. Some 60 % of Romania’s bank-
work having significant geographic concentration.
ing sector is currently foreign-owned, but the completion of
◆ Financial intermediation is still at a low level in most of
bank privatisation in 2006 is expected to further strengthen
the countries, but has been growing rapidly in recent years.
foreign banks’ market position. In the other countries of the
Lending activity gained momentum in the last couple of
region structural reform of the banking sector is far from over.
years, with banks primarily focusing on the retail segment.
04
Banking in SEE
Editorial
◆ In most of the SEE countries the central banks have already
Macedonia to EUR 30 bn in Croatia) the existence of some
imposed restrictive monetary measures in an effort to curb
16 to 43 commercial banks per country clearly indicates over-
the pace of loan growth, with an eye on consumer price and
banked markets.
current account developments, as well as external indebted-
◆ Even if more complex banking products are offered in the
ness.
future, straightforward lending and deposit business will con-
◆ The level of non-performing loans is gradually decreasing
tinue to dominate banking activity in the next few years.
(except Serbia) due to restructuring measures and improving
More complex banking and capital market products will only
risk management tools. As a result of rapid loan expansion
slowly gain a toehold. Leasing, private pension insurance
over recent years, banks will need to exercise more caution,
products and bonds will supplement the activities and slowly
however, in order to prevent a deterioration in loan portfolio
gain in importance, but their role will remain limited.
quality.
◆ The banks’ earnings outlook for the next ten years is
◆ The banking sectors are adequately capitalised, as indicated
favourable, given high growth rates and significant rational-
by high capital adequacy, which, however, has been decreas-
isation potential. Low market penetration of banking services,
ing in recent years due to stepped-up lending activity.
characterised by the low degree of monetarisation (total
assets in % of GDP) – which except for Croatia (109 %)
For these reasons we expect the following developments
currently lies between 38 % and 73 % of GDP and is thus
in banking markets in SEE:
only a fraction of that of developed economies (euro area:
◆ Strong growth will continue to characterise the SEE bank-
206 % of GDP) – provides a favourable basis for growth.
ing sectors during the next few years. Although to ensure
◆ Margins will decline during the next few years as increas-
banking market stability, most central banks in the region
ing price stability lowers money market interest rates and
have already started to counteract the recent credit booms,
competition between banks intensifies. This development
continued double-digit growth rates on both the asset and
will, however, be offset by efficiency gains and still consider-
liability side are expected.
able rationalisation potential, which will have a positive im-
◆ The banking sectors – except for the most developed in
pact on both profitability and banking system stability.
Bulgaria and Croatia – will continue to undergo considerable
consolidation, including:
These factors combined promise a favourable banking
◆ rapid acceleration of the privatisation process, particularly
market development in SEE, with the potential to outperform
in Romania and Serbia and Montenegro.
the new EU member states.
◆ assumption of a leading role in the privatisation process by
foreign banks.
◆ exit of smaller, non-niche players. There are still many small
banks active in the sector whose respective market share is by
and large less than 1 % and which only service a regional
market. The entry of foreign banks with a retail banking expansion strategy will increasingly have a crowding-out effect
on these small banks. Consequently, given the absolute size
of these markets (total assets ranging from EUR 2.4 bn in
Chief Economist, Bank Austria Creditanstalt
Banking in SEE
05
Banking in SEE – Bridging the gap
Stefan Bruckbauer
Banking in SEE
Bridging the gap
South-Eastern Europe’s banking sector is charac-
GDP is expected to reach EUR 165 bn this year and thus
terised by a relatively high degree of heterogeneity.
about one-third of GDP of the NMS (2005 GDP: EUR 524 bn).
Countries that privatised their banks at a fairly early
This means that the degree of monetarisation, expressed in
stage (particularly if the buyers were foreign investors)
terms of the banks’ total assets as a percentage of GDP, is
and thus swiftly solved the problem of bad loans, currently boast a higher level of financial intermediation
Financial intermediation and GDP per capita
and have recorded stronger growth in recent years. In
particular retail lending has expanded in the region at
and deposits) is expected to amount to around EUR 80 bn,
half of which will be contracted in Romania, 17 % in
Bulgaria, and 14 % in Croatia.
At total assets close to EUR 100 bn in 2005, the banking
sector in South-Eastern Europe (SEE)1 is about one-quarter
the size of the New EU Member States (NMS), which in 2005
will report total assets of around EUR 420 bn. The region’s
Total assets (in % of GDP, 2004)
a rapid pace. In the coming years, new business (loans
120
Latvia
100
Croatia
Estonia
Slovakia
80
BiH
60
Bulgaria
Slovenia
Poland
Macedonia
Albania
Romania
Serbia
40
Czech Rep.
Hungary
Lithuania
20
0
0
2,000
6,000
4,000
8,000
10,000
GDP per capita (in EUR, 2004)
1) For the purposes of this analysis, SEE comprises Albania, Bosnia and Herzegovina, Bulgaria, Croatia, FYR Macedonia, Romania and Serbia (excluding
Montenegro and Kosovo).
12,000
14,000
y = 0.0048x + 49.108, R2 = 0.3803
Source: Bank Austria Creditanstalt Economics Department
Table 1: Overview of the SEE banking market
2004
Number
of
banks
Albania
Market share 1 Total assets
Foreign
in %
banks 2
Top 5
of GDP
Total loans
Loans to
in %
Growth households
of GDP 4 rate3 p. a., per capita
2000 – 2004
in EUR
Total deposits
in % of
Growth
GDP rate 3 p. a.,
2000 – 2004
Household
deposits
per capita
in EUR
16
89
77
53.5
8.9
31.5
53
46.8
12.5
774
Bosnia and Herzegovina 33
66
61
72.6
45.2
18.2
352
41.3
31.4
352
Bulgaria
35
79
55
65.6
35.5
45.3
287
39.4
23.7
591
Croatia
37
88
74
108.9
61.7
21.3
1,979
60.3
18.2
2,662
Macedonia
21
48
76
56.7
17.3
15.5
112
30.0
18.3
382
Romania
39
59
60
38.3
18.4
42.5
135
24.1
38.0
415
43
37
47
38.8
20.3
8.8
111
19.9
49.2
221
224
72
63
58.2
30.3
28.9
323
34.6
31.8
622
Serbia
SEE
NMS
euro area
205
62
58
78.2
34.0
10.4
823
45.0
3.6
1,777
2,287
24
54
206.3
102.1
4.5
12,398
73.0
6.0
13,556
Source: National banks, Bank Austria Creditanstalt Economics Department / 1) In % of total assets / 2) Pro rata basis / 3) Per annum in local currency /
4) Albania: excluding loans to the state
06
Banking in SEE
Banking in SEE – Bridging the gap
lower in SEE than in the NMS. After 58 % in 2004, SEE’s
The relationship between a country’s level of income in
total assets to GDP should come in at around 60 % in 2005,
terms of per-capita GDP and the level of intermediation is
which compares with 78 % for the NMS in 2004 and an esti-
even more significant in SEE than in the NMS.
As in the NMS, the level of intermediation is highest in the
mated 80 % for this year.
Overall, SEE is served by 224 banks and thus, despite the
wealthiest country (Croatia) in SEE (per capita GDP of
lower volume of banking transactions and the smaller num-
EUR 6,200). With per capita GDP ranging between EUR 1,700
ber of inhabitants, by more banks than the NMS (205
in Bosnia and Herzegovina and EUR 2,700 in Romania, the
banks). This suggests that bank consolidation has not yet
level of income in the other countries in the region is, however,
progressed as far as in the NMS. At present, countries such
significantly below that of the NMS (average: EUR 6,300). In-
as Croatia, Bulgaria and Serbia have as many or even more
come, therefore, cannot be used as a valid explanation of dif-
banks than Hungary or the Czech Republic, each with 35 ac-
ferences in intermediation between these countries. Instead,
tive banks. Foreign banks account for about 72 % of the SEE
different bank product penetration rates can be traced to a
market and thus hold a share similar to that in the NMS.
country’s economic development in recent years, the degree of
Only in Serbia and Macedonia is foreign banks’ market share
financial stabilisation and finally, the development of the bank-
below 50 %. The degree of concentration in terms of market
ing sector since the beginning of the transition process.
share of total assets held by the top five banks is, at an average 63 %, higher than in the NMS. This is attributable to the
high level of concentration in Croatia, Albania and Macedonia, whereas in Serbia and Bulgaria concentration levels are
lower than in comparable CEE countries.
Banking sector development since the
beginning of the transition process
Although the economic development in SEE, as in the
NMS, was different in each country, the region shared one
The SEE region is also more heterogeneous with regard
common experience: the transition from the monobank system
to financial intermediation than the NMS, with the ratio of
of a planned economy to a two-tiered banking system with pri-
banks’ total assets to GDP in SEE ranging from 38 % in
vatised, independent banks did not proceed without crises. The
Romania to 109 % in Croatia, and in the NMS from 47 % in
pattern that unfolded in most of the countries was a more or
Lithuania to 107 % in Latvia. The country with the lowest
less extended period characterised by soft budget constraints,
intermediation rate (Romania) in CEE is thus to be found in
moral hazard and connected lending leading up to – occasion-
SEE, as is the country with the highest degree of financial
ally severe – banking crises (Croatia 1998 / 99, Bulgaria
intermediation, i. e. Croatia.
1996 / 97, Romania 1999 / 2000, Albania 1997) and / or protracted loss-making phases (Serbia through 2004, Bosnia and
Herzegovina through 2001).
Table 2: Banking market profitability (ROE, in %, 1995 – 2004)
Albania
Bosnia and Herzegovina
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
n. a.
n. a.
– 84.9
– 82.3
16.4
20.7
21.6
19.1
19.5
21.1
n. a.
n. a.
n. a.
n. a.
n. a.
– 5.8
– 4.2
2.9
6.9
6.0
Bulgaria
– 3.7
65.2
115.5
15.8
20.9
21.9
20.5
15.6
22.8
20.6
Croatia
n. a.
n. a.
n. a.
– 16.1
4.8
10.7
6.6
13.7
14.5
16.6
FYR Macedonia
n. a.
n. a.
9.3
8.2
3.5
3.8
– 3.2
2.1
2.3
6.2
Romania
n. a.
48.8
75.1
1.0
– 15.3
12.5
21.8
18.3
15.8
17.0
Serbia
n. a.
n. a.
n. a.
n. a.
n. a.
– 78.5
– 26.0
– 34.5
– 1.2
– 5.0
– 3.7
57.6
68.1
– 6.5
0.3
– 17.8
3.1
9.9
14.1
14.9
SEE
Source: National banks, Bank Austria Creditanstalt Economics Department
Banking in SEE
07
Banking in SEE – Bridging the gap
A variety of factors contributed to the current state of
Serbia, have experienced periods of hyperinflation since the
the SEE banking sector. In addition to the above-mentioned
mid-1990s. A noticeable positive correlation can also be iden-
income level, developments since the beginning of transfor-
tified between the degree of intermediation and privatisation.
mation have played a major role. It is difficult, however, to
Countries that privatised more than 50 % of their banks early
identify patterns in the development that could be considered
on, today boast a higher intermediation level, with a large
typical. Nonetheless, a number of similarities do exist.
presence of foreign banks providing additional momentum in
The current level of intermediation, measured in terms of
the ratio of loans to GDP, was significantly influenced by the
this regard. Not surprisingly, a negative influence was exerted
by the proportion of non-performing loans in recent years.
level of intermediation that had been reached by the mid-
Regarding possible explanations for financial deepening
nineties and which in Croatia, Serbia and Bosnia and Herze-
as reflected by a higher ratio of loans to GDP in recent years,
govina was clearly higher than in Albania or Macedonia. This
it appears that countries with largely privatised banking sec-
must of course be considered against the fact that a number
tors also experience stronger loan growth, with foreign own-
of countries, among them Bulgaria and Romania as well as
ership contributing to this development. Solving the problem
Table 3: Factors determining the level of financial intermediation
Loans
in % of GDP
2004 1
Loans
in % of GDP
1996 1
Max. Inflation
since 1996
yearly average
Years since 50 %
of banks were
privatised
9
5
32
1
47
11.0
Bosnia and Herzegovina
45
35
13
4
52
6.7
Bulgaria
36
52
1,082
5
75
5.7
Croatia
62
29
6
8
75
6.5
FYR Macedonia
17
9
6
6
49
22.5
Albania
Market share of Non-performing loans
foreign banks
in % of total loans
2000 – 2004,
2000 – 2004,
average
average
Romania
18
25
155
5
45
5.9
Serbia
20
36
92
3
20
19.3
Source: National banks, Bank Austria Creditanstalt Economics Department / 1) Albania: excluding loans to the state
Table 4: Factors contributing to financial deepening
2000
Albania
Loans
in % of GDP 1
2004 2000 – 2004,
change p. a.
Market share of
privatised banks 2
2000 – 2004,
2004
average
Market share of
foreign banks 2, 3
2000 – 2004,
2004
average
Non-performing loans
in % of total loans
2000 – 2004,
2004
average
4.4
8.9
1.1
54
100
47
89
11.0
4.2
Bosnia and Herzegovina
31.2
45.2
3.5
82
95
52
66
6.7
3.3
Bulgaria
11.3
35.5
6.0
88
98
75
79
5.7
3.5
Croatia
38.7
61.7
5.7
96
97
75
88
6.5
4.5
FYR Macedonia
10.9
17.3
1.6
98
98
47
48
22.5
13.2
Romania
13.3
18.4
1.3
66
93
45
59
5.9
8.1
Serbia
52.0
20.3
– 7.9
43
65
20
37
19.3
23.3
Source: National banks, Bank Austria Creditanstalt Economics Department / 1) Albania: excluding loans to the state / 2) In % of total assets / 3) Pro rata basis
08
Banking in SEE
Banking in SEE – Bridging the gap
of non-performing loans was also of key importance for credit
last but not least, the legal environment (ownership rights)
growth. Countries such as Croatia and Bulgaria, which had a
strengthened. Over the past four years, retail lending (in
head start in privatising their banking systems, have a large
local currency) expanded at an annual rate of 53 %. This
share of foreign banks and a low proportion of non-perform-
segment therefore showed even more momentum in SEE
ing loans, and lending has expanded at an annual rate equiv-
than in the NMS, where retail lending also grew very vigor-
alent to six percentage points of GDP. The same applies to
ously at an annual rate of 24 %, compared with growth of
Bosnia and Herzegovina, albeit at a slightly slower pace of
just 6 % y-o-y in the euro area. Despite this fast-paced ex-
growth and with a lower share of foreign investment. In
pansion, however, retail lending volume is still only some
Macedonia, most of the banking sector had been privatised
12 % of GDP versus 50 % in the euro area. On the other
early on, but the majority is still domestically-owned and the
hand, 12 % indicates that retail lending has attained a simi-
bad loan problem is still being dealt with (in 2004 13 %). The
lar level to the NMS, although the distribution is still very
situation is even more acute in Serbia, where 60 % of the
uneven. At 32 %, Croatia has hit a level that is significantly
banks had been privatised by the end of 2004, with slightly
above that of the NMS and not even roughly within the
more than half foreign-owned. The non-performing loans
reach of any of these countries. At the same time, the corre-
ratio in Serbia, at 23 %, was by far the highest in the region
sponding levels in Romania, Serbia, Albania and Macedonia
as of year-end 2004.
are around 5 % or less, and thus considerably below that of
However, as all of the countries that are lagging behind
the NMS.
in privatisation have stepped up their efforts substantially in
Measured in terms of household deposits, lending in
recent months, an upward trend may be expected in the
SEE stands at 52 %, a level similar to the NMS, where lend-
coming years even in countries with an – as yet – low level of
ing amounts to 46 % of deposits and still exhibits potential
intermediation.
for growth (euro area: 91 %). In Croatia and Bosnia and
Herzegovina, however, the corresponding rates are very
Retail lending
high. In terms of per capita retail lending, Croatia, at close
In many countries in SEE, retail lending gathered momen-
to EUR 2,000, is significantly above the NMS average as well
tum once the problem of non-performing loans had been re-
as clearly above the level of Slovenia, the frontrunner
solved. The banks’ risk assessment expertise improved and,
among the NMS (EUR 1,600). Even though retail lending
Table 5: Loans to households in SEE
Country
Loans to households
in EUR bn
in % of
2004 household
deposits
2004
Loans to households
Growth rate
in % per capita
p. a.1
of GDP
in EUR
2000 – 2004,
2004
2004
in %
Loans to households 2
Growth rate
in % per capita,
p. a.1
of GDP
in EUR
2004 – 2008,
2008
2008
in %
Albania
0.2
7
26.3
3
53
25.8
5
136
Bosnia and Herzegovina
1.3
100
58.3
20
352
16.5
28
648
Bulgaria
2.2
49
66.5
12
287
23.8
18
673
Croatia
8.7
74
29.4
32
1,979
9.8
36
2,887
Macedonia
0.2
29
40.8
5
112
22.1
10
248
Romania
2.9
33
129.8
5
135
30.1
9
466
Serbia
0.9
50
72.4
5
111
40.9
12
316
SEE
16.5
52
53.0
12
323
20.1
15
665
NMS
60.0
46
24.4
13
823
14.5
17
1,445
3,804.3
91
6.3
50
12,397
euro area
Source: National banks, Bank Austria Creditanstalt Economics Department / 1) Per annum in local currency / 2) Forecast
Banking in SEE
09
Banking in SEE – Bridging the gap
growth potential will be limited in Croatia during the next
few years, we expect annual growth rates of
10 %.2
higher. Overall, we expect annual growth rates of 20 %
The
(weighted by loan volume) and thus one-quarter more mo-
region’s more heavily populated economies such as Romania
mentum than in the NMS, which is also consistent with the
and Serbia offer considerable potential, with growth rates
projection of higher nominal GDP growth in SEE. According-
expected to rise to 20 % or even 30 % and in Serbia, even
ly, retail lending as a percentage of GDP will not exceed
15 % in 2008, thereby remaining below the level we expect
for the NMS (17 %). Per capita loan volume is expected to
2) The growth assumptions are based on BA-CA forecasts of the macroeconomic development in each country, as well as on an analysis of the current
situation of the countries’ banking systems and the levels already attained.
reach EUR 665, or slightly less than half the level of the
NMS in 2008.
Table 6: Household deposits in SEE
Country
Household deposits
in EUR bn
2004
Household deposits
Growth
in % of
per capita,
rate1, in %
GDP
in EUR
2000 – 2004
2004
2004
Household deposits2
Growth
in % of
per capita,
rate1, in %
GDP
in EUR
2004 – 2008
2008
2008
Albania
2.4
14.3
40
774
11.4
40
1,207
Bosnia and Herzegovina
1.3
41.6
20
352
16.0
27
637
Bulgaria
4.6
15.6
24
591
16.0
29
1,069
Croatia
11.8
16.7
43
2,662
6.8
44
3,509
Macedonia
0.8
33.9
18
382
11.0
22
575
Romania
9.0
39.0
15
415
21.7
20
1,100
1.8
83.0
10
221
30.2
17
458
31.8
29.4
22
622
15.8
26
1,153
6.0
27
2,343
Serbia
SEE
NMS
euro area
129.6
6.4
28
1,777
4,160.0
5.7
55
13,556
Source: National banks, Bank Austria Creditanstalt Economics Department / 1) Per annum in local currency / 2) Forecast
Table 7: The ten largest banks in SEE ranked in terms of total assets as of 31 December 2004
Bank
Country
Total assets
in EUR mn
Market share
in %, home market
Market share
in %, SEE region
1
Zagrebacka banka
2
Banca Comerciala Romana
HR
7,511
25.0
9.0
RO
6,017
26.1
7.2
3
4
Privredna banka Zagreb
HR
5,459
18.2
6.5
Erste & Steiermärkische Bank
HR
3,366
11.2
4.0
5
Raiffeisenbank Austria
HR
3,181
10.6
3.8
6
Banca Romana Pentru Dezwoltare
RO
2,997
13.0
3.6
7
HVB Splitska banka
HR
2,797
9.3
3.3
8
Hypo Alpe-Adria Bank
HR
2,235
7.4
2.7
9
Raiffeisen Bank
RO
2,121
9.2
2.5
10
Bulbank
BG
1,841
14.5
2.2
Source: National banks, Bank Austria Creditanstalt Economics Department
10
Banking in SEE
Banking in SEE – Bridging the gap
Household deposits
SEE players
At 22 % of GDP, deposits of households in SEE were lower
The largest banks in the SEE region are, of course, to be
than in the NMS (28 %) and in the euro area (55 %), although
found in countries that are either large (Romania) or boast a
the difference is less substantial than in retail lending. In line
high degree of financial intermediation (Croatia).
with the somewhat lower catch-up potential, deposits expanded
Croatia’s Zagrebacka banka is the largest bank in SEE 4,
at a slower pace (29 % per year) than retail lending (53 %) and
ahead of Romania’s BCR bank. Of the ten largest banks in
the gap with the euro area was therefore less significant. At
the SEE region, six are from Croatia, three from Romania,
29 %, the rate of growth was significantly higher in SEE than in
and one from Bulgaria.
the NMS, where deposits grew at some 6 % per year and thus
An analysis of bank ownership, i. e. of international
at the same rate as in the euro area. In the NMS, a shift to
banks operating in the SEE region, shows that Austrian and
alternative investments is becoming increasingly noticeable as
Italian banks predominate. Austrian banks hold a market
bank deposits are no longer the only type of assets held by
share5 of more than 30 %, Italian banks 20 %. Greek banks
wide parts of the population. In addition, the decline in interest
have a market share of 7 %, French institutions 4 %, and
rates has reduced the attractiveness of bank deposits in many
Hungarian banks 3.5 %.
of the NMS.3 Despite the highly diverse situation where bank
UniCredit is the largest banking group in SEE, with total
deposits are concerned, Croatia and Albania, at 40 % or more,
assets of EUR 10 bn 5 and a share of 12.6 % of the SEE mar-
are already above the NMS average and approaching the level
ket. Its key holdings are Zagrebacka Banka, Croatia’s (and
of the euro area. Serbia and Romania, at 10 % and 15 %, re-
the region’s) largest bank, with a market share of 25 %, and,
spectively, are still clearly below the NMS level. Overall, deposits
through a subsidiary, 15 % in Bosnia and Herzegovina, as
are expected to expand at a faster pace in SEE than the rate we
well as Bulbank in Bulgaria, the country’s No. 1 with a mar-
estimate for the NMS. At an annual growth rate of 16 %, de-
ket share of 15 %. No. 2 in the SEE region is Raiffeisen Inter-
posits will reach 26 % of GDP by 2008, a level similar to that of
national at 11.9 % and a market share of between 8 % and
the NMS. In SEE, deposits will thus be growing faster than
14 % in Croatia, Romania, Bulgaria and Serbia, 22 % in
nominal incomes, which is no longer expected to be the case in
Bosnia and Herzegovina (No. 1), and 47 % in Albania (No. 1).
the NMS. The ratio of deposits to GDP in the NMS will stagnate
BA-CA is in third place with an 8 % share of the region and
in the coming years.
market shares of between 6 % and more than 10 % in all
3) Also see Bruckbauer (2005): CEE5: Managed Assets 2001 to
2007, Report Xplicit, BA-CA, April 2005.
4) For a list of the top 10 banks by countries see the individual country reports.
5) Majority holdings are included at 100 %, minority interests on a pro rata basis.
Table 8: International banking groups in SEE by country of origin
Rank
2004
Country
of origin
Total assets (majority holding =
100 %) in EUR bn
Market share
in %
Total assets (pro
rata basis) in EUR bn
Market share
in %
1
2
Austria
24.9
30.2
24.0
29.1
Italy
16.5
20.0
13.4
16.2
3
Greece
5.9
7.2
5.2
6.3
4
France
3.3
4.0
2.3
2.8
5
Hungary
2.9
3.5
2.8
3.4
6
Netherlands
2.8
3.4
2.8
3.4
7
USA
2.1
2.6
2.6
3.2
8
Germany
0.7
0.8
1.8
2.1
9
Turkey
0.6
0.8
0.4
0.5
10
Slovenia
0.1
0.2
0.1
0.2
Source: National banks, Bank Austria Creditanstalt Economics Department / 1) BA-CA and HVB holdings are reported under Austria
Banking in SEE
11
Banking in SEE – Bridging the gap
countries in the region, with the exception of Macedonia and
at a rate of 19 % per annum. Measured in terms of GDP, in-
Albania. BA-CA’s largest holdings are HVB Splitska Banka,
termediation will thus rise from the current level of 30 % to
HVB Bank Romania, which is being merged with Banca Tiriac,
38 %, nearly reaching the level of the NMS (where 40 % is
and HVB Bank Biochim in Bulgaria. Major market shares in
projected for 2008). The volume of deposits will rise from
SEE are also held by Banca Intesa and Hypo Alpe-Adria Bank.
EUR 49 bn to EUR 88 bn, thus climbing from 35 % of GDP to
39 % of GDP at an annual rate of 17 % p. a., which is a sig-
Outlook for the SEE banking market to 2008
nificantly faster rate than in the NMS (3 % p. a.).
Overall, lending (retail, corporate and government) will
An analysis of new business (loans and deposits) con-
rise in SEE from EUR 43 bn in 2004 to EUR 86 bn in 2008, i. e.
tracted in the individual countries shows a concentration in
Table 9: International banking groups in SEE
Rank
2004
Banking
group
1
2
3
4
5
6
7
8
9
10
UniCredit
Raiffeisen
BA-CA (HVB Group)
Banca Intesa
Hypo Alpe-Adria Bank
Erste Bank
Société Générale
OTP
National Bank of Greece
ING. N. V. Amsterdam
Total assets (majority holding
= 100 %) in EUR bn
Market share
in %
Total assets (pro
rata basis) in EUR bn
Market share
in %
10.4
9.8
6.6
5.7
3.9
3.4
3.2
2.9
2.1
1.6
12.6
11.9
8.0
6.9
4.7
4.1
3.9
3.5
2.6
2.0
8.6
9.6
6.2
4.4
3.8
2.0
2.1
2.8
2.0
1.6
10.4
11.7
7.5
5.3
4.6
2.4
2.6
3.4
2.4
2.0
Source: Bank Austria Creditanstalt Economics Department
Table 10: Outlook for the SEE banking market until 2008
Country
Loans
in EUR bn
Deposits
in EUR bn
Loans
in % of GDP
Deposits
in % of GDP
2004
2008
2004
2008
2004
2008
2004
2008
Albania
0.5
Bosnia and Herzegovina
3.0
Bulgaria
6.9
Croatia
17.0
Macedonia
0.7
Romania
10.9
Serbia
3.8
SEE
42.9
NMS
156.9
1.1
5.2
14.7
24.0
1.5
32.0
7.7
86.4
255.3
2.9
2.7
7.7
16.6
1.3
14.2
3.7
49.1
207.4
4.5
4.8
13.5
21.7
2.1
35.1
6.5
88.2
286.6
9
45
36
62
17
18
20
30
34
12
59
52
68
29
27
35
38
41
47
41
39
60
30
24
20
35
45
48
54
48
62
40
30
29
39
46
Source: Natonal banks, Bank Austria Creditanstalt Economics Department / 1) Per annum in local currency
12
Banking in SEE
Loans
Deposits
Growth rate 1, Growth rate 1,
p. a. in %
p. a. in %
2004 / 2008 2004 / 2008
19
15
21
9
21
25
29
19
12
12
15
15
7
14
20
25
17
3
Banking in SEE – Bridging the gap
Romania, whose 22 million inhabitants represent 40 % of
with the EU will play a key role.6 This is also where the risks to
the region’s population. Given the currently low ratio of busi-
future development may potentially arise. In addition, the ro-
ness to GDP, Romania is naturally one of the countries in the
bust loan growth experienced in the region in recent years
region with the largest catch-up potential, both in the lend-
may imply the possibility of macroeconomic problems result-
ing and deposit segments. In the coming years, new business
ing from higher current account deficits, as well as the need
volume in the individual countries will be determined, how-
for higher loan loss provisioning in the future. While the
ever, not only by the country’s size and catch-up potential,
strong commitment of international banks to the region and
but also by the level already attained (in terms of EUR per
the significant enhancement in the quality of risk manage-
capita). Therefore, Croatia, despite a slower growth rate, will
ment and banking supervision in most countries should keep
attract an above-average share of the region’s new business
risk low, the emergence of problems in some countries and
volume.
for some banks cannot be entirely ruled out. At this point,
Overall, SEE will offer a highly dynamic banking market
however, major banking crises are not expected.7
over the coming years, with growth prospects better than
those of the NMS and significantly brighter than the outlook
for the euro area. Of course, further development in the individual countries will be closely tied to the performance of the
overall economy and, in some countries, to political developments. In this context, ongoing integration or convergence
6) Also see BA-CA (2005): South-Eastern Europe – On the Right Track; SEEReport Xplicit; Vienna, May 2005. A current assessment of the development in
SEE is provided in BA-CA CEE Report 3 / 2005.
7) The conclusions that strong lending growth may lead to current account
problems, but that the risk of a banking crisis is low were also drawn by the
IMF in a recent analysis. Duenwald, C / Gueorguiev, N / Schächter, A: Too Much
of a Good Thing? Credit Booms in Transition Economies: The Cases of Bulgaria, Romania, and Ukraine; IMF WP / 05 /128, Washington, June 2005.
New business 1 in SEE
Share in new business 1 in SEE by country
2005 – 2008, in EUR bn
2005 – 2008, in %
Albania 2.7%
45
40
35
30
25
20
15
10
5
0
Macedonia 2.0 %
Bosnia and Herzegovina 5.2 %
Serbia 8.2%
Croatia 14.2%
Romania
Loans
Bulgaria
Croatia
Serbia
Bosnia and Albania
Herzegovina
Macedonia
Romania 51.0 %
Bulgaria 16.7%
Deposits
Source: Bank Austria Creditanstalt Economics Department / 1) Loans and deposits
Source: Bank Austria Creditanstalt Economics Department / 1) Loans and deposits
Banking in SEE
13
Albania – Coming to terms with the past
Lisa Perrin
Albania
Coming to terms with the past
In contrast to banks in those SEE countries that
banking system was transformed from a monosystem into a
inherited a two-tier banking system from the former
two-tier one, underscoring the central bank’s (Bank of Albania
Socialist Federal Republic of Yugoslavia, Albania’s banks
– BoA) independent status and its primary function of main-
embarked upon economic transition saddled with the
taining monetary stability and carrying out banking super-
trappings of a centrally-planned economy, including
vision activities. In 1993 the four state-owned banking institu-
that of a monobank system. Since 1992, however, a two-
tions were consolidated into three commercial banks: the
tier banking system has been in place, along with a legal
Savings Bank, National Commercial Bank (merging Albanian
and regulatory framework based upon international
Commercial Bank and commercial operations of the central
standards. Albania’s banks regained public confidence
bank – formerly State Bank of Albania) and Rural Commercial
following the pyramid schemes’ collapse in 1997 and are
Bank (created by spinning off the performing assets of the
gradually overcoming their risk aversion. Loan volumes –
Bank of Agriculture and Development, which ceased opera-
particularly in the retail segment – are growing rapidly,
tions).
albeit from a low base. Privately-owned banks hold
Progress on the macroeconomic and structural fronts was
95 % of the banking system’s total assets, and the gov-
interrupted by the collapse of pyramid schemes in 1997. Lack
ernment aims to have the sector fully privatised by the
of public confidence in an inefficient banking system (the
end of 2005. Competition and consolidation are expected
three state-owned banks accounted for over 90 % of total
to increase, given the acquisition of the country’s largest
deposits) resulted in the use of alternative channels for
bank by a foreign investor and the prospect of further
deposits (e. g. foreign exchange dealers – not all of whom
sales to foreigners.
were licensed). This situation allowed a number of companies
to develop pyramid schemes – collecting deposits (much of
Prior to the communist regime’s demise in 1991, Alba-
the population’s savings was in cash) with the promise of high
nia’s banks operated in an isolated political and economic en-
returns, but investing these funds on their own behalf, with
vironment that was dominated by rigid centralised planning.
limited ability to pay out the promised returns to the increas-
In the early phase of transition the country experienced eco-
ingly broader depositor base. By year-end 1996 the pyramid
nomic shocks, with 1991 GDP declining by 28 % and annual
schemes’ estimated liabilities were USD 1.2 bn or some 50 %
average inflation reaching 226 % in 1992. A reform pro-
of GDP.
gramme introduced in 1992 by the newly-elected govern-
In 1997 the pyramid schemes’ final collapse led to the
ment succeeded in rapidly getting the economy back on its
incumbent government’s demise and unleashed civil strife.
feet. Tight monetary and fiscal policies, the installation of a
The lek depreciated by 40 % during the first half of 1997,
free market economy and rapid privatisation of some key sec-
and GDP declined by over 10 % that year. The government
tors (including agriculture) helped reduce annual average in-
acted quickly to rectify the situation, appointing foreign
flation to 7.8 % by 1995, while GDP growth averaged some
liquidators to wind up the pyramid schemes and freezing the
10 % p. a. between 1993 and 1996. Current account and
assets of the two schemes that had the largest number of
budget deficits were also brought under control.
depositors. Although bank deposits declined markedly as an
In 1991 four state-owned banks were active in Albania:
immediate reaction to the crisis, by the end of 1997 levels
the State Bank of Albania (functioning as both a central and
had normalised. In the post-1997 period Albania’s economy
commercial bank), the Savings Bank, Albanian Commercial
has maintained strong GDP growth, recording 5.9 % in 2004,
Bank (ABC) and the Bank for Agriculture and Development.
while last year annual average inflation was contained at just
With the introduction of the laws On the Bank of Albania
under 3 %. Continued dynamic GDP growth of some 6 %
(Law No. 7559, 22 April 1992) and On the Banking System in
is forecast for 2005 and 2006. At the same time Albania
the Republic of Albania (Law No. 7560, 28 April 1992) the
is – after Bosnia and Herzegovina – the poorest country in
14
Banking in SEE
Albania – Coming to terms with the past
South Eastern Europe, with 2004 GDP per capita of about
Some USD 165 mn in bad loans (including those stemming
EUR 1,900 versus that of the CEE new Member States’ aver-
from the defunct Rural Commercial Bank) were transferred to
age of some EUR 6,300.
the BART. The Savings Bank was recapitalised in 2000 with
The pyramid schemes’ existence and their subsequent
USD 124 mn in treasury bills, but its significant exposure to
unravelling underscored the need for further banking sector
government securities (approximately 80 % of the balance
legislative and structural reform. Amendments in 1996, 1997
sheet) put off potential buyers. In 2003 Austria’s Raiffeisen
and 1998 to the 1992 banking laws dealt with issues such as
Bank acquired a 100 % stake in the bank, with the transac-
minimum capital requirements, capital adequacy, credit expo-
tion completed in 2004. The Savings Bank was subsequently
sures and connected lending, largely in line with the Basel
renamed Raiffeisen Bank. Privatisation of the country’s largest
Committee’s Basic Principles of Banking Supervision. Pruden-
bank boosted private banks’ share in the banking system’s
tial measures were tightened, with the BoA given increased
total assets to 95.3 % as of year-end 2004.
supervisory authority.
Rehabilitation of Albania’s banking sector aimed to elimi-
Banking Market Structure
nate state intervention, privatise or liquidate state-owned
The number of banks in Albania has increased steadily,
banks and create a sound legal and regulatory environment. In
with 16 banks currently servicing a population of just 3.1 mn.
1997 the Bad Asset Resolution Trust (BART) was established to
In February 2005 the BoA issued a preliminary license to
deal with the banks’ non-performing loans. Costs to the
Financial Union Tirana (Western Union’s agent for Albania,
Albanian government for the banking sector’s rehabilitation
Kosovo and Macedonia) to establish Union Bank, which
amounted to an estimated 11.9 % of average 1991 – 2002
should ultimately bring the total number of banks to 17. The
GDP, excluding any additional costs incurred for the Savings
banks are classified according to three groups: state-owned
Bank prior to its privatisation in 2003. Steps toward sector
banks (G1), joint-venture banks (including the state’s partici-
consolidation and privatisation were taken in January 1997
pation) (G2) and private banks – domestically and foreign-
when 22 branches of the National Commercial Bank and 24
owned (G3). Foreign presence is considerable, with twelve of
branches of the Rural Commercial Bank were transferred to
the G3 banks foreign-owned, two a joint venture with a for-
the Savings Bank, which in turn was transformed into a 100 %
eign partner(s) and the remaining two founded with domestic
state-owned joint stock company in July of that year. In 1998
private capital.
The banking landscape underwent a change in 1993 with
Rural Commercial Bank was closed down owing to its failed
privatisation, and its bad assets were transferred to the BART.
the commencement of activity by the joint venture Italian-
The National Commercial Bank (NCB) was transformed
Albanian Bank (Ministry of Finance 40 %, Banca di Roma –
into a joint stock company in July 1997. In 1998 the BART as-
now part of the Capitalia Group – 40 %, EBRD 20 %), which
sumed USD 70 mn in NCB’s bad loans, the government sup-
marked the beginning of foreign participation in the banking
plied USD 13 mn for recapitalisation and between 1997 and
sector. This undertaking was followed in the same year with
1999 NCB’s staff was reduced by over 60 %. The bank was
privatised in 2000 when Turkey’s Kent Bank, the EBRD and
IFC acquired stakes of 60 %, 20 % and 20 %, respectively
Banks’ ownership structure
and provided a total capital injection of USD 10 mn. As part
1997 – 2004, in % of total assets
of NCB’s privatisation process the Albanian government capitalised the bank with USD 24 mn in treasury bills.
Privatisation of the Savings Bank, the country’s largest
100
80
bank, was governed by the Law for Privatisation of the
Savings Bank, enacted in 1999. The aim was to reduce the
60
Savings Bank’s dominant market position and to restructure
40
the institution between December 2002 and September
20
2003. This agenda included the transfer of pension services
0
to Alba-Post, network restructuring, staff reductions and IT
systems enhancement. Given the Savings Bank’s dominant
market position (56.5 % of the banking sector’s total 2003
total deposits), the central bank and banking supervision
raised public awareness for the need to privatise the bank.
1997
1998
1999
State-owned banks
2000
2001
Joint-venture banks
2002
2003
2004
Privately- owned banks1
Source: BoA, Bank Austria Creditanstalt Economics Department
1) Includes domestic and foreign-owned banks
Banking in SEE
15
Albania – Coming to terms with the past
the start-up of another joint venture – the Arab Albanian
acquiring a stake in the Italian-Albanian Bank, as has France’s
Islamic Bank, licensed in 1992 and currently operating as United
Société Générale Group. In addition, the domestic banks –
Bank of Albania (Ministry of Finance 40 %, Arabian financial
International Commercial Bank Albania and American Bank of
institutions / individuals and other foreign financial institutions
Albania – have been cited as potential buyers. Binding bids
60 %).
are due in mid-September.
Privately-owned banks (both foreign and domestic) first
Furthermore, in June 2005 the BoA approved the sale of
made their appearance in Albania in 1994 with the establish-
a 95 % stake in Kosovo’s Dardania Bank to an Italian investor
ment of Kosovo’s Dardania Bank, joined in 1997 by Tirana
and 5 % to Banca Popolare di Puglia for Euro 5 mn. The sale
Bank (owned by Greece’s Piraeus Bank), International Com-
had been questioned by rival bidders Kasa Bank (Kosovo) and
mercial Bank (Malaysian investors) and the first foreign bank
Factor Bank (Slovenia), who argued that Albania’s banking
branch – that of the National Bank of Greece (Tirana).
regulations require at least three shareholders. Dardania
Greece’s Alpha Bank opened a branch in Tirana and the
Bank’s main shareholder was the Kosovo Republic Fund of the
American Bank of Albania (Albanian-American Enterprise
former prime minister in exile, Bujar Bukoshi. The bank’s new
Fund) began operations in 1998. Three additional private
shareholders will be required to apply for a new license.
banks started up in 1999: FEFAD Bank (since renamed Pro-
The country’s largest bank (Raiffeisen Bank) continues to
Credit Bank), Bulgaria’s First Investment Bank (Tirana branch)
dominate deposits, with a market share of 56.5 % of total
and Inter Commercial Bank (Commercial Bank of Greece),
deposits and current accounts as of December 2003 (2001:
since renamed Emporiki Bank. In 2002 Credit Bank of Albania
63.7 %). Competition is expected to pick up in the wake of
(established by Commercial Bank of Kuwait) joined the group
the bank’s recent privatisation, as it has resumed lending ac-
of private banks and in 2003 Credins Bank (the first private
tivity, thereby posing a challenge to its peers. Furthermore, a
bank founded with 100 % domestic capital) obtained a
potential increase in the presence of foreign banks (as
license. Banka Popullore, founded by Albanian entrepreneurs,
witnessed by the interest expressed in acquiring the Italian
entered the market in 2004
Albanian Bank) would also intensify competition.
The Ministry of Finance is making a final push to fully privatise the banking sector by year-end 2005, with the goal of
Banking Sector Profitability and Efficiency
selling off the state’s 40 % stakes in the joint-venture banks
Financial intermediation (the ratio of total assets to GDP)
Italian-Albanian Bank and United Albanian Bank by Septem-
remained steady at 53.5 % as of year-end 2004, in contrast to
ber 2005. Italy’s Banca Intesa, Banca Popolare Pugliese and
the CEE average of 75 %. This gap indicates a need to increase
Banca Monte dei Paschi di Siena have expressed interest in
Albanian banks’ effectiveness in transmitting monetary policy.
Financial intermediation
Non-performing loans
1997 – 2004, in % of GDP
1998 – 2004, as % of total loan portfolio
80
60
50
60
40
40
30
20
20
10
0
0
1997
1998
1999
Total assets
2000
Deposits1
2001
2002
2003
2004
Banking in SEE
1999
2000
2001
2002
2003
Private sector loans
Source: BoA, Bank Austria Creditanstalt Economics Department
1) Includes non-financial corporations, households, other financial institutions
and local authorities
16
1998
Source: BoA, Bank Austria Creditanstalt Economics Department
2004
Albania – Coming to terms with the past
In 2003, for example, treasury operations constituted nearly
a lending freeze for the country’s two largest banks, Savings
77 % of the banking system’s total assets against lending of
Bank and the National Commercial Bank. The National Com-
just 13.5 %. The banking sector’s loan / deposit ratio, which in
mercial Bank was permitted to take up lending activities again
2004 was just 19 %, also attests to the underdeveloped state
following its privatisation in October 2000, but only gradually
of the banks’ financial intermediary activities. At the same
did so. During the second quarter of 2005 after an eight-year
time, this low ratio can signal an impending credit boom.
hiatus, Raiffeisen Bank (former Savings Bank) announced a re-
As these figures indicate, for years Albania’s banks have
sumption of its retail lending activities (having already resumed
taken a risk-averse approach to lending, preferring to invest
corporate lending), extending lek-denominated loans only. The
their assets abroad or in government securities. Although
banking sector’s non-performing loans (substandard, doubtful
loans to the private sector (non-financial corporations and
and loss) declined dramatically to 7.0 % at year-end 2001
households) grew by a nominal 37 % y-o-y, loan stock
from 33.6 % in 2000 with the transfer of the Savings Bank’s
amounted to just 8.9 % of 2004 GDP. The retail segment has
portfolio of bad loans to the BART. As of year-end 2004 the
recorded particularly strong growth, increasing by an average
banking sector’s level of non-performing loans to the total
of 75 % y-o-y between 2002 and 2004. This trend has been
loan portfolio had fallen to 4.2 % (2003: 4.5 %), as loan port-
supported by the banks extending an increasing amount of
folio growth continued to outpace that of bad loans.
mortgage loans. In 2004, for example, NCB reportedly
Foreign currency-denominated loans constitute some
doubled the volume of loans that it extended for a house
80 % of total loans to the private sector, having increased
purchase. Despite high growth rates, retail loans to GDP at
steadily from approximately 32 % in 1998. This is attributable
the end of 2004 stood at just under 3 %, compared with
to a considerable spread between interest rates on lek-
Hungary (14.8 %), Poland (13.5 %) and Czech Republic
denominated loans and those in euro or USD. At the end of
(11.5 %), attesting to this client segment’s considerable up-
March 2005, for example, the average-weighted interest rate
side, particularly as per capita income rises.
on a USD-denominated loan was 7.2 % (March 2004: 7.8 %)
As of 1997 the three state-owned banks’ non-performing
and on a euro-denominated one 8.1 % (March 2004: 8.2 %)
loans amounted to 90 % of the total loan portfolio, prompt-
compared with that of 14.6 % on a lek-denominated loan.
ing the BoA in 1998 to establish a criteria for assessing
The BoA has noted that the high proportion of foreign cur-
whether or not a bank would be permitted to extend loans.
rency loans could pose some risk to asset quality in the case
Only those banks whose category of overdue loans exceeding
of unhedged borrowers. In an effort to stimulate demand for
30 days constituted less than 20 % of their loan portfolio were
lek-denominated loans the central bank has successively cut
permitted to continue lending – a regulation that necessitated
the repo rate, most recently in March 2005 by 25 bp to an
Banking sector profitability
Interest rates on new LEK, EUR and USD credits
1997 – 2004, in %
2002 – 2005, in %
20
25
15
15
5
10
–5
2004
Return on equity (ROE)
Lek
Source: BoA, Bank Austria Creditanstalt Economics Department
Euro
Dec 2004
2003
Sep 2004
2002
Jun 2004
2001
Mar 2005
Return on assets (ROA)
2000
Mar 2004
0
1999
Dec 2003
1998
Sep 2003
1997
– 82.3
Jun 2003
– 84.9
Dec 2002
– 25
Mar 2003
5
– 15
USD
Source: BoA, Bank Austria Creditanstalt Economics Department
Banking in SEE
17
Albania – Coming to terms with the past
historic low of 5 %. The BoA has stated that the banks’ prac-
Public confidence was restored fairly quickly in the wake
tice of extending the majority of loans in foreign currency
of the pyramid schemes’ collapse in 1997, as witnessed by a
weakens the effect of its interest rate policy, as banks are
maturities shift in bank deposits. In 1996 before the schemes
slower to react to lek interest rate changes.
completely unravelled, lek time deposits accounted for just
Loan maturities have been lengthening, with the share of
24 % of total deposits – nearly half that of the previous year’s
short-term loans in total lending declining steadily to 34 % in
level. By year-end 1997, however, the proportion of lek time
2004 from nearly 54 % in 2002, while long-term loans rose
deposits had recovered to nearly 49 %. This recovery was due
from 16 % to 30 % during the same period. In terms of sec-
in part to banks luring depositors by offering high real inter-
tors, the banks are most heavily exposed to the trade, auto-
est rates during the second half of 1997. During this period
mobile and home repair items sector, although its share has
prices were up 11 % (23 % annualised), while the annualised
diminished from 40.4 % in 2002 to 20.6 % in the first quarter
interest rate on a three-month deposit was over 30 %.
of 2005. By the same token, the share of loans to the
Some 31 % of deposits were denominated in foreign cur-
construction sector increased to 11.2 % (2002: 8.6 %). Real
rency in 2004, varying only marginally from the 2001 level
estate also gained ground at 14.7 % at the end of the first
when cash savings in foreign currency derived from workers’
quarter against 9.1 % at the end of 2002.
remittances were deposited into bank accounts prior to the
At the end of 2004 the ratio of deposits to GDP reached
euro’s introduction as the single currency in the EU. The BoA
47.3 %, a level that has been fairly constant since 1997.
provides direction for lek deposit rates, while rates on foreign
Given that loans to GDP stood at just 8.9 %, the ability to
currency deposits are linked to LIBOR and EURIBOR. Low in-
fund increased loan expansion should not be an issue for
flation has kept real interest rates on lek deposits higher than
Albania’s banks.
those on foreign currency. Total lek deposits grew in nominal
Table 1: Overview of Albania’s banking sector (1997 – 2004)
1997
Number of banks
Return on assets (ROA)
Return on equity (ROE)
Capital adequacy ratio (in %)
Non-performing loans (in % of total
1999
2000
2001
2002
2003
2004
8
10
13
13
13
14
15
16
– 5.9
– 1.8
0.6
2.1
1.5
1.2
1.4
1.3
– 84.9 – 82.3
16.4
20.7
21.6
19.1
19.5
21.1
8.2
42.0
35.3
31.6
28.5
21.6
5.5
loans) 1
1998
– 1.8
n. a.
55.1
45.6
33.6
7.0
5.5
4.5
4.2
Deposits (in % of GDP) 2
44.8
46.4
49.7
47.9
46.8
45.4
46.5
47.3
FX deposits (in % of deposits) 2
25.2
21.0
22.6
25.0
32.3
32.2
30.6
31.4
Short-term lek deposits (in % of deposits) 2
25.9
18.6
19.5
19.7
8.7
7.7
6.0
9.4
Lek time deposits (in % of
deposits) 2
48.9
60.4
57.9
55.3
59.0
60.2
63.4
59.2
Corporate loans (in % of GDP)
n. a.
4.1
2.2
2.8
4.1
5.1
5.6
6.2
Household loans (in % of GDP)
n. a.
0.2
2.0
1.6
0.7
1.1
1.8
2.7
4.9
4.3
4.2
4.4
4.8
6.2
7.4
8.9
Private sector FX loans (in % of loans)
n. a.
31.7
46.6
63.8
81.7
79.0
82.1
80.5
Private sector loans to deposits (in %) 2, 3
11.0
9.3
8.4
9.1
10.2
13.5
15.7
19.0
Private sector loans (in % of GDP) 3
Financial intermediation (total assets / GDP, in
%) 4
Market share of state-owned banks “G1” (total assets, in %)
Market share of joint-venture banks “G2” (total assets, in
%) 5
Market share of privately-owned banks “G3” (total assets, in %) 6
56.2
50.4
52.0
50.8
53.7
53.9
54.0
53.5
89.8
85.6
81.4
64.8
59.2
54.1
51.9
0.0
6.5
5.1
5.8
6.2
5.8
5.6
5.3
4.7
3.6
9.3
12.8
29.0
35.0
40.3
42.7
95.3
Source: BoA, Bank Austria Creditantalt Economics Department / 1) 2001 decline due to transfer of Savings Bank’s NPLs to Bad Asset Resolution Trust (BART) / 2) Deposits
include non-financial corporations, households, other non-bank financial institutions and local authorities / 3) Loans to non-financial corporations and households /
4) Based on commercial banks’ assets / 5) Includes state’s participation / 6) Includes domestic and foreign-owned banks, based on banking supervision data
18
Banking in SEE
Albania – Coming to terms with the past
terms by nearly 13 % y-o-y during 2004, with lek-denomi-
in the Republic of Albania, No. 8365 (2 July 1998). Amend-
nated current account and demand deposits up some 78 %
ments to the original 1992 banking laws have dealt with is-
y-o-y, against foreign currency deposit growth of just 17 % as
sues such as minimum capital requirements, capital adequacy,
the interest rate spread to lek deposits narrowed. During first
credit exposures and connected lending. Banking supervision is
quarter 2005, however, foreign currency deposit growth
governed by regulations that are largely in conformity with
picked up to 23.9 % y-o-y, attributable in part to strong in-
the Basel Committee’s Basic Principles of Banking Supervision.
flows of emigrant workers’ remittances.
A new accounting law enacted in 1998 requires banks to
Interest income continues to be the major source of the
comply with IAS.
banks’ revenues, constituting 84 % of 2003 net income.
At the end of January 2005 the minimum capital require-
Costs increased due to projects such as network expansion
ment for establishing a bank was raised to Lek 1 bn from Lek
and IT upgrades. Profitability indicators entered positive terri-
700 mn in a move to increase the banking sector’s financial
tory as of 1999, with return on assets (ROA) for 2004 slightly
stability. Existing banks have a three-year grace period in
lower at 1.3 % over the previous year (1.4 %) and return on
which to increase their minimum capital, with half of the
equity (ROE) moving upward to 21.1 % (2003: 19.5 %), as
amount due in one-and-a-half years. In March 2002 law
the banking system’s net profit increased.
No. 8873 (29 March 2002) On Deposit Insurance was passed,
The minimum capital adequacy ratio in Albania is set at
providing for insurance of a maximum level of Lek 700,000.
12 %, higher than the Basel Committee’s 8 %. As of year-
The deposit insurance scheme insures 100 % of deposits up to
end 2000 the banking system’s capital adequacy ratio
Lek 350,000, while 85 % of the remaining Lek 350,000 is in-
jumped from 8.2 % in 1999 to 42 % due to capital increases
sured.
of existing banks and recapitalisation of the Savings Bank. In
Banks’ open foreign currency positions may not exceed
addition, just under 90 % of total assets were classified as
20 % of capital for a single currency and total positions 30 %.
risk-free or low-risk investments. Since 2000 the capital adequacy ratio has declined steadily to 21.6 % as of year-end
Conclusion
2004, as risk-weighted assets have grown more rapidly than
In recent years Albania’s banks have shed some of their
regulatory capital. Nevertheless, even with this level of capi-
risk-averse behaviour; taking a more proactive stance toward
talisation, Albania’s banking system has more than sufficient
lending, particularly with regard to retail clients. Network ex-
liquidity, reflecting the still relatively modest degree of lending
pansion is ongoing and sector employment increased last year
activity. At the end of 2003 capital adequacy ratios varied
by 26 %. Measures to move away from a cash-based economy
among the three bank groups, with private banks (G3) at
are supported by the growing availability – although still limited
24.4 % (indicating a more aggressive lending stance), 32.7 %
to six banks – of ATM services and the gradually increasing
for joint-venture banks (G2) and 54.9 % for the Savings Bank
use of debit and credit cards.
(G1) prior to its privatisation taking effect – a figure that is
expected to decline as Raiffeisen Bank resumes lending.
The prospect of rapid lending expansion raises the issue
of the need for prudent lending decisions supported by an
appropriate risk management apparatus. To this end the
Legal framework
establishment and launch of a credit register by mid-2006 is
The legal and regulatory framework that has been put in
on the central bank’s agenda. The BoA would administer the
place has positioned Albania’s banks to respond to increased
register and membership by banks would be compulsory.
loan growth. Law No. 7559 (22 April 1992) On the Bank of
Furthermore, the central bank recognises the need to address ju-
Albania and Law No. 7560 dated (28 April 1992) transformed
dicial issues such as those related to collateral and mortgages.
the system from a single-tier to a two-tier one, assigning the
Finally, plans to fully privatise Albania’s banking sector by
Bank of Albania central bank functions. The unfolding story
the end of 2005, along with the resumption of lending by the
of the pyramid schemes prompted an amendment in 1996
country’s largest bank should stimulate competition and im-
that prohibited any institution other than a bank from accepting
prove the efficiency of financial intermediation. In turn, the
deposits. The central bank’s supervisory function is regulated
banks will be better positioned to take advantage of increas-
by the law On the Bank of Albania, No. 8269 (23 December
ing demand, particularly as the country’s income per capita
1997) and Albania’s banking system by On the banking system
rises over the longer term.
Banking in SEE
19
Bosnia and Herzegovina – Putting two and two together
Lisa Perrin /Sándor Gardó
Bosnia and Herzegovina
Putting two and two together
Since the end of civil war in 1995 Bosnia and Herze-
the civil war had come to a virtual standstill, with the economy
govina’s banking system has evolved from a remnant of
plagued by hyperinflation and GDP cut by 75 % of pre-war
the former Yugoslav Republic (SFRY) into a dynamic sec-
levels. World Bank estimates put the replacement cost of cap-
tor composed of two political entities, thanks to a thor-
ital stock that was destroyed during the war at some USD
ough process of restructuring and privatisation. Eighty-
15 – 20 bn. The establishment of the Central Bank of Bosnia
six percent of the banking sector is privately-owned and
and Herzegovina (CBBH) in August 1997 and the introduction
dominated by foreign banks, which control some 67 %
of a new currency, the konvertibilna marka (KM) pegged to
of total capital. Financial intermediation levels have
the deutsch mark and thereafter de facto to the euro (1 KM =
steadily increased, and the restoration of public trust in
EUR 0.51129) were two key factors in stabilising the econo-
the banking system has translated into the successful
my. GDP growth has been at stable levels since 1999, reach-
mobilisation of savings. As the extent of banking system
ing 5.0 % in 2004, with 5.5 % and 6.0 % forecast for 2005
restructuring has outpaced that of the enterprise sector,
and 2006, respectively. As of 1995 inflation was brought
attention will have to be paid to progress in corporate
under control, with last year’s annual average at 0.2 %, with
restructuring in order to help maintain banking stability
a 2005 forecast of 1.5 %.
and the current dynamic. Looking ahead, further inte-
In the immediate post-war period BiH’s banks faced a
gration of the Entities’ (Federation of Bosnia Herzegov-
myriad of issues to be tackled. Like its former SFRY peers, the
ina and Republika Srpska) banking sectors appears to be
country’s banks were predominantly socially-owned. Any
on the agenda.
lending activity was largely targeted toward the owner companies, thereby compromising the banks’ role as intermedia-
Bosnia and Herzegovina’s emergence as an independent
tor and acting as a deterrent to effective corporate govern-
state in March 1992 and its subsequent recognition by the in-
ance. Larger socially- or state-owned banks included hold-
ternational community in May of that year was rapidly over-
overs from the former Yugoslavia. These institutions were
shadowed by the outbreak of war between Croats, Muslims
major contributors to the banking system’s non-performing
and Serbs shortly thereafter. The conflict formally ended in
assets, estimated at 90 %. There was little hope of recovering
December 1995 with the signing of the Dayton Peace
these claims, given the financial plight of many enterprises.
Accords, which accorded Bosnia Herzegovina (BiH) interna-
Public confidence in BiH’s banking system had waned after
tional recognition as a country consisting of two Entities: the
the banks froze households’ foreign currency deposits to
Muslim-Croat Federation of Bosnia and Herzegovina (FBiH)
counter their own claims in foreign currency deposits seized
made up of ten cantons and the Serbian Republika Srpska
by the National Bank of Yugoslavia before the civil war’s out-
(RS). BiH is organised along decentralised lines; the State
break. The existence of payments bureaux also affected
directs foreign policy and trade, foreign debt, monetary policy,
banks’ ability to perform traditional banking activities and
exchange rate decisions and issues pertaining to the two enti-
made liquidity management problematic.
ties (e. g. international communications), leaving the FBiH and
In mid-1996 there were 53 banks operating in BiH, of
the RS jurisdiction over remaining areas, including bank pri-
which 30 (27 in FBiH and 3 in the RS) were majority privately-
vatisation and supervision. A High Representative (with an
owned. Most of these were established during the war to
office in Brussels and Sarajevo) was appointed to oversee the
facilitate international transfers, rather than to carry out tradi-
implementation of the Dayton Peace Accords, which took
tional banking activities. Twenty-three banks (15 in the FBiH
effect on 1 January 1996.
and 8 in the RS) were majority-held by socially-owned enter-
On the economic front, the country faced the daunting
prises or state-owned. The private banks tended to be small
task of securing macroeconomic stability by getting the tran-
in terms of balance sheet size, with the result that market
sition to a market economy back on track. Production during
share was highly concentrated. Older state or socially-owned
20
Banking in SEE
Bosnia and Herzegovina – Putting two and two together
(non-private) banks controlled some 95 % of total assets and
Sheets of Enterprises and Banks, enacted in the FBiH in Spring
eight of these banks accounted for approximately 80 % of
1998, which outlined the conditions for bank solvency, and
the banking system’s total assets, with uneven geographical
served as a vehicle for purging the state-owned banks’ bal-
distribution – banks in the FBiH accounted for 76 % of total
ance sheets of loans to public enterprises made prior to the
assets.
civil war as well as carving out claims against the former
Given the banking sector’s integral role in forging a sus-
Yugoslavia’s central bank. An Entity’s banking agency deter-
tainable economic recovery, a top priority was cleaning up the
mined solvency based on a bank’s audited opening balance
banks’ balance sheets by dealing with the issues of bad loans
sheet and this decision then had to be approved by the re-
and frozen foreign currency deposits, and thereafter privatis-
spective BPU and the Ministry of Finance. Paris and London
ing the sector – a process that occurred in BiH largely be-
Club debts on the banks’ balance sheets were rescheduled at
tween 1998 and 2002. Measures aimed at banking system
the state level and serviced by the FBiH or the RS.
reform and privatisation were drawn up in co-operation with
As a further step, the Law on the Privatisation of Banks
the World Bank, USAID and other agencies. The aim was to
(October 1998) established guidelines for the privatisation of
legislate a solid regulatory environment, liquidate insolvent
majority state-owned banks. A bank that had been determined
banks and privatise the remaining state-owned ones, improve
to be solvent submitted a preliminary privatisation programme
banking supervision, install deposit insurance schemes and
to the FBA or RSA, which had 90 days to approve it. Owner-
phase out the payments bureaux. Although BiH’s banks had
ship of solvent state banks was transferred to the Ministry of
inherited the framework of a two-tier banking system from
Finance. Insolvent banks were slated for liquidation or merger.
the SFRY, some of the pitfalls associated with that country’s
The Law on Banks was issued in the FBiH in October 1998.
banking sector (e. g. connected lending) were avoided by
A similar scenario was followed in the RS. A mid-1998
establishing legislation that clearly defined the central bank’s
law established the Banking Agency of the Republika Srpska
and commercial banks’ roles and created a strong banking
and a Law on Opening Balance Sheets and on the Privatisa-
supervision.
tion of Banks took effect in July 1998. Although the Banking
In 1998 the High Representative issued the Framework
Law was passed in July 1999, banking activity in the RS re-
Law on Privatisation of Enterprises and Banks in BiH. Banking
mained subdued as capital adequacy was too low to enable
agencies in the FBiH and RS, charged with the task of admin-
any significant lending volumes.
istrating the banks’ privatisation each set up a Bank Privatisa-
Both the FBiH and the RS issued privatisation vouchers
tion Unit (BPU). Banks were given one year to prepare open-
for use in the enterprise privatisation programme as a form of
ing balance sheets, based on the Law on Opening Balance
partial compensation for claims against e. g. frozen foreign
Table 1: The ten largest FBiH banks ranked in terms of total assets as of 31 December 2004
Bank
Main shareholders
Total assets
(in EUR mn)
Market share
(in %)
1
Raiffeisen Banka BiH dd Sarajevo
Raiffeisen International Beteiligungsgesellschaft (96.7 %)
2
UniCredit Zagrebacka banka
BiH dd Mostar
1,043.0
26.0
Zagrebacka Banka (93.6 %), Unicredito Italiano (4.7 %)
672.3
16.8
3
Hypo Alpe-Adria-Bank dd Mostar
Hypo Alpe-Adria-Bank AG (100 %)
554.0
13.8
4
HVB Central Profit Banka dd
Sarajevo
Bank Austria Creditanstalt (80.8 %), IFC (19 %)
378.8
9.4
5
UPI Banka dd Sarajevo
EBRD (19.9 %), Sarajevska pivara dd (15.7 %), Klas dd (11.6 %)
195.3
4.9
6
Tuzlanska Banka dd Tuzla
Jata doo (15.8 %), Tehno biro doo (4.5 %), Humic Midhat (4.0 %)
142.8
3.6
7
Volksbank BiH dd Sarajevo
Österreichische Volksbank (100 %)
136.9 1
3.4
8
CBS Bank dd Sarajevo
LHB-Frankfurt (60 %), Banka Domzale (40 %)
87.1
2.2
9
ABS Banka dd Sarajevo
Hasanbegovic Fadil (3.7 %), Zenkic Ilijas (3.5 %), FDS (3.5 %),
Alagic Hamdija (2.7 %)
73.0
1.8
EBRD (23.1%), IFC (23.1%), International Micro Investitionen (22.0 %),
Commerzbank (12.5 %), FMO (11.6 %)
71.0
1.8
10 ProCredit Bank dd Sarajevo
Source: Banks’ annual reports, Bank Austria Creditanstalt Economics Department / 1) Estimate
Banking in SEE
21
Bosnia and Herzegovina – Putting two and two together
currency deposits or arrears in wages. Both the FBiH and the
largest banks controlling 61.7 % of the banking system’s total
RS passed capital market laws, i. e. Law on Securities, Law on
assets. Two banks have assets between KM 300 – 500 mn and
Securities Commission, Law on Registrar of Securities, Law on
account for 7.5 % of total assets, while 26 banks control
Fund Management Companies and Investment Funds as
30.8 % of total assets.
vehicles for the public to trade their vouchers via a capital
Of the 33 banks in BiH, six were owned by the state as of
market. Banks were allowed to sell existing shares or issue
year-end 2004, which accounted for 14 % of share capital –
new ones. Anyone (including foreigners) holding a banking
up from 10 % in 2003 due to a capital increase by the FBiH
license could purchase a bank. When the privatisation process
government in Investicijska banka FBiH. The other 27 banks
drew to a close in 2002 all banks in the RS were private ma-
were privately-owned, accounting for 86 % of total banking
jority-held, while the state still retained a stake in a number
sector capital, of which private domestic capital accounted
of (specialised) FBiH banks.
for 19 % and foreign capital for 67 % of the total.
Banking Market Structure
the same as those for local banks, BiH’s economic situation
Although regulations for market entry by foreigners were
As of year-end 2004 the number of banks in BiH stood at
combined with a passive resistance to foreign players initially
33 (24 in FBiH and 9 in RS), down from a total of 37 the pre-
kept foreign investors at bay. Until the end of 1999 just two
vious year and significantly below the figure of 76 in 1997.
foreign banks operated in BiH, including Turkish Ziraat Bank
Five of the FBiH banks were under provisional administration.
Bosnia, which began operations in March 1997 and was the
The decline in the number of banks last year resulted from two
first bank founded with foreign capital to be licensed in BiH.
bank mergers (Zagrebacka banka dd Mostar with Universal
In late 1999, however, Croatia’s Zagrebacka banka acquired
banka dd Sarajevo into UniCredit Zagrebacka banka BiH dd
Hrvatska banka dd Mostar and in December 2000 Zagrebacka
Mostar on 1 July, and HVB Bank dd Sarajevo with Central
also purchased a majority stake in Universal banka dd Saraje-
Profit Banka dd Sarajevo into HVB Central Profit Banka dd on
vo (now both part of UniCredit Zagrebacka banka BiH dd
1 October) and the revocation of two banks’ licenses (Gospo-
Mostar). In July 2000 Austria’s Raiffeisen Zentralbank ac-
darska banka dd Mostar’s and the initiation of a liquidation
quired 89.7 % of Market Banka dd Sarajevo (renamed Raif-
process and the liquidation process of Privredna banka dd
feisen Bank dd BiH), which at the beginning of 2003 merged
Srpsko Sarajevo).
with Raiffeisen Bank HPB dd Mostar (acquired in May 2001
BiH’s banking sector is top heavy in terms of total assets
under the name of Hrvatska postanska banka dd Mostar).
size. Five (four in the FBiH, 1 in the RS) of the 33 banks have
In July 2000 Austria’s Volksbank became the first EU bank
total assets of over KM 500 mn (EUR 256 mn), two between
to open a subsidiary (Volksbank BiH dd). Lithuania’s Ukio
KM 300 mn and 500 mn and 26 banks less than KM 300 mn.
Bankas (49 %) and Ukio banko Investicine Grupe (51 %)
The banking system is heavily concentrated with the five
founded Balkan Investment Bank ad Banja Luka in the RS. In
Banks’ ownership structure
Banking sector profitability
2002 – 2004, in % of total capital
2000 – 2004, in %
8
100
90
80
70
60
50
40
30
20
10
0
23.9
20.5
18.5
4
2
66.4
69.6
67.0
0
–2
–4
9.8
2002
State
9.8
2003
Private (foreign)
14.5
2004
Private (domestic)
Source: CBBH, Bank Austria Creditanstalt Economics Department
22
6
Banking in SEE
–6
2000
2001
Return on assets (ROA)
2002
2003
Return on equity (ROE)
Source: CBBH, Bank Austria Creditanstalt Economics Department
2004
Bosnia and Herzegovina – Putting two and two together
September 2000 the Islamic Development Bank, Dubai Islamic
pervision to set a deadline by which a significant maturity mis-
Bank and Abu Dhabi Investment Bank founded Bosna Bank
match had to be corrected. Liabilities with a maturity up to 90
International dd Sarajevo. A subsidiary of Bank Austria Credit-
days must be 100 % matched by assets with a similar maturity,
anstalt (HVB Group) started up operations in 2002, merging
with a compliance deadline (depending on the bank) between
in 2004 with Central Profit Banka dd Sarajevo. Greenfield
June and September 2004. It should be noted that part of the
operations also include the Micro Enterprise Bank dd Sarajevo
reason for the increase in short-term loans to GDP in 2004 to
(founded by the IFC and EBRD), which became active in
26.2 % from 22.7 % in 2003 was the re-categorisation of
November 1997.
claims on domestic institutional sectors by one FBiH bank.
The share of foreign currency-denominated loans in pri-
Banking Sector Profitability and Efficiency
vate sector loans has declined sharply from 89.3 % in 1997 to
During the last several years growing competition for
15.4 % in 2004. As of May 2004 foreign currency-indexed
market share and lower interest rates, combined with banks’
loans are, however, categorised together with those denomi-
increased liquidity have helped drive lending growth in BiH.
nated in local currency, which does not make any direct com-
As of year-end 2004 loans to the private sector (non-financial
parison with 2003 (28.0 %) meaningful. The International
corporations and households) grew by a nominal 16.1 % y-o-y
Monetary Fund (IMF) has commented that the private sector
(2003: + 20 %). The ratio of private sector loans to GDP con-
has gone along with the banks’ practice of indexing over
tinued to increase, reaching 44.9 % of 2004 GDP. Growth
50 % of KM-denominated loans to the euro without expect-
was highest in the household segment (+ 33.5 % y-o-y), and
ing that the implied currency risk be countered by a lower in-
as a percentage of GDP this client group has expanded from
terest rate on the loan. One reason for this, notes the IMF,
just 1.9 % of GDP in 1997 to 20.4 % at the end of 2004. By
may be a lack of borrowers’ awareness of the indexation
contrast, last year the pace of corporate loan growth deceler-
clause, in addition to being a measure of their trust in the do-
ated to 4.7 % y-o-y (2003: 12.2 %) while its intermediation
mestic currency and the currency board.
level at 24.5 % was basically unchanged over 2003 (24.6 %).
Private sector deposits have rebounded from the levels
Banks continue to look to funding from abroad to support
ranging from some 14 % to 17 % of GDP recorded prior to
lending activity. As BiH does not have a liquid bond market,
2001. Banks’ ability to mobilise savings had been impeded by
foreign assets still constitute some 25 % of the banks‘ consol-
hyperinflation eradicating savings, frozen foreign currency de-
idated balance sheet.
posits and a lack of disposable income during the civil war,
Long-term loan growth has produced a maturity mis-
compounded by a struggling economy in the post-war period.
match for a number of banks, particularly in the FBiH. Presum-
In addition, the banks themselves provided limited deposit-
ably some of these institutions do not have access to funding
related services, as the payments bureaux had basically
via a parent. Their situation prompted the FBiH’s banking su-
usurped this function.
Table 2: Banks in Republika Srpska ranked in terms of total assets as of 31 December 2004
Bank
Main shareholders
Total assets
(in EUR mn)
Market share
(in %)
1
Hypo Alpe-Adria-Bank ad Banja Luka
Hypo Alpe-Adria-Bank AG (100 %)
2
Razvojna Banka Jugoistocne Evrope ad
Banja Luka
Bank of Southeast Europe International (91.0 %)
298.9
34.3
151.0
17.3
3
Nova Banjalucka banka ad Banja Luka
Verano Motors (84.0 %), Invest bank (8.0 %)
102.5
11.8
4
Zepter Komerc banka ad Banja Luka
n. a.
89.2
10.2
5
Nova banka ad
n. a.
83.9
9.6
6
LHB banka ad
n. a.
69.7
8.0
7
Pavlovic International Bank ad
n. a.
31.8
3.6
8
Balkan Investment Bank
Ukio Bankas (49.0 %), Ukio Banko Investicine Grupe (51.0 %)
24.0
2.8
9
Bobar banka
Bobar Group (100 %)
20.1
2.3
Source: BARS, Bank Austria Creditanstalt Economics Department
Banking in SEE
23
Bosnia and Herzegovina – Putting two and two together
Confidence in BiH’s banking system has been gradually
lished. Banks require borrowers of consumer loans to provide
restored, with private sector deposits to GDP reaching 34.5 %
a personal guarantor, but it is difficult to track whether the
as of year-end 2004. Privatisation vouchers were distributed
same person has made guarantees for more than one bor-
to partially compensate for losses from frozen foreign currency
rower. Looking at the issue of credit risk from a broader per-
deposits; the remaining claims are being addressed at the en-
spective, banks’ asset quality could potentially be affected by
tity level. A Deposit Insurance Agency was established in
the corporate sector, where many companies still need re-
2002 to add an additional element of security to the banking
structuring; 70 % of state-owned enterprises and 25 % of
system. The conversion of workers’ DM remittances from
private ones posted a loss in 2002.
abroad into euro in 2001 boosted private sector deposits to
Increased lending has caused BiH’s average capital ade-
25.2 % of GDP (2000: 15.7 %). Payments bureaux have been
quacy ratio to decline to 18.2 % in 2004 from 20.3 % the
phased out. Furthermore, the konvertibilna marka has come
previous year. This level is still sufficiently above the 12 % re-
to enjoy a fairly high degree of public confidence, with for-
quirement. A number of banks, however, will be faced with
eign currency deposits contracting from 84.5 % of private
the task of having to increase capital in order to meet the
sector deposits in 1998 to 48.1 % in 2004.
legal limit.
In 2004 the banks’ total income amounted to KM 817 mn,
up 10 % over the previous year. Interest income accounted for
Legal Framework
60 % of revenues (2003: 54 %). Consolidated profit of KM
In the last decade the legal framework for banks’ activi-
57.6 mn rose by nearly 50 % over 2003. For BiH’s banks, re-
ties in BiH has undergone significant changes that strongly
turn on assets (ROA) has been in positive territory since 2002,
reflect the country’s geopolitical settings and features. After
but declining to 0.6 % in 2004 from 0.8 % in 2003. Likewise,
independence was proclaimed in March 1992, the monetary
return on equity (ROE) eased to 6.0 % from 6.9 %, in part
system that the country inherited from the SFRY with the
due to an increase in the sector’s capitalisation, including a
National Bank of Bosnia and Herzegovina (NBBH) at its helm,
capital injection in a state-owned bank.
was disrupted by the outbreak of civil war in the spring of
The existence of a credit boom always raises the possibili-
1992. As a consequence, the NBBH’s function was split
ty of a deterioration in asset quality. In BiH non-performing
among three monetary authorities, thereby contributing to
assets as a percentage of total classified assets were quite low
the emergence of a decentralised and confusing legal and
as of year-end 2004 at just 3.3 %. There is still a need, how-
regulatory framework for the banking sector. While the NBBH
ever, to implement additional credit risk assessment tools. To
continued to regulate the Bosniac majority area, in May 1992
this end a credit bureau and pledge registry have been estab-
the RS established its own central bank, the National Bank of
the Republika Srpska (NBRS), with close relations with the
National Bank of Yugoslavia. Furthermore, in early 1993 a
monetary authority that reported to the regional Ministry of
Finance was created in the Croat-majority region. Diffuse
banking sector legislation and supervision accompanied het-
Financial intermediation
erogeneous monetary structures, with the Yugoslav dinar the
1997 – 2004, in % of GDP
currency in circulation in the Republika Srpska, the Croatian
kuna in the Croat-majority areas and the Bosnian dinar in the
Bosniac-majority regions.
80
From a political point of view the Dayton Peace Accords
70
60
on 1 January 1996 dissolved this decentralised system, setting
50
up two Entities, the Muslim-Croat Federation of BiH and Re-
40
publika Srpska. From an economic perspective the establish-
30
ment of the currency board system in 1997 put an end to
20
multiple currencies by officially naming the convertible mark
10
0
1997
1998
1999
2000
2001
2002
2003
2004
(konvertibilna marka – initially pegged 1:1 to the region’s substitution currency, the Deutsch Mark, and later to the euro
Total assets
Private sector deposits
Private sector loans
1 KM = EUR 0,51129) as legal tender. The foundation of the
currency board arrangement was preceded by that of the
Source: CBBH, Bank Austria Creditanstalt Economics Department
24
Banking in SEE
Central Bank of Bosnia and Herzegovina (CBBH), which com-
Bosnia and Herzegovina – Putting two and two together
menced operations on 11 August 1997 and whose main
Regulation on banks’ net open foreign exchange position
tasks were to establish and maintain macroeconomic and
was strengthened in 2003 not only by tightening limits to
price stability, determine monetary policy and issue currency.
30 % of a bank’s core capital on an aggregate level (20 % in
As a consequence of monetary unification, the two / three
one currency), but also by including KM assets and liabilities
central banks were closed down.
indexed to foreign currencies.
The Banking Agency of the Federation of BiH (FBA) was
Assets are to be classified in five categories – A (performing
established as early as 1996 by inheriting some of the NBBH’s
assets), B (special mention), C (substandard), D (doubtful) and E
responsibilities (including banking regulatory and supervisory
(loss). Classification is to be carried out keeping in mind both ob-
powers), based on the Law on the Banking Agency of the
jective (maturity dates) and subjective criteria (finances, economic
Federation of BiH, and began operations in 1997. As of mid-
and moral stance of the debtor). Provisioning requirements stipu-
1998 the Banking Agency of the RS (BARS) became the legal
late a value adjustment of 2 %, 5 – 15 %, 16 – 40 %, 41– 60 %
successor of the NBRS, with the main goal of maintaining a
and 100 % according to the above-mentioned categories.
sound and stable banking system by developing a high-quality
Liquidity regulations occupy an important position in BiH
legal framework. As a result, banking institutions are still reg-
banking regulation, given that the central bank is not allowed
ulated at the Entity level, i. e. currently by the Law on Banks
to act as a lender of last resort within the framework of the
as of 2000 and its subsequent amendments as of 2002 in the
currency board, i. e. to lend to either the public or private sec-
FBiH and the RS Law on Banks as of April 2003. Although the
tor, should liquidity or solvency problems at individual banks
Entities’ legal environments were extensively harmonised in
arise. Banks must comply with various limits as regards the
recent years, further progress on this front (also with respect
structure of assets and liabilities, not only with respect to
to BIS and EU standards) is inevitable, as some banks more
their level, but also maturity structure. For example, liquid
recently started to offer banking services in both Entities. To
assets must not represent less than an average 20 % of demand
counteract the possible emergence of legal arbitrage, the
and short-term deposits in a ten-day period and are not al-
integration of the two banking agencies under the umbrella
lowed to fall under the 10 %-mark at any time.
of the CBBH is currently being discussed. This would presum-
In order to boost the population’s confidence in the
ably pave the way for a unified banking supervision of all BiH
banking system and to further banks’ ability to mobilise sav-
banks, with a view to strengthening banking supervision in-
ings a deposit insurance scheme was set up in the FBiH in
dependence.
2001 and shortly thereafter in the RS, with a reserve fund
Although commercial banks in BiH are incorporated
achieving operational status only in the FBiH. To prevent the
under Entity banking laws, regulatory norms with respect to
disadvantages of a dual deposit insurance system, the two
minimum capital standards are harmonised. After several
entity agencies were recently merged at the state level De-
gradual increases minimum capital requirements reached KM
posit Insurance Agency (DIA). The DIA, established with initial
15 mn (EUR 7.7 mn) as of 31 December 2002 (with all banks
capital contributions of foreign donors, started operations in
having to comply with this obligation by May 2003) – at a
October 2002 according to the Law on Deposit Insurance on
level somewhat higher than that required by the EU (EUR 5 mn).
Banks of Bosnia and Herzegovina adopted in August 2002. To
Furthermore, to ensure adequate bank capitalisation, banks in
become a member banks must fulfil two criteria. First, they
both entities have to adhere to a capital adequacy ratio of at
have to fulfil the prudential criteria laid down by the banking
least 12 %. Again, this is in accordance with the higher risks
agencies. Second, they must to be at least 90 % privately-
associated with BiH’s banking market, and is well above the
owned. Twenty-one (15 from the FBiH, 6 from the RS) com-
internationally required 8 %.
mercial banks were members of the deposit insurance pro-
Banks have to adhere to certain limits with regard to port-
gramme as of March 2005. Although the statutory deadline
folio and risk diversification, including ones regarding large
for joining the programme expired on August 12, 2003 the
exposures, connected lending and holdings in non-bank under-
Deposit Insurance Agency agreed to take on the remaining
takings. According to these legal requirements, large expo-
banks as members if they deliver action plans to their respec-
sures (defined as an exposure exceeding 15 % of a bank’s core
tive banking agencies, which will in turn specify membership
capital) may not exceed 40 % of a bank’s core capital on an
conditions and deadlines. Initially the minimum coverage
individual, and 300 % on an aggregate basis. Lending to con-
level was set at KM 5,000, but was raised to KM 7,500
nected parties is limited to 1 % and 10 % of a bank’s core cap-
(EUR 3,800) as of February 2005, still well below the EU stan-
ital on an individual and aggregate basis respectively, holdings
dard of EUR 20,000. Banks must pay an annual contribution
in non-bank enterprises to 15 % and 50 %.
of 0.3 % of insured deposits on a quarterly basis.
Banking in SEE
25
Bosnia and Herzegovina – Putting two and two together
Conclusion
Given the loan dynamic and the extent to which lending
Banking reform in BiH has possessed something of a dual
is funded from abroad, it will be important to strike a balance
nature, given the political constellation of two Entities, the
between a credit boom that underpins financial deepening
FBiH and the RS. Progress has in some respects been uneven,
and macroeconomic stability. On the domestic front, atten-
but taken as a whole, the country’s banking sector has man-
tion will need to be paid to progress in restructuring the cor-
aged to surmount a number of obstacles, due largely to both
porate sector, given a potential negative impact on banks’
the FBiH and the RS having pursued basically the same reform
asset quality. Finally, the consolidation process is expected to
scenario. The result is a banking sector equipped with a legal
continue, not only in terms of reducing the number of banks
and regulatory framework aligned with international stan-
in BiH, but also with respect to further harmonising the bank-
dards and the privatisation of the majority of banks, with a
ing system’s legal and regulatory framework and institutional
significant foreign presence. Public confidence in the banking
settings, both between the two Entities and with EU stan-
system has been restored, supported by a strong and stable
dards.
currency, the phasing out of the payments bureaux and the
creation of a state-level deposit insurance scheme.
Table 3: Overview of BiH’s banking sector (1997 – 2004)
1997
Number of banks
1998
1999
2000
2001
2002
2003
2004
76
72
61
55
48
40
37
33
Number of bank employees
n. a.
n. a.
n. a.
6,986
7,315
7,519
7,623
7,839
Return on assets (ROA)1
n. a.
n. a.
n. a.
– 1.5
– 0.6
0.4
0.8
0.6
Return on equity (ROE)1
n. a.
n. a.
n. a.
– 5.8
– 4.2
2.9
6.9
6.0
Capital adequacy ratio (in %)
n. a.
n. a.
n. a.
28.4
25.1
20.5
20.3
18.2
Non-performing assets (in % of classified assets)
n. a.
n. a.
n. a.
10.9
8.7
6.1
4.6
3.3
Spread (difference between lending and deposit rates)
n. a.
n. a.
n. a.
15.8
10.5
7.7
7.1
5.9
Private sector2 deposits (in % of GDP)
14.0
16.7
16.4
15.7
25.2
25.2
27.5
34.5
Private sector FX deposits (in % of private sector deposits)
84.5
84.5
63.8
53.7
61.3
52.8
47.9
48.1
Private sector short-term deposits 3 (in % of private sector deposits)
66.4
66.0
60.0
70.9
64.0
62.6
59.3
53.6
Private sector loans (in % of GDP)
33.5
34.9
31.7
30.9
31.3
35.8
40.7
44.9
Corporate loans (in % of GDP)
31.6
31.6
28.5
26.5
24.6
23.1
24.6
24.5
Private sector FX loans (in % of private sector loans)
89.3
89.5
80.3
67.1
51.7
35.2
28.0
15.4
Private sector short-term loans (in % of private sector loans)
34.9
29.4
29.4
28.2
26.4
24.3
22.7
26.2
239.7
208.3
193.5
196.2
124.5
142.2
148.0
129.9
49.4
48.8
45.4
44.4
53.2
54.5
62.5
72.6
Private sector loans to private sector deposits (in %)
Financial intermediation (total assets/GDP, in %)
Concentration ratio (C5 – total assets, in %)
n. a.
n. a.
n. a.
n. a.
49.2
46.7
49.7
61.7
Market share of state-owned banks (capital, in %) – FBiH (RS) 4
n. a.
n. a.
n. a.
(78.2)
42.9
(60.1)
14.4
(36.7)
12.8
(1.3)
12.6
(1.3)
19.9
(1.3)
Market share of foreign-owned banks (capital, in %) – FBiH (RS) 4
n. a.
n. a.
n. a.
26.2
(n.a.)
63.2
(33.6)
66.7
(65.0)
68.2
(73.2)
61.7
(72.1)
Source: CBBH, FBA, BARS, EBRD, IMF, Bank Austria Creditanstalt Economics Department / 1) Before tax / 2) Private sector includes corporates and households /
3) Demand deposits / 4) FBiH – Federation of Bosnia and Herzegovina, RS – Republika Srpska
26
Banking in SEE
Bulgaria – A race to the top
Sándor Gardó
Bulgaria
A race to the top
The painful process of transforming Bulgaria’s bank-
bonds (government bonds denominated in foreign currency)
ing system came to a head in 1996 / 97, when the country
to solve the problem of non-performing loans, nor the brief
suffered a serious banking and financial crisis. The intro-
economic upswing in 1994 – 1995 were sufficient to resolve
duction of a currency board system in 1997 and the subse-
the mounting problems. Banks’ financial situation deteriorat-
quent restructuring and privatisation of state-owned
ed as a result of the continued subsidisation of state-owned
banks marked the beginning of recovery. Since then, Bul-
enterprises and the interference of the state in banks’ day-to-
garia’s banking sector has advanced to become one of the
day management (directed lending). The population’s increas-
fastest-growing markets in Central and Eastern Europe.
ing distrust peaked in 1996 with a run on banks and the accompanying “flight to currency” (cash, foreign currency) and
The first tentative steps toward creating a market-orient-
“flight to quality” (real assets, property) – a mortal blow for a
ed banking sector began in Bulgaria in 1989 with the trans-
banking sector already plagued with liquidity and solvency
formation of numerous branches of the Bulgarian National
problems. The banking crisis that followed eventually spread
Bank (BNB) into independent commercial banks and the ad-
to the real economy and developed into a full-blown eco-
mission of private banks to the market, essentially represent-
nomic and financial crisis. As a result, economic performance
ing a final break with the monobank system. But soon a mix
contracted sharply, dropping by 9.4 % in 1996 and another
of political uncertainty, economic instability, stop-and-go
5.6 % in 1997; the 1996 budget deficit exploded to over
character of structural reforms, soft budget constraints in the
10 % of GDP. Unemployment rose and prices skyrocketed as
corporate sector, a lack of market discipline on the part of
hyperinflation set in and the value of the national currency
newly-founded banks (moral hazard), as well as lax supervi-
plummeted.
sion of banks’ activities led to severe undercapitalisation at
The introduction of the currency board arrangement in
Bulgarian banks and an enormous bad debt problem. Neither
1997 not only stabilised the currency and prices, it also tight-
the initial restructuring efforts involving the issue of ZUNK
ened liquidity by restricting the central bank’s competencies.
Table 1: The ten largest Bulgarian banks ranked by total assets as of 31 December 2004
Bank
Main shareholders
Total assets
(in EUR mn)
Market share
(in %)
1
Bulbank
UniCredito Italiano SA (85.2 %)
1,841.3
14.5
2
3
DSK Bank
OTP Bank (100 %)
1,664.4
13.1
HVB Bank Biochim 1
Bank Austria Creditanstalt (99.6 %)
1,313.6
10.3
4
United Bulgarian Bank
National Bank of Greece (99.9 %)
1,125.4
8.8
5
Raiffeisenbank Bulgaria
Raiffeisen International Bank-Holding AG (100 %)
1,025.5
8.0
6
First Investment Bank
Ivaylo Mutafchiev (31.8 %), Tzeko Minev (31.8 %), EBRD (20 %)
845.8
6.6
7
Bulgarian Post Bank
Aliko / CEN Balkan Holdings (91.7 %)
597.1
4.7
8
Economic & Investment Bank
Katex AD (21.1 %)
399.3
3.1
9
SG Expressbank
Société Générale Group (98.0 %)
392.6
3.1
DZI AD (50.9 %)
370.8
2.9
10 DZI Bank
Source: BNB, Bank Austria Creditanstalt Economics Department / 1) Including Hebros Bank acquired in November 2004
Banking in SEE
27
Bulgaria – A race to the top
This measure had the positive side-effect of disciplining both
banks – the number of bank employees and branch offices
the government and the commercial banks and left little lee-
showed a general downward trend. The credit boom that has
way, either for moral hazard by banks or for soft budget con-
emerged in the last two years, however, has reversed this tend-
straints at state-owned enterprises. In the end, the stabilisa-
ency by requiring banks to increase staff levels and to up-
tion measures got the economy back on track in 1998, and
grade their branch network. At year-end 2004 the number of
since then Bulgaria has experienced positive economic devel-
bank employees and branches had climbed to some 22,500
opment. Over the last five years (2000 – 2004) the country
and 727 respectively, thus reaching their 2001 level. Despite
recorded average economic growth of 4.9 % despite the
the high number of banks and the expanding branch net-
weak global economy, with growth even accelerating to a
work, there was only one branch office for every 10,730 in-
real 5.6 % in 2004 – the highest rate since the beginning of
habitants at the end of 2003, an indication of an under-
the transition process. Inflation was reduced to single-digit
serviced banking market. The comparable figure for the Euro-
figures by 2001 with price stability prevailing since. The disci-
pean Union is five times lower, with an average of one branch
plined fiscal course followed in recent years resulted in bud-
per 2,060 inhabitants. Taking other bank agencies and offices
get deficits of less than 1 % of GDP for several years and
into consideration, however, the number of inhabitants per
more recently in the accumulation of huge budget surpluses.
service unit decreases to 4,400.
A large current account deficit and the still high unemployment rate remain the only causes for concern.
With a market share of 14.5 % as of year-end 2004, Bulbank was the largest Bulgarian bank, with the recently privatised savings bank DSK (13.1 %) and HVB Bank Biochim (in-
Banking Market Structure
cluding Hebros Bank acquired in November 2004), a subsidiary
The currency board’s introduction not only stabilised
of Austria’s Bank Austria Creditanstalt, ranking second and
Bulgaria’s economy, but also laid the foundation for a rapid re-
third. United Bulgarian Bank and Raiffeisenbank Bulgaria
covery of the banking system, whose current characteristics
ranked fourth and fifth with a market share of 8.8 % and
have nothing in common with those of the crisis-ridden mid-
8.0 % respectively. The level of concentration in the Bulgarian
1990s. After peaking in 1992 at 81, the number of banks fell to
market is relatively modest, with the four leading banks con-
34 at year-end 1997 and since then has remained at around this
trolling 46.7 % of total assets as of year-end 2004. In terms of
level. At the end of 2004 there were 29 fully-licensed commer-
deposits, the four largest banks held a market share of 50.8 %,
cial banks and six foreign bank branches operating in Bulgaria.
whereas their share in loans was somewhat lower at 47.9 %.
In the initial consolidation phase after the banking crisis –
Despite a decline in banking market concentration over the last
despite some fluctuations due to the market entry of foreign
several years, the second wave of consolidation that was initi-
Banking market structure
Banking market concentration
31 December 2004, in % of total assets
1995 – 2004, in %
80
70
Bulbank 14.5 %
Other 24.8 %
60
50
40
DSK Bank 13.1 %
DZI Bank 2.9 %
Economic and
Investment Bank 3.1 %
Bulgarian Post Bank 4.7 %
First Investment Bank 6.6 %
30
20
SG Expressbank 3.1 %
HVB Bank Biochim 10.3 %
United Bulgarian Bank 8.8 %
10
0
1995
1996
1997
1998
1999
2000
2001
2002
Raiffeisenbank 8.0 %
Concentration ratio (C4 – Total assets, %)
Concentration ratio (C4 – Deposits, %)
Concentration ratio (C4 – Loans, %)
Source: BNB, Bank Austria Creditanstalt Economics Department
28
Banking in SEE
Source: BNB, Bank Austria Creditanstalt Economics Department
2003
2004
Bulgaria – A race to the top
ated by market player Bank Austria Creditanstalt’s acquisition
Banking Sector Profitability and Efficiency
of Hebros Bank in late 2004 (resulting in a combined market
After digesting the shock from the 1996 / 97 banking cri-
share of over 10 %) and that of Greece’s Piraeus Bank’s pur-
sis for several years, Bulgarian banks’ activity increased, which
chase of Eurobank in January 2005 should produce a gradual
is clearly reflected in the rising level of financial intermedia-
increase in concentration levels and simultaneously a decrease
tion (total banking sector assets to GDP). After reaching a
in the number of market players. The merger of United Bulgarian
deceptive high of around 200 % during the period of hyper-
Bank’s operations with National Bank of Greece’s branch activi-
inflation and currency depreciation in the mid-1990s, inter-
ties in the second half of 2005 underscores this trend.
mediation plunged to a record low of 34.6 % in 1999. Since
At the onset of transition, the BNB’s strategy for licensing
then, however, a financial deepening has occurred, with the
foreign banks was extremely restrictive, and thus the banking
ratio of total assets to GDP climbing gradually to 50.1 % at
market was opened very slowly to foreign competition. The
the end of 2003. The emerging credit boom, however, had a
first branches and subsidiaries of foreign institutions were only
pronounced effect on monetarisation in 2004, when total
allowed to enter the market in 1994 and 1995. This negative
assets to GDP soared to over 65 %. Although this figure is
attitude toward foreign banks, however, disappeared quickly
already comparable with some of Bulgaria’s more advanced
after the economic and banking crises, as it was recognised
CEE peers (e. g. Poland: 65.5 %), it is, however, well below
that foreign banks play an important role in transferring finan-
the euro area’s average of 210 %, indicating considerable
cial resources, human capital and technology, and that this in
catch-up potential.
turn is crucial to the process of restructuring and consolidating
The years after the banking crisis were characterised by
the banking system. As a result of the privatisation of state-
low credit demand and a risk-averse approach on the part of
owned banks, the Bulgarian banking market is now dominat-
banks’ with respect to lending. This lead banks to shy away
ed by foreign banks. Measured in terms of total assets, they
from lending to the state and state-owned enterprises (prior
held a market share of 70 % at year-end 2001. Following the
to the crisis) and turn to government securities and deposits
sale of Bank Biochim to Bank Austria Creditanstalt in 2002
at banks abroad (after the crisis). In both cases, however, the
and the privatisation of Bulgaria’s second largest bank, the
logical result was a “crowding out” of the private sector,
state-run savings bank DSK in June 2003, foreign banks’ mar-
especially small and medium-sized enterprises, which was
ket share increased to some 82.5 % by the end of 2004.
reflected in the hesitant increase of the ratio of private sector
There are now only two small banks (Encouragement Bank,
loans to GDP to a mere 11.6 % in 2000. Thanks to the credit
Municipal Bank) left in state hands, accounting for 2.3 % of
boom that emerged at the beginning of the new millennium
banking sector assets as of year-end 2004.
driven both by supply- and demand-side factors, this ratio has
Financial intermediation
Banking market liquidity
1995 – 2004, in % of GDP
1995 – 2004
200
180
160
140
120
100
80
60
40
20
0
45
40
35
30
25
20
15
10
5
0
1995
1996
Total assets
1997
1998
1999
2000
Private sector deposits
2001
2002
2003
2004
Private sector loans
Source: BNB, Bank Austria Creditanstalt Economics Department
1995
1996
1997
1998
1999
Capital adequacy ratio (in %)
2000
2001
2002
2003
2004
Private sector loans (in % of GDP)
Source: BNB, Bank Austria Creditanstalt Economics Department
Banking in SEE
29
Bulgaria – A race to the top
already tripled, reaching 34.7 % as of year-end 2004 – al-
from the market, in spring 2004 the government initially
though remaining modest compared to the euro area’s aver-
withdrew the lion’s share of its funds deposited with the com-
age of 103 %. Banks’ increasing risk appetite and improving
mercial banks. Further restrictive measures implemented in
risk assessment capabilities are also reflected in the loan port-
July 2004 (the introduction of a four percent minimum re-
folio’s maturity structure. In 2004 only slightly less than 25 %
serve ratio for deposits with a term exceeding two years) and
of total private sector loans were of a short-term nature (ma-
in October (only 50 % of the banks’ cash reserves qualify as
turity of less than one year), compared to 52.5 % ten years
minimum reserves) also failed to have any significant impact,
ago, reflecting the increasing confidence of both creditors
prompting the BNB to take further action as of 6 December
and borrowers. The share of foreign currency loans in private
2004. The central bank introduced a minimum reserve ratio
sector loans climbed to 47.8 % in 2004 on the back of lower
of 8 % for all deposits, regardless of maturity, and tightened
interest rates, as well as the banks’ strategies of repatriating
the regulations for calculating minimum reserves (banks’ cash
assets and taking on debt abroad to refinance credit growth.
holdings no longer qualify as minimum reserves).
This development implies a currency risk, which if unhedged,
As these steps also proved insufficient to curtail the surge
raises the possibility of an increase in the level of non-per-
in bank credit, the BNB took tougher measures in February
forming loans. The distribution of loans to corporates by in-
and April 2005 by specifying credit ceilings. For banks with
dustry showed a high concentration at year-end 2004, with
aggressive lending policies, a higher minimum reserve re-
trade and manufacturing accounting for a share of 25 % and
quirement automatically applies from 1 April 2005 on with
18 %, respectively. However, banks recently have increasingly
31 March 2005 the basis for credit growth reporting, if their
turned their attention toward households (especially in terms
credit growth exceeds 5 % on average in the first quarter
of mortgage lending), as indicated by the retail segment’s
(10 % as of end period), 12.5 % in the first two quarters
33.2 % share in private sector loans against just 0.7 % in 1997.
(15 %), 17.5 % in the first three quarters (20 %) and 23 % in
Continued robust loan growth is, however, a source of
the entire year (26 %), while exceeding a 60 % ceiling for a
concern for the BNB. In the wake of 2004 loan volume
“refinancing indicator” (loan volume less own funds as a per-
growth of 50 % y-o-y (2003: + 47 %) driven by households
centage of deposits attracted). In this case the minimum re-
(+ 77 %) and corporates (+ 41 %), there is no sign of a slow-
serve requirement is prohibitive (double the absolute amount
down, and growth rates are well above the BNB’s 25 – 30 %
by which the limits were exceeded). The effectiveness of this
benchmark. In order to prevent a deterioration in Bulgaria’s
regulation that entered into force on 1 April 2005 is hard to
current account position, an acceleration in inflation and a
predict, with initial results only likely to be visible toward the
decline in the banks’ credit portfolio quality, the BNB repeat-
end of third-quarter 2005. If the most recent steps should
edly intervened in 2004. In a move intended to drain liquidity
also prove to be inadequate, the BNB will probably resort to
Loan portfolio quality
Banking market profitability
1995 – 2004
in %
40
64
30
35
56
25
30
48
25
40
20
32
15
24
10
16
5
8
0
0
0
–5
1995
1996
1997
1998
1999
2000
2001
2002
2003
Private sector loans (in % of GDP) – Left scale
2004
65.2
115.5
1996
1997
20
15
10
5
1995
1998
Return on assets (ROA)
1999
2000
2001
2002
Return on equity (ROE)
Non-performing loans (in % of total loans) – Right scale
Source: BNB, Bank Austria Creditanstalt Economics Department
30
Banking in SEE
Source: BNB, Bank Austria Creditanstalt Economics Department
2003
2004
Bulgaria – A race to the top
more vigorous measures. In this respect the introduction of
claims no longer qualify as a standard exposure, reporting is
liquidity requirements and a further increase in the minimum
also required below this threshold. This downward trend in
reserve requirements are being considered.
non-performing loans is also attributable to the fact, that due
Bulgaria’s banking sector was confronted with a legacy of
to the recent credit boom, total loan volume has been grow-
bad debt both before and during the economic and financial
ing faster than non-performing loans, thereby lowering the
crisis in 1996 / 97. The vastness of this problem was a conse-
latter’s share in total loans. Indeed, the strong pick-up in
quence of imprudent lending in the early 1990s to essentially
lending requires careful monitoring and risk management on
bankrupt state-owned enterprises, as well as the banking in-
the part of commercial banks and the BNB in order to avoid a
dustry’s regional and sectoral focus, which reduced the
sudden deterioration in loan portfolio quality in the event of
banks’ capacity to absorb shocks. Loan portfolio quality, how-
external, sectoral or regional economic shocks.
ever, has improved considerably over the last decade. The
The difficult task of regaining depositors’ confidence was a
share of non-performing loans in total loans shrank from just
long and drawn-out process after the banking crisis, as is indi-
under 60 % in 1996 to 3.5 % at year-end 2004. This decline
cated by the low percentage of private sector deposits to GDP.
was accelerated in part by the BNB`s foundation of the
Although the introduction of the euro in 2002 and the resul-
Central Credit Register of Banks in March 2000. The register
tant need to deposit Deutsch Mark savings with banks in order
allows banks to obtain information on potential borrowers’
to convert them into euros accelerated the process of mobilis-
credit indebtedness and creditworthiness. All claims exceed-
ing the population’s savings, private sector deposits only
ing BGN 1,000 (EUR 510) are subject to reporting, whereas if
reached slightly more than one-third of GDP in 2004. This
Table 2: Overview of Bulgaria’s banking sector (1995 – 2004)
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
42
30
34
34
34
35
35
35
35
35
Number of bank branches
n. a.
n. a.
n. a.
545
583
789
719
673
727
n. a.
Number of bank employees
n. a.
n. a.
n. a. 23,612 21,768 21,634 22,266 21,616 21,434 22,453
Number of banks
Return on assets (ROA)
– 0.3
3.2
5.0
1.7
2.4
3.0
2.7
2.0
2.4
2.1
Return on equity (ROE)
– 3.7
65.2
115.5
15.8
20.9
21.9
20.5
15.6
22.8
20.6
Capital adequacy ratio (%)
4.6
10.8
28.9
36.7
41.3
35.5
31.1
25.2
22.2
16.1
Non-performing loans (in % of total loans)
48.4
56.3
16.7
17.0
11.7
8.2
7.0
5.5
4.2
3.5
Spread (difference between lending and deposit rates)
36.1
153.8
129.0
11.1
10.3
7.9
8.6
7.1
6.4
5.8
Private sector deposits (in % of GDP) 1
58.1
66.0
25.0
20.8
21.3
22.4
27.0
28.4
30.9
36.0
Private sector FX deposits
(in % of private sector deposits)
30.3
55.3
55.2
53.7
53.6
55.2
57.8
54.2
50.0
47.7
Corporate loans (in % of GDP)
19.4
33.2
4.4
5.8
8.0
9.3
10.8
14.1
18.4
23.2
Private sector loans (in % of GDP)
20.0
33.4
5.4
8.0
10.2
11.6
14.0
18.4
25.6
34.7
Private sector short-term loans
(in % of private sector loans)
52.5
38.9
38.6
32.1
33.6
33.5
33.0
31.6
25.0
23.6
Private sector FX loans (in % of private sector loans)
45.5
78.3
48.3
34.9
35.7
34.3
34.9
42.3
42.8
47.8
Private sector loans to private sector deposits (in %)
34.5
50.6
21.4
38.6
47.9
51.8
51.7
64.7
82.7
96.5
Financial intermediation (total assets / GDP, in %)
123.7
188.7
47.4
35.2
34.6
36.5
41.1
45.0
50.1
65.6
Concentration ratio (C4 – loans, in %)
50.1
67.8
56.5
47.7
43.6
41.5
38.7
41.7
43.1
47.9
Concentration ratio (C4 – deposits, in %)
57.5
62.6
56.3
58.9
61.7
62.2
58.2
55.8
53.1
50.8
Concentration ratio (C4 – total assets, in %)
53.0
62.1
56.2
56.3
57.0
55.2
51.4
49.9
47.0
46.7
Market share of state-owned banks (total assets, in %)
n. a.
82.2
67.1
56.4
50.5
19.8
19.9
16.6
2.5
2.3
Market share of foreign-owned banks
(total assets, in %)
n. a.
9.5
18.0
32.3
44.7
67.0
70.0
72.0
82.3
82.5
Source: BNB, EBRD, IMF, FBE, Bank Austria Creditanstalt Economics Department / 1) Private sector includes corporates and households
Banking in SEE
31
Bulgaria – A race to the top
includes the recent boost to deposits that not only can be
matically due to hyperinflation, thereby reducing their repay-
traced back to more attractive conditions offered by banks as a
ment obligations. On the other hand, following the lev’s mas-
means of refinancing their rapid loan growth, but is largely
sive depreciation during the financial and economic crisis, most
attributable to privatisation revenues channelled through the
banks were able to book exceptionally strong exchange rate
banking system at year-end 2004. However, these revenues are
gains, due to the large share of foreign exchange positions
to be withdrawn by the state and will be transferred to the
(ZUNK bonds) in their portfolios. In effect this worked as a pas-
fiscal reserves. Nevertheless, the ratio of private sector loans to
sive recapitalisation of the banks. In terms of return on assets
private sector deposits (96.5 % at year-end 2004) indicates that
(ROA) and return on equity (ROE), increases in banks’ profitabil-
banks are still in a position to finance their expansive loan
ity in the past few years have been modest. Nevertheless, with
policy by attracting new deposits. But as deposits are not an in-
an ROA of 2.1 % and ROE of 20.6 % as of year-end 2004 the
finite source of cheap refinancing, it is increasingly apparent
Bulgarian banking sector can generally be viewed as relatively
that banks are repatriating their assets invested abroad, as
profitable. With progressing banking sector consolidation,
these constitute more profitable investment opportunities in
increasing economies of scale and the ongoing tax reform
Bulgaria. Likewise, the banks are taking on debt abroad (in
(gradual decrease in corporate income taxes), sustained high
view of the relatively low international interest rate setting) to
profitability can be expected in the years ahead.
be able to finance domestic credit expansion.
The maturity and currency structure of private sector de-
Legal framework
posits underscores the dominance of short-term deposits, as
The transition to a two-tier banking system in Bulgaria
deposits with a maturity of less than one year account for
was launched with the adoption of the Law on the Bulgarian
some 97 % of total private sector deposits. At the same time,
National Bank in June 1991 and the Law on Banks in March
the decreasing importance of foreign exchange deposits
1992. Following the economic and financial crisis in 1996 / 97,
(47.7 % of total deposits as of year-end 2004) indicates the
these two laws were replaced with two new pieces of legisla-
growing confidence in and higher interest rates on the na-
tion that took effect in mid-1997, with the goal of bolstering
tional currency.
the banking sector’s stability. In accordance with the currency
Prior to the crisis Bulgarian banks’ capital adequacy ratio
board system, these new laws focused mainly on defining the
fell to as low as 4.6 % in 1995 (the statutory minimum was
BNB’s organisational structure (Issue Department, Banking
8 %), indicating serious undercapitalisation. After the crisis in
Department and Banking Supervision Department) and compe-
the mid-1990s, however, this situation swung to the opposite
tencies. Accordingly, the legal basis for the commercial banks’
extreme. Banks’ “overcapitalisation” peaked in 1999 with a
activities is currently laid out in the Law on Banks of 1997,
capital adequacy ratio of 41 %. Although capital adequacy
which has been amended on numerous occasions by BNB de-
has tended sharply downward in recent years as a result of
crees, in order to align regulations with EU standards.
lending expansion and the increasingly keen competition on
According to the Law on Banks, bank owners must pro-
the Bulgarian market, the 16.1 % ratio for 2004 still reflects
vide minimum capital of at least BGN 10 mn (EUR 5.1 mn) to
adequate capitalisation on the sectoral level. Yet as a conse-
incorporate a bank, regardless of the entity’s legal form.
quence of an expansive lending policy individual banks are
Above and beyond this, a capital adequacy ratio of 12 %
already rapidly approaching the official 12 % minimum re-
must be maintained. As against the internationally common
quirement. This fact should, however, not cast doubt on the
8 % (recommendation of the Basel Committee), the manda-
general soundness of the banking market, as the BNB has al-
tory capital adequacy ratio was initially raised to 10 % in
ready responded by tightening capital adequacy requirements.
1998 and then to the current level of 12 % in 1999. This high
Spreads (difference between lending and deposit rates)
capital adequacy requirement is the BNB’s reaction to the
decreased hand in hand with the drop in inflation, falling
banks’ dramatic undercapitalisation prior to and during the
from 154 % in 1996 to 5.8 % in 2004. This sharp downward
banking crisis in 1996 / 97.
trend, however, also mirrors the banking sector’s improving
In compliance with EU law banks must also adhere to a
health and the subsequent diminishing need for loan loss
number of regulations to ensure adequate risk diversification.
provisioning, as well as the increasingly strong competition
Limits on large exposures and loans (exposures equalling or
that prevails on Bulgaria’s banking market.
exceeding 10 % of a bank’s own funds) to connected parties
In terms of profitability, most (large state-owned) banks
are set at 25 % of own funds, with an 800 % limit on total
weathered the 1996 / 97 crisis fairly well. This was attributable,
large exposures. An open foreign exchange position in a sin-
on the one hand, to banks’ liabilities (deposits) devaluating dra-
gle currency (excluding euro) is limited to 15 % of a bank’s
32
Banking in SEE
Bulgaria – A race to the top
own funds, with the aggregate position not to surpass 30 %.
2002 also assigns broad supervisory powers to the deposit in-
Investments by banks in real estate and other tangible fixed
surance fund (especially within the bankruptcy procedure).
assets shall not exceed 50 % of own funds, which together
with holdings in non-bank companies may not exceed total
Conclusion
own funds. According to the loan classification and provision-
The recovery of Bulgaria’s banking sector was accompa-
ing scheme, which was tightened in April 2004 (by decreas-
nied by economic and political stabilisation. Although the
ing the number of risk categories from five to four and raising
1996 /1997 financial and economic crisis marked a painful ex-
provisioning requirements) to prevent a deterioration in loan
perience on the road to a market economy, by revealing the
portfolio quality as a result of the credit boom, banks now are
necessity of pressing ahead with restructuring it also had a
required to provision – based on the duration of default –
cathartic effect, thereby triggering a thorough reform of the
watch exposures by 10 %, substandard by 50 % and non-per-
banking system. Measures taken to manage the crisis were
forming loans by 100 %.
underpinned by the currency board arrangement and also in-
A deposit insurance scheme was established in Decem-
cluded the reinforcement of banking supervision and the
ber 1995 as a protective element of banking regulation. The
liquidation of insolvent banks. These steps not only treated
economic and financial crisis of 1996 / 97, however, had a
the crisis’ symptoms, but also its causes, thereby paving the
detrimental impact on the fund, necessitating an overhaul of
way for the banking market’s rapid recovery. The sale of the
the deposit insurance system. A new deposit insurance law
last major state-owned bank (DSK) in 2003 essentially
was passed in April 1999, giving the system an explicit char-
brought the sector’s restructuring and privatisation to its com-
acter and providing a solid basis for the deposit insurance
pletion. Bulgaria now has a strong banking sector, one that is
fund’s activities. The new law, however, did not apply to the
adequately capitalised, stable and profitable, and in many re-
state-run savings bank DSK, whose deposits remained 100 %
spects already on a par with its more advanced CEE peers.
state-guaranteed. This dual system, which distorted competi-
The new Law on Banks and regulations recently issued by
tion, remained in effect until 1 January 2001, when the de-
the BNB have considerably strengthened the legal framework.
posit insurance law was also extended to include DSK. The
Reform of bankruptcy procedures and further alignment with
deposit insurance scheme is of a mandatory nature, funded
IAS accounting regulations also represent key steps toward
by a one-off admission fee levied on the banks (currently
ensuring greater transparency.
equivalent to 1 % of a bank’s own funds, but not less than
Financial intermediation in Bulgaria, however, is still fairly
BGN 100,000) and annual contributions amounting to 0.5 %
low, despite considerable deepening in recent years, indicat-
of insured deposits. Deposits of natural and legal persons are
ing significant upward potential. A cautious approach and a
guaranteed, regardless of their origin (resident or non-resi-
preference for low-risk investments eventually gave way to
dent) and currency (domestic or foreign). Minimum coverage
brisk lending activity in the corporate and households seg-
is currently at BGN 25,000 (approx. EUR 12,800), which is
ments, driven by sharp competition on the banking market,
just slightly below two-thirds of the minimum coverage of
strong economic growth, buoyant investment activity and
EUR 20,000 set forth in the EU-Directive 94 /19 / EC on De-
robust private consumption. At the same time, the upturn in
posit Guarantee Schemes. The full harmonisation with the EU
lending resolved the issues of excess liquidity and overcapitali-
norm will take place at the end of 2006, just shortly before
sation. In light of the recent credit boom and several failed
Bulgaria’s EU accession on 1 January 2007.
attempts by the BNB to curtail loan growth, however, the
The Banking Department is another protective element in
banking system’s risk profile has somewhat deteriorated. This
the BNB’s organisation and is a peculiarity of the Bulgarian
situation poses a major challenge for the BNB, whose main
currency board arrangement. This department, in contradic-
tasks now are to avoid a worsening of loan portfolio quality
tion to the basic premise of a currency board, functions to a
and a herd mentality on the part of banks. Stepped-up moni-
certain extent as lender of last resort, by providing loans to
toring of the banks’ activities and strict compliance with pru-
essentially solvent, but temporarily illiquid banks in exception-
dent banking principles are necessary in order to prevent a
al situations (e. g. risk of a systemic crisis).
destabilisation of Bulgaria’s banking system.
Banking sector supervision is performed by the BNB, or
Other important issues on the agenda include enhancing
more specifically, the Banking Supervision Department, which
creditors’ rights, improving the legal framework related to in-
is a predominantly autonomous organisational unit within the
solvency, fully harmonising the country’s banking regulations
central bank. The new law on bankruptcy procedures for
with EU standards with an eye to EU accession in 2007 and
credit institutions, however, which was passed in September
eventually, preparations for Basel II.
Banking in SEE
33
Croatia – Taming the untamable?
Sándor Gardó
Croatia
Taming the untamable?
Martial conflicts in the aftermath of Yugoslavia’s dis-
ber 1991 Croatia already possessed a set of market-like
integration and a reform-reluctant political regime for
banking practices and a basic institutional and legal frame-
many years hindered the development of Croatia’s bank-
work, although somewhat limited in scope. As a result, the
ing sector. The pace of banking reform picked up after
country enjoyed several initial advantages, but the years of
the political sea change in 2000. In light of the country’s
military conflict in the Balkans, which led to the destruction
ambitions to join the EU, Croatia is pressing ahead with
of a great deal of Croatia’s banking infrastructure, and an
this endeavour, with its banking sector rapidly becoming
unstable economic and reform-reluctant political environ-
one of the most developed banking markets in Central
ment, prevented the country from leveraging these compara-
and Eastern Europe. However, the recent credit boom
tive advantages.
poses serious challenges for the authorities with respect
to maintaining macroeconomic stability.
The first tentative steps in the field of bank restructuring
were taken within the framework of a linear rehabilitation
program (affecting the entire banking sector) as a reaction to
Yugoslavia’s special economic concept of market social-
the National Bank of Yugoslavia freezing private foreign cur-
ism and workers’ self management attempted to revitalise the
rency deposits. Yet, these measures were merely of a financial
defunct socialist economy by integrating elements of a mar-
nature (issuance of big bonds and counterpart bonds), thus
ket economy. Within the context of this socialist concept,
neglecting the need to implement effective corporate gover-
Yugoslavia introduced a two-tier banking system as early as
nance structures. As a result, problems (e. g. soft budget
the 1960s. Therefore, in contrast to other transition countries
constraints, moral hazard, bad debt legacy) that had been
in Central and Eastern Europe, upon independence in Octo-
concealed by the economic recovery in 1994 in the wake of
Table 1: The ten largest Croatian banks ranked by total assets as of 31 December 2004
Bank
Main shareholders
Total assets
(in EUR mn)
Market share
(in %)
1
Zagrebacka banka
UniCredito Italiano (81.9 %), Allianz AG (13.7 %)
7,510
25.0
2
3
Privredna banka Zagreb
Intesa BCI Holding (76.3 %), EBRD (20.1 %)
5,458
18.2
Erste & Steiermärkische Bank
Erste Bank (59.8 %), Steiermärkische Bank und Sparkassen AG (35 %)
3,366
11.2
4
Raiffeisenbank Austria
Raiffeisen International Beteiligungs AG (75 %),
Raiffeisenbank Zagreb Beteiligungsgesellschaft mbH (25 %)
3,181
10.6
5
HVB Splitska banka
Bank Austria Creditanstalt (99.7 %)
2,797
9.3
6
Hypo Alpe-Adria Bank
Hypo Alpe-Adria-Bank AG (95.9 %), VCP Finance B. V. (4.1 %)
2,235
7.4
7
Nova banka
Reginter (67.8 %), SEEF Holding (23.3 %), SWR Investment (4.5 %)
1,023
3.4
8
Hrvatska Postanska banka
Croatian Privatisation Fund (37 %), Hrvatska Posta (33.6 %),
Croatian Pension Insurance Institute (28 %)
725
2.4
Hypo Alpe-Adria-Bank AG (76.2 %), VCP Finance B. V. (15.9 %)
724
2.4
Volksbank International AG (92.1 %)
472
1.6
9
Slavonska banka
10 Volksbank
Source: CNB, Bank Austria Creditanstalt Economics Department
34
Banking in SEE
Croatia – Taming the untamable?
stabilisation measures taken in 1993, resurfaced at three of
Banking Market Structure
the four largest banks in 1996. After recognising the gravity
After peaking at 60 in 1997 and 1998, the number of
of the problem the Croatian National Bank (CNB) launched a
commercial banks in Croatia fell by almost one-third during
second round of restructuring measures with the help of the
the consolidation phase, which set in after the 1998 /1999
Bank Rehabilitation Agency, which was founded in 1994.
banking crisis. By year-end 2001, the number of commercial
These new measures aimed to restructure individual banks,
banks had fallen to 43. However, a brief reversal in this
including Privredna, Splitska and Rijecka Banka, at an esti-
downward trend occurred in 2002 due to a provision (Section
mated combined fiscal cost of USD 1.6 bn or 8.3 % of aver-
119) of the 1998 Banking Act that required savings banks to
age 1991 – 2002 GDP.
continue their activities as banks after 31 December 2001 fol-
Nevertheless, Croatia’s banking sector continued to ex-
lowing an increase in capital (with seven savings banks
perience difficulties, which were exacerbated by the high-risk
choosing this option in 2002), or to cease operations in the
activities of some small- and medium-sized banks, a more re-
event that the statutory requirements were not fulfilled.
strictive monetary policy, an economic slowdown, a decline
Despite this one-off effect, the number of commercial banks
in workers’ remittances and, last but not least, a loss of con-
declined again thereafter, falling significantly to 37 as of year-
fidence in emerging markets in the wake of the Asian and
end 2004 due to further market consolidation and numerous
Russian crises. These accumulated problems ultimately lead
bank mergers (e. g. Splitska Banka with HVB Bank Croatia,
to a full-blown banking crisis in 1998 /1999.
Rijecka Banka with Erste & Steiermärkische Bank). Following
The Banking Act of 1998 finally provided a basis for de-
the regulatory changes, the number of savings banks de-
cisive intervention by the CNB, paving the way for the 1999
creased to four in 2004 from 26 in 2000, with the remaining
launch of key reforms which were already a decade overdue.
four specialising in the housing segment, representing some
Additionally, parliamentary elections in January 2000 gave
2.2 % of total banking sector assets.
fresh impetus to the reform process, leading to warmer rela-
The 1998 /1999 crisis in the banking sector led to the col-
tions between Croatia and the EU, and opening up new pos-
lapse of numerous banks and consequently to a sharp decline
sibilities with regard to bank reform. In the end, the closure
in the number of bank branches. Nevertheless, economic re-
of insolvent banks, the withdrawal of the state from the
covery in the early 2000s and the resultant demand for bank-
banking sector, and ultimately, the injection of financial and
ing services, as well as most banks’ desire to shed their re-
human capital through privatisation established a sound
gional character led to an increase in the number of branches
foundation for the recovery of Croatia’s banking sector.
over the last two years. As of year-end 2004 the number of
branches reached 1,037, with the highest branch density in
the counties Zagreb (including city of Zagreb) and SplitDalmatia. Despite considerable branch network expansion
Croatia only had one branch for every 4,300 inhabitants,
Number of banks and savings banks
which is still more than twice the EU average of 2,060.
1995 – 2004
Branch network expansion has also led to a rise in banking
sector employment. As of 2004 the banking sector comprised
17,424 employees, up by some 1,300 over 2001.
Given these conditions, the Croatian banking market can
60
be viewed as overbanked, but underserviced. Accordingly,
50
considering the rather large number of small banks (27 in
40
total), most of which have a regional focus and each of which
30
account for a market share of less than one percent, it seems
20
probable that the recent wave of mergers and acquisitions
10
will continue in the coming years. On the other hand, the
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
rising number of branches and staff indicate the Croatian
market’s considerable potential and suggest that market
Number of banks
Number of savings banks
saturation in banking services is still a long way off.
Zagrebacka banka is the undisputed market leader on the
Croatian banking market, as of year-end 2004 commanding
Source: CNB, Bank Austria Creditanstalt Economics Department
25 % of the sector’s total assets. Second-placed Privredna
Banking in SEE
35
Croatia – Taming the untamable?
banka Zagreb, which claimed a market share of 18.2 %, has
December 1999. Shortly thereafter, Unicredito Italiano ac-
been followed by a phalanx of four Austrian banks in third,
quired a 51 % interest in Splitska Banka, and Bayerische Lan-
fourth, fifth and sixth places, i. e. Erste & Steiermärkische
desbank bought 60 % of Rijecka Banka. Market conditions,
Bank (11.2 %), Raiffeisenbank (10.6 %), HVB Splitska banka
however, altered rapidly, leading to changes in the ownership
(9.3 %) – a subsidiary of Bank Austria Creditanstalt (BA-CA),
structure at most of the country’s major banks. Splitska
and Hypo Alpe-Adria Bank (7.4 %). Croatia’s banking market
Banka, for example, has been a subsidiary of BA-CA since
is highly concentrated. The four leading banks’ market share
April 2002 and Hungary’s OTP bought a 95.6 % stake in sev-
at year-end 2004 was 65 % in terms of total assets. With
enth-placed Nova banka in December 2004 for EUR 236 mn,
respect to deposits, the top four banks held a market share of
a price well above market estimates of some EUR 150 mn.
61.4 %, with their share in total lending likewise high at
Foreign banks’ market share has continued to increase, reach-
61.7 %. Another indicator of market concentration, the
ing 91.3 % in 2004. By contrast, state-owned banks’ market
Herfindahl-Hirschman index (the sum of squared market
share declined from 45.6 % in 1999 to 3.1 % in 2004, leav-
shares of individual banks), reached 1,363.0 points with re-
ing only two banks, Croatia banka and Hrvatska Postanska
spect to total assets, also an indication of a concentrated
banka, directly or indirectly owned by the state.
market structure. Concentration is expected to rise further, as
with intensifying competition small banks will find it increasingly difficult to go it alone.
Banking Sector Profitability and Efficiency
Croatia has enjoyed substantial success in recent years in
Foreign banks’ market access to Croatia started in 1994
its efforts to reform the banking sector, and this has been
(with the 1993 Banking Law liberalising market entry), but
clearly reflected in the positive development of the sector’s
was slow due to military conflicts, the hostile political envi-
efficiency and profitability. As a result of the bank’s expansive
ronment and the obvious problems plaguing the country’s
lending policy, financial intermediation (total assets as a per-
banking sector in the early 1990s. In 1998, when foreign
centage of GDP) has rebounded from 65.9 % of GDP in the
banks’ market share in terms of total assets had already
crisis year 1999 to 108.9 % of GDP in 2004, making Croatia
climbed to over 60 % in other transition countries (e. g. Hun-
the front runner in this respect among the Central and East-
gary), Croatia lagged far behind with a mere 6.7 %, as for-
ern European countries (e. g. Poland: 65.5 %, Hungary:
eign banks preferred greenfield investment. However, in 1999
82.4 %, Slovak Republic: 87.7 %, Estonia: 96.0 %, Czech Re-
and 2000 Croatia also raced ahead in the field of bank pri-
public: 96.1 %, Latvia: 106.7 %). The banking sector’s in-
vatisation, quickly moving from the rear into the vanguard.
creasing efficiency is reflected in the gradual increase in total
The breakthrough came with the sale of a 66 % share pack-
assets per employee, which (despite a gradual increase in
age in Privredna Banka to Banca Commerciale Italiana in
total employment) more than tripled from EUR 0.5 mn in
1995 to EUR 1.7 mn in 2004, but is still well below the EU-15
average of EUR 9.5 mn.
The banking market has experienced a period of rapid
lending growth in recent years. Accordingly, the ratio of pri-
Banking market structure
vate sector loans to GDP roughly doubled from a low of
1995 – 2004, in % of total assets
27.5 % of GDP in 1996 to 58.1 % in 2004, thanks mainly to
exceptionally strong loan growth of 36 % on average in the
household segment (corporates: + 22 %) in the years 2001
100
and 2002. In order to stem the strong rise in lending and the
80
consequent need to borrow abroad (contributing to a boost
in the country’s foreign debt) and to reduce pressure on the
60
current account, the CNB intervened several times by taking
40
corrective measures. In 2003, in accordance with the CNB
20
Decision on the Compulsory Purchase of CNB Bills, these involved requiring banks whose annual lending growth exceed-
0
1996
State
1997
1998
1999
2000
Private (domestic)
2001
2002
2003
Private (foreign)
2004
ed a targeted 16 % (4 % per quarter) to provision 200 % of
the portion in excess of the limit with CNB bills with an unattractive annual interest rate of 0.5 %. After not yielding the
Source: CNB, Bank Austria Creditanstalt Economics Department
36
Banking in SEE
desired effect, with banks circumventing the regulation by re-
Croatia – Taming the untamable?
allocating their assets (strong expansion of leasing and asset
In the meantime, the restrictive monetary measures taken
management companies, housing savings banks), this mea-
significantly altered the banks’ balance sheet composition. Al-
sure was repealed at the end of 2003. This regulation was
though total credit growth further moderated in 2004, the pace
replaced by more market-oriented ones, including changes to
of private sector credit growth at 13.9 % (2002: 29.9 %, 2003:
minimum reserve requirements and the introduction of a
14.8 %) was tempered only marginally due to a renewed pick-
35 % (lowered to 32 % in February 2005 in order to spur
up in corporate lending to + 9 % (2003: 4 %) and the retail seg-
government financing from domestic sources) minimum ratio
ment’s still considerable growth rate of 18.7 % (2002: 43 %,
of foreign currency claims to foreign currency liabilities. In
2003: 27.7 %). On the contrary, banks’ deposits with the CNB
order to slow banks’ foreign borrowing, as of end-2003 the
rose substantially in 2004 (+ 25.9 %) following banks’ efforts to
CNB adopted a new Decision on Reserve Requirements and in
comply with the aforementioned regulations. The monetary
July 2004 a Decision on Marginal Reserve Requirement. The
measures applied also succeeded in slowing banks’ foreign liabil-
first decision specifically addressed the foreign exchange
ities growth from 60.2 % in 2002 to 22.5 % in 2004, with the
component of the uniform reserve requirement (currently
first quarter of 2005 recording only a 2.4 % pick-up.
18 %) by raising the reserve requirement on funds of non-
Since 1995, the share of foreign currency loans to the pri-
residents and foreign exchange funds received from legal per-
vate sector has steadily decreased due to statutory restrictions
sons in a special relationship with a bank (i. e. parent compa-
reaching 12.1 % as of year-end 2004. However, the actual
nies) to 100 %, with the remaining portion of the foreign ex-
share is probably quite a bit higher, as the majority of HRK
change component of reserve requirements being raised from
loans are indexed to foreign currencies. Such indexing is nec-
40 % to 60 %. The second regulation prescribes the interest-
essary to offset the high foreign exchange positions on the lia-
free allocation of 24 % of banks’ foreign liabilities net in-
bility side. Nevertheless, this results in substantial currency risk,
crease to an account with the CNB in order to discourage
which significantly increases the probability of loan losses in
banks from borrowing abroad to fund domestic lending.
the event of a major depreciation of Croatia’s currency. To
However, also these monetary tightening measures proved to
counter the problem of a currency mismatch, banks’ minimum
have limited effectiveness due to banks’ continued strong for-
amount of foreign currency claims must not be less than 32 %
eign borrowing. This prompted the CNB again to strengthen
of foreign currency liabilities.
the above-mentioned regulations, raising the marginal reserve
Underpinned by the lending boom in recent years, the struc-
requirement in two steps from 24 % to 30 % as of January
ture of loans by sectors as of year-end 2004 showed the domi-
2005 and further to 40 % in May 2005. Should these steps
nance of households and corporates with a share of 49.3 % and
also prove ineffective, the CNB has already signalled its readi-
40.5 % in total extended loans, respectively (2002: 44.5 % and
ness to implement tougher measures.
40.9 %). The state sector followed third with 6.9 % (7.3 %).
Financial intermediation
Loan portfolio structure by sectors
1995 – 2004, in % of GDP
2004, in %
Non-residents 0.5 %
120
Public entities 6.9 %
Financial institutions 2.5 %
100
80
Housholds 49.3 %
60
Corporates 40.5 %
40
20
1995
1996
Total assets
1997
1998
1999
2000
Private sector deposits
2001
2002
2003
2004
Non-profit organisations 0.3%
Private sector loans
Source: CNB, Bank Austria Creditanstalt Economics Department
Source: CNB, Bank Austria Creditanstalt Economics Department
Banking in SEE
37
Croatia – Taming the untamable?
Progress in restructuring and privatising state-owned credit
It is noteworthy that despite a slight downward trend,
institutions, improvements in banks’ efficiency in credit assess-
roughly 70 % of private sector deposits were denominated in
ment and stricter regulatory rules were reflected in the decline
foreign currency (predominantly euro) as of year-end 2004, a
in non-performing assets as a share of total classified assets,
clear indication of the Croatian economy’s high degree of euro-
which fell from its peak of 10.3 % in 1999 to 4.6 % in 2004.
isation. This is not only due to the public’s gradually dimin-
Nevertheless, the credit boom Croatia experienced recently
ishing mistrust in the national currency, the kuna (the D-Mark
might increase the probability of a deterioration in loan quality.
was widely used as a substitution currency in Croatia for
To counter such a development the CNB not only tightened
many years), but also stems from the fact that the majority of
regulations with respect to loan classification and provisioning,
tourism revenues and workers’ remittances are held in foreign
but also approved the establishment of a credit register
currency with the banks.
(HROK). HROK will be fully owned by Croatian banks and is ex-
Capital adequacy briefly dipped to a low of 12.7 % in
pected to become completely operational in the second half of
1998 as a result of the banking crisis, but rebounded to
2005. For the time being, it will collect, process and exchange
21.3 % by 2000, due to bank restructuring (including recapi-
data and information on the credit record of natural persons,
talisation) and banks’ ensuing risk-averse business policies in
but should later also be extended to legal entities.
the aftermath of the crisis. However, the last two years’ credit
Private sector deposits at commercial banks advanced
boom and the resulting increase in competitive pressures has
from 20.5 % of GDP in 1995 to almost 60 % of GDP in 2004.
forced banks to dismantle their high cash balances, causing
This development not only mirrors the public’s growing confi-
the banking system’s capital adequacy to fall to 15.3 % as of
dence in the banking system, thereby increasing the banks’
2004. Despite this downward curve, however, Croatia’s bank-
ability to mobilise savings, but can also be attributed to two
ing sector is adequately capitalised, with the 2004 figure still
specific factors. First, the period 1995 – 1998 saw strong de-
significantly above the 10 % required by Croatian law and the
posit growth mainly as a result of high domestic interest
BIS proposal of 8 %.
rates, prompting Croatian citizens to retransfer their savings
A marked recovery in profitability indicators has also
deposited abroad. Second, after witnessing a loss in deposi-
taken place since the banking crisis in the late 1990s. After
tors’ confidence during the banking crisis, the exceptionally
dipping to – 2.8 % in 1998 return on assets (ROA) rose to
high jump in 2001 came as a consequence of the introduction
1.7 % in 2004. Similarly, return on equity (ROE) turned
of the single European currency in the euro area on 1 January
around from – 16.1 % in 1998 to 16.1 % last year. The tem-
2002, prompting the population to deposit foreign currency
porary downturn in 2001 can be ascribed to financial prob-
(especially D-Mark) savings (mattress money) with banks for
lems at Rijecka Banka due to hidden trading losses, forcing
the purpose of conversion.
the government to bail out and restructure the bank, which
Banking sector capitalisation
Banking sector profitability
1995 – 2004, in %
1998 – 2004, in %
25
18
15
12
9
6
3
0
–3
–6
–9
–12
–15
–18
20
15
10
5
0
1995
1996
1997
1998
1999
2000
2001
2002
Capital adequacy ratio
Source: CNB, Bank Austria Creditanstalt Economics Department
38
Banking in SEE
2003
2004
1998
1999
2000
Return on assets (ROA)
2001
2002
2003
Retun on equity (ROE)
Source: CNB, Bank Austria Creditanstalt Economics Department
2004
Croatia – Taming the untamable?
entailed total costs of USD 100 mn. Given the credit boom,
to found a bank. For savings banks, which in accordance with
banks’ profitability is mainly boosted by interest income,
the 1998 Banking Act had to increase their minimum capital
which accounted for some 70 % of total income as of year-
to HRK 20 mn by end-2001 and receive an operating license
end 2004, with net interest income recording an annual aver-
as a commercial bank from the CNB, a transitional period
age growth rate of some 15 % in the years 2002 – 2004.
lasting until 31 December 2006 was granted to comply with
Spreads (difference between lending and deposit rates)
the HRK 40 mn requirement. Furthermore, to ensure ade-
have been declining since 1996, not only due to disinflation,
quate capitalisation, banks are required to maintain a capital
but also on the back of increasing operational efficiency and
adequacy ratio of at least 10 % of risk-adjusted assets,
keener competition on the banking market. The outlier in
whereby the new Banking Act grants the CNB the right to
2002 can be attributed to changes in statistical methodology
prescribe a higher ratio if so required for individual banks.
In order to provide adequate risk diversification, a bank’s
related to the calculation of lending rates.
exposure to a single client is limited to 25 % of a bank’s regu-
Legal framework
latory capital. Furthermore, large exposures (i. e. those
The legal framework in Croatia is characterised by fre-
equalling or exceeding 10 % of a bank’s capital) may in total
quent changes, as evidenced by new banking laws introduced
not exceed 600 % of a bank’s capital. Loans to connected
in 1989, 1993 and 1998, and most recently in 2002. The cur-
parties are confined in individual cases to 10 % of a bank’s
rent Banking Act came into force on 25 July 2002 and repre-
capital, and in total to 20 % of such, whereas the total open
sents another step toward harmonisation with EU standards.
foreign currency positions may not exceed 20 % of a bank’s
According to the Banking Act in force, bank owners are re-
capital. Maximum limits for holdings in non-financial enter-
quired to provide a minimum capital of HRK 40 mn (EUR 5.3 mn)
prises are set at 15 % and 30 % of a bank’s capital, for indi-
Table 2: Overview of Croatia’s banking sector (1995 – 2004)
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Number of banks
54
58
60
60
53
43
43
46
41
37
Number of savings banks
21
22
33
36
34
26
18
4
4
4
n.a.
n.a.
n.a.
n.a.
822
756
879
956
1,022
1,037
Number of bank branches
Number of bank employees
18,310 18,513 18,084 17,318 16,858 16,193 16,098 17,126 17,086 17,424
Bank assets per employee (in EUR mn)
Return on average assets (ROAA) 1
Return on average equity
(ROAE) 2
0.52
0.57
0.71
0.76
0.72
0.91
1.26
1.37
1.56
1.72
0.3
0.6
1.2
– 2.8
0.7
1.4
0.9
1.6
1.6
1.7
n.a.
n.a.
n.a.
–16.1
4.8
10.7
6.6
13.7
14.5
16.1
19.6
17.7
16.4
12.7
20.6
21.3
18.5
17.2
16.2
15.3
Non-performing placements (in % of total placements)
8.3
7.3
5.2
9.3
10.3
9.5
7.3
5.9
5.1
4.6
Spread (difference between lending and deposit rates)
8.7
8.3
5.0
8.4
4.7
3.3
3.8
7.3
7.0
7.3
Capital adequacy ratio (in %)
Private sector 3 deposits (in % of GDP)
20.5
28.3
35.3
36.1
34.0
31.8
56.9
56.9
57.9
59.8
Private sector FX deposits (in % of private sector deposits) 69.2
70.5
71.0
75.9
76.1
95.5
76.5
70.8
67.3
66.4
Corporate loans (in % of GDP)
22.9
21.4
25.3
26.6
22.1
20.7
23.1
26.2
25.6
25.8
Private sector loans (in % of GDP)
27.7
27.5
35.6
39.5
35.7
36.0
42.0
51.1
54.1
58.1
Private sector FX loans (in % of private sector loans)
43.3
27.9
20.7
17.9
14.6
13.3
12.7
13.4
11.0
12.1
Private sector loans to private sector deposits (in %)
135.2
97.1
101.0
109.6
105.2
113.2
73.8
89.8
93.4
97.1
Financial intermediation (total assets / GDP, in %)
63.7
62.5
68.9
67.8
65.9
72.1
86.1
92.3
101.1
108.9
Market concentration (C4 – total assets, in %)
68.2
60.1
53.1
53.3
58.1
62.0
60.0
58.6
61.6
65.0
Market concentration (Herfindahl-Hirschman index)
1,596.7 1,266.7 1,016.1 1,017.6 1,189.9 1,368.4 1,315.5 1,237.4 1,270.0 1,363.0
Market share of state-owned banks (total assets, in %)
Market share of foreign-owned banks (total assets, in %)
n.a.
78.4
41.9
43.1
45.6
5.7
5.0
4.0
3.4
3.1
0.0
1.0
4.0
6.7
39.9
84.1
89.3
90.2
91.0
91.3
Source: CNB, IMF, EBRD, FBE, Bank Austria Creditanstalt Economics Department / 1) Before tax / 2) After tax / 3) Private sector includes corporates and households
Banking in SEE
39
Croatia – Taming the untamable?
vidual and total holdings respectively. Furthermore, total investments in real property and fixed assets may not surpass
40 % of a bank’s regulatory capital.
Conclusion
Despite numerous advantages over its Central and Eastern European peers, Croatia was unable to utilise its compar-
The new loan classification and provisions requirements
atively favourable starting position due to a range of exoge-
which entered into force on 1 January 2004 take into ac-
nous factors of uncertainty that prevented the country from
count both the borrower’s credit rating, the duration of de-
rapidly restructuring and revitalising its banking sector.
fault and the quality of loan collateral. Provisions must be
The 1998 /1999 banking crisis, however, highlighted the
formed depending on the risk category (A – enforceable
need for deep restructuring leading to a significant increase
claims, B (B1, B2, B3) – partially enforceable claims, C – un-
in reform intensity. A new political setting after the 2000
enforceable claims) amounting to 0.85 – 1.2 % (A), 10 %
change in government and the subsequent warmer relations
(B1), 30 % (B2), 70 % (B3) and 100 % (C).
with the EU (a Stability and Association Agreement conclud-
A deposit protection scheme, which is operated by the
ed in 2001 went into effect as of 1 February 2005 and the
State Agency for Deposit Insurance and Bank Rehabilitation,
country was recognised as an EU candidate in June 2004)
was created in 1997 to raise the population’s confidence in
facilitated a rapid resolution of the banking crisis. The coun-
the banking market by protecting depositors’ savings in the
try managed to advance from the rear to the front, now pos-
event of bank insolvency and to minimise the possibility of a
sessing one of the most advanced banking sectors in Central
system-wide crisis. Participation in the insurance scheme is
and South-Eastern Europe. Indeed, in terms of financial inter-
mandatory. The Agency is financed by banks’ contributions.
mediation, Croatia boasts the highest level in Central and
More specifically, funding is based both on an initial contri-
Eastern Europe. Regarding banking services penetration
bution amounting to 0.3 % of own funds and an annual con-
Croatia is also one of the top performers in CEE. Some 85 %
tribution of 0.8 % (quarterly premium payments of 0.2 %)
of the population aged 15 or older have some kind of rela-
of the total amount of insured deposits. Savings deposits
tionship with a bank, 75 % have a bank account, and roughly
of natural persons, i. e. households, both in domestic and
50 % use a bank card.
foreign currency are insured. Demand deposits and foreign
The banking sector’s restructuring and privatisation has
currency deposits made before 1993 that have been trans-
been virtually completed. Nevertheless, work remains to be
formed into debt securities of the Croatian state are,
done in the area of market consolidation and catching up to
however, not covered. The minimum coverage level has been
Western standards. The new 2002 Banking Act represents a
HRK 100,000 (roughly EUR 13,500) since 1998, representing
key step toward harmonising Croatian banking law with EU
some two-thirds of the EU requirement of EUR 20,000, im-
standards. Notwithstanding, in light of the country’s ambi-
plying the need for further alignment. Furthermore, the de-
tion to join the EU, further efforts will be necessary in this
sign of the deposit insurance system poses the problem of
field. The sector is clearly overbanked, implying a continua-
asymmetric information. The lack of a risk-based funding
tion of the recent wave of mergers and acquisitions, which
mechanism (uniform premia) makes the scheme prone to ad-
will further boost the level of market concentration. The
verse selection, just as the lack of co-insurance (deposit pro-
banks’ fight for market share will, however, prevent any
tection of 100 % up to the coverage limit) does to moral
abuse of dominant market positions. Risk exposure has in-
hazard.
creased as a result of the credit boom, with credit and cur-
The Croatian National Bank has been responsible for
rency risk to be carefully monitored. Nevertheless, the bank-
banking supervision since 1992 and has been working hard
ing sector is currently in generally good shape, characterised
to continuously adapt the regulatory and supervisory stan-
by adequate capitalisation, growing profitability, improving
dards to those prevalent in Europe. The most important
loan portfolio quality and increasing efficiency. Rapid credit
progress in the recent past includes:
expansion has produced, however, undesired macroeconomic
◆ Creation of a legal basis for the supervision of credit insti-
effects, specifically with regard to the current account and
tutions on a consolidated basis;
Croatia’s external debt position, thereby triggering economic
◆ Issue of new loan classification and provisions guidelines;
imbalances. Given the limited effectiveness of corrective
◆ Preparation of a new regulatory standard with regard to
steps already taken, the CNB’s main challenge is to walk a
limiting foreign currency risks;
◆ Overhaul of accounting regulations.
40
Banking in SEE
tightrope between a dynamically growing banking market
and macroeconomic stability.
FYR Macedonia – At a crossroads
Lisa Perrin
FYR Macedonia
At a crossroads
Macedonia’s banks have made considerable strides
Macedonia’s banks operate in a small economy, one that
over the last decade in shedding themselves of a legacy
is heavily dependent on foreign trade. In the period immedi-
of non-performing loans, dispensing with the practice of
ately following the country’s independence from the former
connected lending and bringing the legal and regulatory
Yugoslav Federation (SFRY) in January 1991, its economy
environment into line with EU standards. The vast majority
contracted in the wake of a series of shocks from the loss of
of the sector is privatised, although just under 50 % of
an important trading partner due economic sanctions against
total capital is majority foreign-held – a modest figure
the SFRY, confiscation (freezing) of households’ foreign cur-
compared with most of CEE. With 21 banks servicing a
rency deposits by the SFRY central bank and an economic
population of 2.1 mn, Macedonia is overbanked – a clear
blockade by Greece. Hyperinflation and high unemployment
signal that consolidation – via mergers and / or the mar-
were the by-products. The Macedonian denar was anchored
ket exit of smaller banks – is on the agenda. The banking
to the deutsche mark in 1992 (now de facto to the euro) in
market is also highly concentrated, with two banks con-
order to keep inflation in check, with average annual infla-
trolling over one-half of total assets. Although the
tion declining to single-digit figures as of 1996. The country
soundness of Macedonia’s banking system has measur-
returned to a positive growth path in 1996 that endured
ably improved, increased involvement by foreign in-
even during the 1999 Kososvo conflict, but progress was
vestors would inject a stronger element of competition,
interrupted by the security crisis (armed conflict between
accelerate the sector’s consolidation process, create effi-
Albanian ethnic minority and Slavic majority groups) in
ciencies to boost intermediation levels and profitability
Macedonia in 2001, when GDP contracted by 4.5 %. Since
and promote corporate governance. Such changes are
then the economy has grown, albeit at a moderate pace
key to improving the banks’ ability to facilitate further
(2004: + 1.0 %), in light of continued structural problems
structural changes in Macedonia’s economy.
and ethnic strife.
Table 1: The ten largest Macedonian banks ranked by total assets as of 31 December 2004
Bank
Main shareholders
Total assets
(in EUR mn)
Market share
(in %)
1
Komercijalna banka a. d. Skopje
EBRD (6.1%), Prva Pokojninska druzba DD Ljubljana (4.99 %)
544.1
28.3
2
Stopanska banka a. d. Skopje
National Bank of Greece Group (71.2 %), EBRD (10.5 %), IFC (10.5 %)
473.3
24.6
3
Tutunska banka a. d. Skopje
Nova Ljubljanska Banka Group (77.2 %)
268.9
14.0
4
Ohridska banka a. d. Ohrid
Otex AD Ohrid (18.6 %)
102.0
5.3
5
Stopanska banka a. d. Bitola
ZK Pelagonija (22.9 %), Blagoj Gorev (14.0 %), Pivara AD Skopje (8.9 %)
79.0
4.1
6
Investbanka a. d. Skopje
n. a. (dispersed)
47.4
2.5
7
Alfa banka a. d. Skopje
Alpha Bank Greece (100.0 %)
8
Izvozna i kreditna banka a.d. Skopje EBRD (31.9 %)
9
Makedonska banka a. d. Skopje
10 ProKredit banka
46.6
2.4
43.3
2.2
AD Jaka 80 Radovis (85.4 %)
35.0
1.8
IFC (9.5 %), EBRD (12.5 %), IMI (53.3 %), KfW (14.7 %), FMO (10.0 %)
33.8
1.8
Source: Banks’ annual reports, Bank Austria Creditanstalt Economics Department
Banking in SEE
41
FYR Macedonia – At a crossroads
In the decade following independence, Macedonia’s banks
assets of only EUR 2.4 bn. Despite the fact that Macedonia is
played a subdued role in terms of lending to the real economy.
overbanked, however, the banks’ geographical distribution is
Despite having inherited from the SFRY a two-tier banking sys-
heavily skewed toward Skopje, with just four banks located out-
tem that had been in place since 1964, the country’s four com-
side the city as of 30 June 2004. As of year-end 2004 Macedo-
mercial banks operated in an atmosphere that ran counter to
nia’s banking system employed 4,635 persons (+ 40 over 2003),
the notions of effective intermediation and higher profitability.
58 % of which were employed by the country’s three largest
Instead, the banking environment was characterised by owner-
banks. Although consolidation should result in a reduction in
ship by formerly socially-owned enterprises (a situation that
staffing levels, this could be offset to a certain extent by staffing
compromised prudential lending practices and crowded out the
requirements accompanying branch network expansion.
retail and SME segments), generous interest rate spreads and an
Eighteen of Macedonia’s commercial banks are licensed to
attitude of indifference or at least of benign neglect toward in-
conduct domestic universal banking operations and to carry
creasing profitability by improving efficiencies. The lack of cor-
out payment, credit and guarantee operations abroad (as per
porate governance stemming from the banks’ ownership struc-
Banking Law Articles 45 and 46), while the licensing for three
tures encouraged connected lending, with banks continuing to
banks restricts them to domestic activities (Banking Law Article
fund loss-making enterprises whose finances had deteriorated
45). Commercial banks dominate Macedonia’s banking system,
in the post-independence period. In addition, large exposures to
accounting for 98.7 % of total assets, while the savings houses
a single borrower were not uncommon. By year-end 1992 the
– whose lending and deposit-taking activities are directed at
misallocation of funds had driven the share of non-performing
households – control a negligible 1.3 %.
loans to 85 % of the banks’ total loan portfolio. On the demand
Commercial banks are categorised by asset size into large,
side, confidence in the banking system was low, exacerbated by
medium and small groups. The large group (defined as individ-
the freezing of households’ foreign exchange deposits and pro-
ual banks whose assets exceed MKD 15 bn / EUR 245 mn) as
hibitively high lending rates.
of December 2004 consisted of Komercijalna banka a. d.
This situation in the banking sector began to reverse itself
Skopje, Stopanska banka a. d. Skopje and Tutunska banka
somewhat with the introduction of the Macedonian denar
a. d. Skopje. Eight banks (individual assets MKD 2 – 15 bn /
(MKD) in April 1992, marking monetary independence from the
EUR 33 – 245 mn) belonged to the medium-sized group and
SFRY. Monetary independence was accompanied by the issu-
ten banks (individual assets of up to MKD 2 bn / EUR 33 mn)
ance of the National Bank of the Republic of Macedonia Act
to the group of small banks. Eight of the commercial banks
(April 1992), which confirmed the National Bank of the Republic
are foreign-owned, including Macedonia’s second and third
of Macedonia (NBRM) as an independent entity, entrusted with
largest banks in terms of total assets.
the primary tasks of maintaining monetary and price stability
and carrying out the banking supervision function. Furthermore,
the Bank and Savings House Act was introduced in May 1993
(with subsequent amendments), based on the principle of universal banking. Minimum capital requirements for founding a
bank and licensing requirements were tightened and legally
Banks’ ownership structure
mapped out in the wake of the proliferation of commercial
1999 – 2004 in % of total assets
banks from four prior to 1992 to 19 by the end of 1993, during
which time the NBRM had set lenient requirements. The Bank-
100
ing and Savings House Act also set down regulations that included those relating to capital adequacy and single exposures.
80
60
Banking Market Structure
As of year-end 2004 21 banks were operating in Macedonia, a number that has declined only marginally since peaking at
24 (including two foreign bank branches) in 1998. In addition,
40
20
0
1999
2000
2001
2002
2003
there are 15 savings houses (down from a high of 28 in 1996)
and two foreign representative offices. This is a considerable
State
Foreign investors
Domestic private investors
number of banking institutions for a country with a population
of just 2.1 mn and with commercial banks’ aggregate total
42
Banking in SEE
Source: NBRM, Bank Austria Creditanstalt Economics Department
2004
FYR Macedonia – At a crossroads
Despite the sizeable number of banks, concentration levels
capital and 47.3 % of total assets foreign majority-owned. In-
are considerably high – as of year-end 2004 Komercialna banka
vestment by foreigners has originated mainly from countries in
a. d. Skopje and Stopanska banka a. d. Skopje had a combined
South-East Europe and the surrounding region. Domestic
market share of 52.9 % of total assets (down from 55.9 % as
private investors hold 47.5 % of total capital and 50.8 % of
of first-half 2004, as Stopanska lost some ground) and 47.9 %
total assets. These ownership levels have remained largely
and 66.3 % of loans and deposits, respectively as of 30 June
unchanged since a major inflow of foreign investment in 2000.
2004. Further consolidation of the sector, which has been slug-
Although by the end of 1999 some 94 % of the banking sec-
gish, seems inevitable. As loan demand increases – and with it
tor’s total capital (ca. 99 % of total assets) was in private hands,
the competition for cheap sources of refinancing – smaller
foreign ownership amounted to only 10.7 % (11.5 % of total as-
banks may find the going even more difficult. This should pro-
sets). Bank privatisations were of a passive nature, carried out
duce a wave of mergers among the smaller, more viable banks
within the framework of an enterprise privatisation programme
and the exit of those who are unable to contend. The Euro-
outlined in the Law on Transformation of Enterprises With Social
pean Bank for Reconstruction and Development (EBRD), for ex-
Capital (June 1993). The programme’s objective was to transform
ample, is encouraging the merger of smaller, credit-worthy
enterprises/banks from socially-owned entities into ones with
banks either directly or indirectly through its participations in
shareholder rights. Transactions occurred primarily via manage-
other banks.
ment, employee or enterprise buyouts, with the result that a fair
By 1995 Macedonia’s banks were still confronted with a
number of privatisations were insider ones. By 1999 Macedonia’s
high level of non-performing loans (44.4 %) and the issue of
banking sector was largely controlled by formerly socially-owned
frozen foreign currency deposits. Rehabilitation and restructur-
companies, a situation that contributed to a lack of corporate
ing of the banking sector got underway in 1995, with the pas-
governance and a preponderance of connected lending. Despite
sage of the Act on Rehabilitation and Restructuring. The
the liberalisation of foreign banks’ market entry, foreigners
process was administered by the Bank Rehabilitation Agency
remained conspicuously absent from the banking market.
(BRA). Rehabilitation focused on: writing off DM 1.4 bn
The year 2000, however, marked a turning point for Mace-
(EUR 0.7 bn) in frozen foreign currency deposits from the
donia’s banking sector, with the share of foreign majority-held
banks’ balance sheets; writing off debts related to the Paris and
total capital increasing from 10.7 % in 1999 to 45 % and total
Zurich Club Creditors; and restructuring the country’s largest
assets from 11.5 % to 53.4 %. This was due in large part to
bank, Stopanska banka, a. d. Skopje, which included transfer-
the sale of a majority stake in Stopanska banka a. d. Skopje (at
ring the bank’s bad loans to the BRA and recapitalising the
that time the country’s largest bank, today ranking second) to
bank with 15-year government bonds. An additional debt /
the National Bank of Greece (NBG), along with the EBRD and
equity swap occurred at the end of 1999, prior to Stopanska’s
International Finance Corporation (IFC). Currently the NBG
privatisation. Furthermore, Stopanska’s 65 % market share was
Group holds 71.2 % of Stopanska banka’s total capital, the
diluted to 34 % by spinning off its five largest branches into
EBRD and IFC each 10.5 %. Additional banks taken up by for-
stand-alone banks. In addition, in 1995 as part of a Special Re-
eign investors in 2000 included: Kreditna banka a. d. Skopje
structuring Programme a debt / equity swap eliminated claims
(renamed Alpha bank a. d. Skopje), now 100 %-owned by
against 25 large loss-making companies from the banks’ bal-
Greece’s Alpha Credit Bank (Athens); Tutunska banka a. d.
ance sheets, with the companies then slated for breakup, liqui-
Skopje (currently Macedonia’s third largest bank) by Slovenia’s
dation or privatisation.
Nova Ljubljanska Banka and its subsidiary LHB Internationale
The cost of rehabilitating Macedonia’s banks was signifi-
Handelsbank, with the NLB Group currently holding 77.2 % of
cant, reportedly amounting to 42.3 % of GDP (12.1 % attrib-
Tutunska’s total capital; and Izvozna i Kreditna banka a. d.
utable to the loan portfolio restructuring and 30.2 % to costs
Skopje, in which the EBRD now has a 31.9 % stake.
associated with the payment of frozen foreign currency
Other
foreign-owned
banks
currently
operating
in
household deposits) as of year-end 1995. Additional costs in-
Macedonia include T. C. Ziraat bankasi Skopje, (fully-held by
curred in the above-mentioned 1999 recapitalisation of
Turkey’s T. C. Ziraat bankasi – Turkey), ProKredit banka (a
Stopanska banka a. d. Skopje boosted the total cost of the
member of the ProCredit Group) and Eurostandard banka, all
banks’ rehabilitation to 45.8 % of GDP.
greenfield operations. Two representative offices also operate
The large majority of Macedonia’s banks have been priva-
in Macedonia, consisting of Bank Austria Creditanstalt and
tised, with the state retaining just 4.9 % of total capital and
Nova Ljubljanska Banka. The Macedonian Bank for Develop-
1.9 % of total assets as of December 2004. Foreign investor
ment and Promotion (MBDP) is the only bank that is wholly-
presence, however, remains moderate with 47.6 % of total
owned by the state.
Banking in SEE
43
FYR Macedonia – At a crossroads
Foreign banks are again making inroads into Macedonia.
currency loans using credit lines to banks abroad. As of year-
Slovenia’s Nova Ljublijanska Banka (NLB) stated in March 2005,
end 2004 some 21 % of total private sector loans were in for-
that in line with its strategy for growing its market share in
eign currency (2003: 17 %). In addition to these, a significant
South-East Europe, it had reached an agreement to acquire
portion of denar loans are foreign currency-indexed (as of
66.6 % of Postenska banka (Post Bank) by purchasing two
year-end 2003 some 22 %), bringing total forex exposure to
33 % stakes from domestic shareholders. NLB planned to bid
around 40 % of total private sector loans.
for the remaining state-owned shares (33 % plus one golden
In terms of private sector deposits (including demand
share). The deal with NLB fell through, however, on reports that
deposits), intermediation has improved, reaching 29.4 % of
the state was considering selling its stake to another investor. In
GDP as of year-end 2004 (2003: 25.4 %). This is the highest
June Eurostandard banka in Macedonia acquired the 66.6 %
level recorded since 2001, when prior to the euro conversion
stake as the two shareholders were about to default on a EUR
in the euro area households were able to convert their
2.2 mn loan. Eurostandard banka has announced its intention
deutschmark savings (often derived from workers’ remit-
to sell Postenska, and there have been reports that it had start-
tances from abroad) into euro. The continued increase in the
ed discussions with the Dutch ING Group. Komercijalna banka,
deposit base indicates a gradual return of confidence in
as of year-end 2004 Macedonia’s largest bank in terms of total
Macedonia’s banks, and is key to the institutions’ ability to
assets, is widely held by private domestic investors and could be
fund increasingly stronger loan growth. However, the euroisa-
a potential acquisition target for foreigners.
tion of deposits and a dependency on short-term deposits remain a concern. Some 95 % of private sector deposits are
Banking Sector Profitability and Efficiency
short-term, while foreign currency deposits constitute approx-
Financial intermediation expressed in terms of the banks’
imately 54 %. Since June 2003 the NBRM has set a uniform
aggregated total assets to GDP stood at 56.7 % as of year-end
reserve requirement on denar and foreign currency deposits
2004, a level from which it has only marginally fluctuated
in order to encourage local currency deposits. The require-
since 1999. This figure puts Macedonia’s banks well below the
ment was raised as of January 11, 2005 from 7.5 % to 10 %
2004 New Member States’ (NMS) average of 78 % – an indi-
in order to drain excess liquidity from the market, and in an
cation of the banking sector’s lingering inefficiencies as well as
apparent move to impose some lending restraint.
its catch-up potential.
Lack of corporate governance and its effect on prudential
During 2004 a gradual upward trend in private sector (non-
lending, combined with operating inefficiencies has played
financial corporations + households) lending that began in 2003
out in the banks’ financial results. In 2001 banks’ reported an
showed signs of firming. The ratio of private sector loans (ex-
aggregate net loss, due to repercussions from the security cri-
cluding overdue claims) to GDP reached 17.3 % (12 / 03:
sis, with one bank recording heavy losses. In 2002 and 2003
13.4 %), with nominal loan volume growth of some 34 % y-o-y
the situation stabilised somewhat. The banks managed to re-
(12 / 2003: + 20 % y-o-y). Retail lending has boomed for the sec-
verse a 2003 mid-year loss, producing a (still relatively low)
ond consecutive year, recording growth of over 60 % y-o-y, but
still less than 6 % of GDP. Interest spreads have narrowed. Lending rates should continue to move lower on heightened compe-
Financial intermediation
tition and as Macedonia gradually converges with the rest of
1997 – 2004, in % of GDP
CEE and ultimately, the EU. Macedonia’s current situation resembles the Czech Republic’s, where a conservative approach to
lending – the result of a lengthy and costly restructuring pro-
60
gramme – gradually gave way to lower risk premiums and in-
50
creased loan demand. The maturity structure of loans in Mace-
40
donia continues to improve, with the share of short-term loans
30
to total private sector loans having declined at year-end 2004 to
20
some 41 % from 62 % during the 2001 security crisis.
10
Currency risk has been an ongoing cause for concern,
particularly with regard to unhedged borrowers. In the latter
part of the 1990’s the share of foreign currency-denominated
0
1997
1998
Total assets
1999
2000
2001
Private sector deposits
2002
2003
Private sector loans
loans (including foreign currency-indexed loans) rose on attractive interest rates; the banks were able to fund foreign
44
Banking in SEE
2004
Source: NBRM, Bank Austria Creditanstalt Economics Department
FYR Macedonia – At a crossroads
year-end ROAA of 0.5 % and an ROAE of 2.3 %. In 2004
Legal Framework
banks recorded an ROAA of 1.1 % and a considerable increase in ROAE to 6.2 %.
Macedonia’s banking system is generally considered to be
sound, with efforts made to bring the legal and regulatory en-
Macedonia’s banking supervision functions according to
vironment into line with EU directives and Basle Core Principles
strict loan classification and provisioning requirements based
for Effective Banking Supervision. In 2000 the Banking Law
on international best practices. The 1999 Kosovo crisis inter-
was introduced (with subsequent amendments in 2002 and
rupted the steady progress made in reducing the level of non-
2003), replacing certain portions of the Banks and Savings
performing loans since the banking sector’s rehabilitation in
Houses Act of 1993. The Law established a new licensing
1995. Companies stopped servicing debt as a reaction to the
approach, strengthened banking supervision standards and
crisis, driving the share of non-performing loans upward to
corporate governance and established a variety of corrective
41.3 % (1998: 32.9 %). Since then the level has tended lower,
measures for infringements. In early 2002 a new Law on the
with non-performing loans constituting (a still relatively high)
National Bank of the Republic of Macedonia came into effect,
13.2 % of the total loan portfolio as of year-end 2004. It
structuring the NBRM along the lines of EU requirements and
should be noted that the sharp drop in non-performing loans
underscoring its independence.
from 2001 (33.7 %) to 2002 (15.9 %) was partially attribut-
The minimum capital requirement for establishing a com-
able to a methodological change that broadened the defini-
mercial bank licensed under Article 45 (domestic operations
tion of banks’ credit exposure volumes, thus the years are not
only) is Euro 3.5 mn. Banks licensed to conduct activities under
directly comparable. As banks regain their appetite for lend-
Article 46 (international payment operations and credit guaran-
ing, increased activity must be accompanied by effective credit
tee operations) must have minimum capital of Euro 9 mn. In
risk assessment. A September 2004 NBRM Council Decision
an effort to improve transparency by verifying sources of funds
calling for the creation of a credit register containing informa-
for payment of capital and changes in a bank’s ownership
tion on all bank loans to legal entities and natural persons
structure, any change in voting shares requiring prior NBRM
should facilitate this process.
approval is set at 5 %. Central bank approval is also required
Macedonia’s banks are required to have a minimum capital
adequacy ratio of 8 % (16 % for the Postenska banka), but as of
when a bank’s investment in a financial or non-financial institution exceeds 10 % of its guarantee capital.
year-end 2004 the ratio was much higher at 23.0 %. This level
Large credit exposures to a single borrower (i. e. engagements
indicates the extent of the sector’s excess liquidity, which has
that exceed 10 % of a bank’s guarantee capital) taken together
more to do with low intermediation than with high profitability
may not exceed 25 % of the bank’s guarantee capital. The total
or capital increases. There is also a disparity in the capital ratios
amount of large exposures may not exceed eight times the guar-
among the three groups of banks, ranging from 15.1% for the
antee capital. In terms of connected lending, exposure to a single
three largest banks to 45.1% for the small group of banks.
shareholder of bank whose voting shares exceed 5 % of the total
Non-performing loans
Banking sector profitability
1997 – 2004, in % of total loan portfolio
1997 – 2004, in %
10
50
8
40
6
30
4
20
2
0
10
–2
–4
0
1997
1998
1999
2000
2001
2002
2003
2004
1997
1998
1999
2000
Return on average equity (ROAE)
Source: NBRM, Bank Austria Creditanstalt Economics Department
2001
2002
2003
2004
Return on average assets (ROAA)
Source: NBRM, Bank Austria Creditanstalt Economics Department
Banking in SEE
45
FYR Macedonia – At a crossroads
or likewise, to a single company in which the bank has an equity
regulation and supervision and restoring confidence in the
stake, may not exceed 10 % of the bank’s guarantee capital.
banking system and the denar, but the sector – considerably
The Deposit Insurance Fund (DIF) was established in January
overbanked – now needs to move toward consolidation and
1997. The DIF covers natural persons’ denar and foreign currency
reprivatisation. With the market dominated by Komercijalna
deposits and checking accounts located in banks and savings
banka a. d. Skopje and Stopanska banka a. d. Skopje (with
houses, deposits related to bank-issued payment cards and nat-
Tutunska banka a. d. Skopje gaining ground), many of the
ural persons’ foreign currency inflows. The DIF reimburses 100 %
smaller banks have little chance of going it alone. Increased
of total deposits of each natural person in a bank or savings
strategic foreign investment would stimulate competition, im-
house up to Euro 10,000 in the denar equivalent and 90 % of
prove corporate governance and provide additional know
total deposits from Euro 10,000 to a maximum of Euro 20,000.
how in key areas of product development, technology and
In July 2004 parliament adopted the Law on Prevention of
risk management. Although intermediation levels are still
Laundering Money and Other Proceeds from Crime, which is in-
modest, the recent surge in loan volumes underscores the
tended to reduce cash payments. This requires any client en-
need for prudential lending practices and adequate insolven-
gaged in a financial transaction of Euro 15,000 or more to pre-
cy laws to accompany rapid expansion, in order to maintain
sent identification. Likewise, foreign exchange offices will require
asset quality. As Macedonia possibly moves one step further
identification from customers exchanging more than Euro 2,500.
toward EU candidacy this year (in November the EU Commission intends to issue an opinion as to whether it is prepared
Conclusion
to take up candidacy negotiations) progress in these areas will
Macedonia’s banking sector has reached a crossroads. Significant progress has been made in the areas of rehabilitation,
undoubtedly be scrutinised, given the banks’ crucial role in
furthering the economy’s growth.
Table 2: Overview of Macedonia’s banking sector (1997 – 2004)
Number of banks
Number of saving houses
1997
1998
1999
2000
2001
2002
2003
2004
22
24
23
22
21
20
21
21
20
18
16
19
17
17
15
15
n. a.
n. a.
3,845
3,918
4,332
4,569
4,595
4,635
Return on average assets (ROAA)1
2.2
2.0
0.8
0.8
– 0.7
0.4
0.5
1.1
Return on average equity (ROAE)1
9.3
8.2
3.5
3.8
– 3.2
2.1
2.3
6.2
Capital adequacy ratio (in %)
28.3
25.9
28.7
36.8
35.3
28.1
25.8
23.0
Non-performing loans (in % of total loans)
35.6
32.9
41.3
34.8
33.7
15.9
15.1
13.2
Number of bank employees
Private sector deposits (in % of
GDP) 2,3
9.6
10.8
13.5
14.9
26.0
22.0
25.4
29.4
Private sector FX deposits (in % of private sector deposits) 3
33.3
35.2
31.6
36.9
63.6
52.5
53.2
54.4
Private sector short-term deposits (in % of private sector deposits) 3
80.0
82.2
83.8
86.9
90.3
91.8
94.2
94.8
Corporate loans (in % of GDP) 4
8.9
12.7
9.8
9.3
9.5
9.4
10.0
11.9
GDP) 4
1.0
1.1
1.2
1.5
1.5
2.2
3.5
5.4
9.9
13.8
11.0
10.8
11.0
11.6
13.4
17.3
Private sector FX loans (in % of private sector loans) 4,5
29.9
23.3
24.7
19.5
21.6
17.6
16.9
21.3
Private sector short-term loans (in % of private sector loans)
68.3
56.3
53.8
53.1
61.8
54.5
48.1
41.3
Household loans (in % of
Private sector loans (in % of GDP) 2, 4
Private sector loans to private sector deposits (in
%) 4
103.2
127.4
81.4
72.5
42.3
52.8
52.7
58.8
Financial intermediation (total assets/GDP, in %)
54.1
45.6
53.6
55.6
54.9
49.9
52.0
56.7
Concentration ratio (C2 – total assets, in %)
n. a.
n. a.
55.0
55.8
55.5
54.1
55.5
52.9
Market share of state-owned banks (total assets, in %)
n. a.
n. a.
1.3
1.1
1.3
2.0
1.8
1.9
Market share of foreign-owned banks (total assets, in %)
n. a.
n. a.
11.5
53.4
51.1
44.0
46.9
47.3
Market share of foreign-owned banks (capital, in %)
n. a.
n. a.
10.7
45.0
43.5
44.6
48.6
47.6
Source: NBRM, Bank Austria Creditanstalt Economics Department / 1) After tax / 2) Private sector includes corporates and households / 3) Deposits include demand
deposits / 4) Loans exclude overdue claims, securities and other claims / 5) Excludes fx-indexed loans
46
Banking in SEE
Romania – Knockin’ on EU’s door
Sándor Gardó
Romania
Knockin’ on EU’s door
In light of the financial system’s crucial role in a func-
Cleaning up the banking sector was a costly and time-
tioning market economy, the banking market represents
consuming process. Non-prudential practices by several banks
a key area in Romania’s ongoing transition process. The
came to light as the NBR adopted a more decisive attitude with
country’s upcoming EU membership in 2007 has set the
regard to supervising banks, enacting stricter legal require-
tone for the banking sector’s future development.
ments and taking a more restrictive approach to monetary policy in the late 1990s. Romania’s two largest state-owned banks,
Unlike other transition countries in Central and Eastern
Bancorex and Banca Agricola, were prime examples of the
Europe, Romania commenced fairly late with the reform of its
problem of non-performing loans. In view of the “too big to
banking system – a process that has been anything but
fail” problem authorities made several attempts to bail out and
smooth. The side effects of the transition to a market-oriented
restructure these banks, with total fiscal costs reaching some
banking system (e. g. unstable macroeconomic environment,
USD 3 bn (Bancorex: USD 2.4 bn, Banca Agricola: USD 653 mn)
inefficient regulatory and supervisory norms, lax accounting
or 8.3 % of average 1991 – 2002 GDP. The authorities’ efforts
standards, inadequate definition of property rights, soft bud-
to rescue Bancorex eventually failed, but Banca Agricola was
get constraints in the banking and enterprise sector, poor
successfully restructured and privatised. Further restructuring
qualification of bank managers, political interference in
measures, the closure of insolvent banks (e. g. Banca Albina,
banks’ lending decisions) led in the 1990s to a severely un-
Bankcoop), numerous successes in bank privatisation (e. g.
dercapitalised sector, an extensive bad debt problem and a
BRD, Banc Post) and the stepped-up presence of foreign banks
lack of market discipline on the part of banks (moral hazard).
enabled Romania’s banking market to leave the heritage of a
This produced a banking crisis that dragged on for years, ac-
centrally-planned economy behind; supported by economic
companied by the collapse of numerous banks, an investment
stability that has been firmly in place since 2000, the sector
fund sector crisis and a related crisis in the credit co-operative
embarked on a steady growth path. Indeed, significant struc-
sector in 2000, all of which highlighted the need for radical
tural changes in recent years give rise to expectations of an
and consequent banking system reform.
accelerated consolidation of the sector.
Table 1: The ten largest Romanian banks ranked by total assets as of 31 December 2004
Bank
Main shareholders
1
Banca Comerciala Romana
APAPS1 (36.8 %), EBRD (12.5 %), IFC (12.5 %)
6,016.9
26.1
2
Banca Romana Pentru Dezvoltare
Société Générale (58.3 %), EBRD (5.0 %)
2,996.9
13.0
3
Raiffeisen Bank
Raiffeisen Group (99.5 %)
4
Casa de Economii si Consemnatiuni Ministry of Finance (100.0 %)
5
ING Bank Romania
ING Group (100.0 %)
1,295.6
5.6
6
ABN Amro Bank Romania
ABN Amro (100.0 %)
1,145.7
5.0
7
HVB Bank Romania
Bank Austria Creditanstalt (99.7 %)
1,067.4
4.6
8
Banc Post
EFG Eurobank (55.3 %), GE Capital (7.5 %), EBRD (7.3 %), IFC (7.3 %) 1,060.4
4.6
9
Alpha Bank
Alpha Bank Group (95.4 %)
737.7
3.2
EBRD (15 %)
691.6
3.0
10 Banca Transilvania
Total assets
(in EUR mn)
Market share
(in %)
2,120.9
9.2
1,360.1
5.9
Source: NBR, Bank Austria Creditanstalt Economics Department / 1) Privatisation Agency
Banking in SEE
47
Romania – Knockin’ on EU’s door
Banking Market Structure
share of 26.1 % (2002: 31,4 %) based on total assets. The
Similar to other transition countries Romania’s banking
Romanian Development Bank (BRD) and Raiffeisen Bank
system saw the number of commercial banks mushroom in
lagged considerably behind in second and third place, with
the early phase of the transition process, with a nine-fold in-
market shares of 13.0 % and 9.2 % respectively. In terms of
crease from only five in 1989 to 45 banks nine years later, as a
total assets, the five largest banks controlled just under 60 %
result of the liberalisation of market entry and lax licensing re-
of the market at year-end 2004, which indicates a relatively
quirements. After weathering the financial and banking crisis
high market concentration despite the considerable number
in the late 1990s and subsequently initiating the process of
of banks. The oligopolistic structure of Romania’s banking
bank restructuring, the sector began to consolidate, with the
market is also evident with respect to deposits and loans,
number of banks falling gradually to 38 at year-end 2003.
with the five largest banks commanding a market share of
One year later the Romanian banking system comprised 39
approximately 63 % and 57 %, respectively. Indeed, contrary
banks (including seven foreign bank branches). This increase
to developments seen in recent years, this already high mar-
by one bank in comparison with 2003 resulted from the mar-
ket concentration is expected to rise further in the coming
ket entry of two specialised banks, Porsche Bank Romania
years due to anticipated mergers and acquisitions. In this re-
(vehicle financing) and Raiffeisen Banca pentru Locuinte (real-
spect, the recent merger of seventh-ranked HVB Romania
estate financing), and the merger of two small-scale banks,
with eleventh-placed Banca Ion Tiriac, resulting in a combined
marking a reversal of the downward trend in the total number
market share of approximately 7.5 % in total assets (making it
of banks that had been ongoing since 1999. The same holds
the fourth largest banking group in Romania), well marks the
true for the number of bank branches and bank employees,
beginning of a second consolidation phase.
both of which initially decreased sharply as a result of restruc-
The presence of foreign banks, which can gain a foothold
turing measures taken in the years 1999 and 2000. However,
in Romania’s banking market by either founding a subsidiary
banks’ recent expansionary business strategy given the fierce
according to Romanian law, setting up a branch, or acquiring
competition for market share and their higher risk appetite
a state-owned bank, has grown substantially over recent
which has generated increased lending activity, appear to be
years. The beginning of bank privatisation was marked by the
reflected in an expanding branch network and rising staff
sale of 51 % of the Romanian Development Bank to Société
numbers. With the number of banks’ branches reaching 2,921
Générale in 1999, with GE Capital and Banco Portugues do
at year-end 2003, i. e. 7,500 inhabitants per branch (EU-15:
Investimento (BPI) acquiring 45 % of Banc Post in that same
2,060), however, Romania’s banking market is still highly un-
year. A further milestone in the bank privatisation process
saturated, indicating significant catch-up potential.
was reached with the sale of Banca Agricola to Raiffeisen
Despite gradually losing market share in recent years due
Zentralbank in April 2001. October 2002 brought the sale of
to intensifying competition, Banca Comerciala Romana (BCR)
a further state holding of 17 % in Banc Post to Greek EFG
was the undisputed market leader in 2004 with a market
Eurobank Ergasias. These privatisation successes raised the
Banking market structure
Banks’ ownership structure
as of 31 December 2004
1995 – 2004, in % of total assets
Other 19.8 %
Banca Comerciala
Romana (BCR) 26.1%
Banca Transilvania 3.0 %
Alpha Bank 3.2 %
Banc Post 4.6 %
HVB Bank Romania 4.6 %
ABN Amro Bank Romania 5.0%
ING Bank Romania 5.6 %
Casa de Economii si
Consemnatiuni (CEC) 5.9 %
Banca Romana Pentru
Dezvoltare (BRD) 13.0%
Raiffeisen Bank 9.2%
90
80
70
60
50
40
30
20
10
0
1995
State
Source: NBR, Bank Austria Creditanstalt Economics Department
48
Banking in SEE
1996
1997
1998
1999
2000
2001
2002
Foreign
Source: NBR, Bank Austria Creditanstalt Economics Department
2003
2004
Romania – Knockin’ on EU’s door
market share of foreign banks in terms of the banking sec-
domestic demand which has produced a flourishing lending
tor’s total assets to 62 % by the end 2004, compared with
business), as well as the country’s approaching EU membership.
just 20 % in 1998. Based on capital, foreign banks’ market
Foreign investors’ interest in Romania’s banking market is also
share at year-end 2004 was even higher, at 69.3 %, with
keen, apart from privatisation. Changes in ownership structure
some 80 % of the total foreign capital originating from EU
of already private banks are not uncommon. For example, Hun-
member states. In terms of total foreign capital the keenest
gary’s OTP orchestrated a market entry by acquiring Robank in
interest in the Romanian banking sector was shown as of
April 2004 for USD 47.5 mn from its Turkish owners.
June 2004 primarily by Austrian (33.5 %), Greek (15.2 %),
Italian (9.5 %), Dutch (9.2 %) and French (8.6 %) investors.
Banking Sector Profitability and Efficiency
As a consequence of the closure and privatisation of
Despite progress in catching up in recent years, Roma-
state-owned banks, as well as the growing presence of for-
nia’s banking market can still be considered underdeveloped,
eign banks, the market share of state-owned banks in terms
not only in comparison with the EU-15, but also its CEE
of total assets has decreased steadily since the mid-1990’s
peers. With only some 40 % of the population aged 15 or
(1995: 84.3 %), reaching 6.8 % as of year-end 2004. There
older having some kind of business relationship with a bank,
are only two fully state-owned banks remaining in Romania;
28 % having a bank account and 17 % having a bank card,
Eximbank, with a market share of approximately 1.0 % in
as of year-end 2004 market penetration of banking services
terms of total assets and the fourth-ranked (5.9 %) State Sav-
was still low.
ings bank (CEC). In addition, the state has a significant share-
This underdevelopment is also reflected in the banking sec-
holding of 36.8 % in Banca Comerciala Romana (BCR), the
tor’s main efficiency indicators. Positive developments notwith-
country’s largest commercial bank. The privatisation of BCR,
standing, there is still considerable room for further progress. At
which was put up for sale in June 2005, with binding bids
38.3 % in 2004, financial intermediation (the banking sector’s
due by 19 September 2005, is expected to further strengthen
total assets to GDP) remains low. Declining financial intermedia-
foreign banks’ market position. In the wake of two failed pri-
tion over many years was indeed a sign that the banking sec-
vatisation attempts in previous years, the first stage of BCR’s
tor’s development was lagging considerably behind macroeco-
privatisation in November 2003 involved the sale of a 25 %
nomic expansion. Overcoming the banking crisis, successes in
share package to the EBRD and IFC for USD 222 mn, with a
bank restructuring and privatisation and the buoyant domestic
buy-back option in the event that a strategic investor is iden-
demand-driven revival in lending all supported the banking mar-
tified. In a second step an 8 % stake was sold to the bank’s
ket’s impressive recovery in recent years. Nevertheless, in terms
employees in late 2004, with five Romanian investment funds
of financial intermediation, Romania considerably trails its Cen-
holding the remaining 30 % (6 % each). The government
tral and Eastern European peers (e. g. Poland: 65.5 %, Hungary:
now intends to sell a stake of 50 % plus one share or a stake
82.4 %, Slovak Republic: 87.7 %, Czech Republic: 96.1 %,
of 61.8 % (after exercising the aforementioned buy-back op-
Croatia: 108.9 %), not to mention the euro area (206 %).
tion) of BCR, offering more flexibility for strategic investors.
As of the beginning of July non-binding bids were due.
Twelve banks submitted bids, ten of which (Deutsche Bank,
Financial intermediation
ABN Amro, BNP Paribas, National Bank of Greece, KBC, Erste
1995 – 2004, in % of GDP
Bank, Dexia, Fortis, Banco Comercial Portugues, Banca Intesa)
have been short-listed.
The government meanwhile has also announced its pri-
60
vatisation plan for CEC, with the intention to sell a 90.1 %
50
stake, of which up to 75 % is being allocated to a strategic
40
investor, 9.9 % to a special property restitution fund and 5 %
30
to CEC employees. The state’s remaining stake is to be sold
20
via the capital market.
Interest in both banks is expected to be significant, not
only because of the market’s size and potential and the “cover
the white spots” strategy of numerous globally active foreign
banks, but also because of Romania’s solid macroeconomic
fundamentals, its booming economy (underpinned by robust
10
0
1995
1996
Total assets
1997
1998
1999
2000
Private sector deposits
2001
2002
2003
2004
Private sector loans
Source: NBR, Bank Austria Creditanstalt Economics Department
Banking in SEE
49
Romania – Knockin’ on EU’s door
Likewise, by international comparison the ratio of private
time of capital movements’ liberalisation, the NBR started to
sector loans to GDP is relatively low in Romania, totalling a
gradually cut the policy rate from 21.25 % to 17 % as of
mere 17.5 % as of end-2004 (e. g. Poland: 30 %, Czech Re-
year-end 2004 and to 12.5 % in April 2005, with market
public: 33 %, Hungary: 42 %, Croatia: 62 %, Euro area:
rates declining even further. This measure triggered a shift in
102 %). This low level can be attributed primarily to restruc-
banks’ business focus. While business in securities declined
turing effects, as well as to the very cautious approach of
sharply, interbank operations intensified due to the high in-
banks to lending in the first years after the banking crisis. A
terest rate on deposits placed with the NBR, with lending –
conservative attitude was not surprising given the difficulties
primarily foreign currency lending to non-bank clients – also
in enforcing creditors’ rights, uncertainties in obtaining infor-
remaining very attractive.
mation on potential borrowers’ financial status and hesitant
Loans by sector reflect the dominance of the manufactur-
reforms in the corporate sector. Consequently, banks’ prefer-
ing industry and the services sector, with a share of 38.3 %
ence for low-risk business (foreign exchange and interbank
and 36.1 % of total loans, respectively as of year-end 2004,
transactions, purchasing government bonds) increased, which
although industry is steadily diminishing in importance com-
naturally lead to a crowding out of the private sector.
pared to previous years (2000: 52.9 %). There was an excep-
Stepped-up growth in private consumption in recent
tionally strong increase in loans to households during 2003
years, partly triggered by strong real wage growth, ultimately
and 2004 (+ 258.9 % and + 58.3 % respectively), with this
led to a pick-up in lending in 2003. Total lending to house-
segment’s share in total private sector loans climbing from
holds rose almost three-fold over 2003 (although from a low
2.4 % in 1995 to 28.4 % as of year-end 2004.
base), with corporate loans following suit with impressive
The lower growth rate in household lending in 2004 was
growth of 40 %, thereby bringing the ratio of private sector
not only due to the higher base after exceptionally strong
loans to GDP to 16.0 % in 2003 from 11.8 % in 2002.
growth in 2003, but was also a consequence of the NBR’s
Although still significant, loan expansion lost momentum
tightening measures effective as of 1 February 2004, limiting
in 2004, last but not least due to restrictive monetary mea-
borrowers’ monthly instalments to a maximum of 30 % (35 %
sures taken by the NBR. The central bank raised the policy
in case of real estate loans) of net monthly income and re-
rate in several steps from 17.4 % to 21.25 % in November
quiring a down payment of at least 20 % of the acquired
2003 in order to counter the burgeoning current account
goods’ purchase price. Accelerating growth in household
deficit, inflationary pressures and prevent a deterioration in
lending during the first several months of 2005 and the NBR’s
loan portfolio quality. However, in June 2004 (less than a year
concern about worsening loan portfolio quality, prompted the
before the partial liberalisation of capital movements that
central bank to impose an additional restriction in July, by in-
granted foreigners access to RON-denominated deposits)
troducing a monthly debt service ceiling of 40 % of a borrow-
against the backdrop of subsiding inflationary pressures and
er’s net monthly income for all types of loans.
the need to align Romanian interest rates with global ones in
Foreign currency-denominated loans are increasing in rel-
order to prevent massive speculative capital inflows at the
evance, reaching 60.8 % of total private sector loans in 2004.
The euro’s significance (47 %) as a financing vehicle increased, compared to the RON (26.6 %) or the US-Dollar
Policy rate
(26.1 %). This development is explained by Romania’s gradu-
2003 – 2005, in %
ally strengthening ties with the EU economy, lower interest
rates on euro-denominated loans, as well as by the recent
FDI-driven strong appreciation of the RON against the European currency.
After strong growth in foreign currency loans during
both 2003 and 2004 the NBR in August 2004 raised the minimum reserve requirement on banks’ foreign currency liabili-
01. 06. 2005
01. 04. 2005
01. 02. 2005
01. 12. 2004
01. 10. 2004
01. 08. 2004
01. 06. 2004
01. 04. 2004
01. 02. 2004
01. 12. 2003
01. 10. 2003
01. 08. 2003
ties with maturities of less than two years from 25 % to 30 %
01. 06. 2003
22
21
20
19
18
17
16
15
14
13
12
11
10
in order to curb foreign currency lending. As this measure did
not have any significant impact, the NBR further broadened
the reserve base by extending the 30 percent reserve ratio to
foreign currency liabilities with maturities longer than two
Source: NBR, Bank Austria Creditanstalt Economics Department
50
Banking in SEE
years, as of 24 February 2005. Nevertheless, foreign currency
Romania – Knockin’ on EU’s door
lending accelerated further, reaching a growth rate of 45 %
tor and banks’ increasing confidence in their customers’ repay-
in May 2005. As a response, the NBR again intervened in July
ment abilities in light of the positive economic outlook, but also
and stipulated the application of the 30 % reserve require-
reflects the above-mentioned strong demand for housing loans,
ment on all foreign currency-denominated liabilities irrespec-
which are generally of a long-term nature. Indeed, at this stage
tive of their maturity and the date they had been assumed. At
of economic development banks’ ability to effect maturity trans-
the same time, in order to encourage lending in domestic
formation is of great importance, as only the disbursement of
currency, the NBR decided to reduce the reserve requirement
long-term loans facilitates the realisation of long-term projects,
on banks’ leu liabilities with maturities of up to two years
which in turn have a positive macroeconomic impact.
from 18 % to 16 %.
Consolidation measures taken (e. g. closure of insolvent
The distribution of loans by purpose show “working capi-
banks, portfolio clean-up via the transfer of bad loans from the
tal” (42.1 %) as the main reason for taking out a loan, fol-
banks’ balance sheets to the Bank Asset Recovery Agency –
lowed by “equipment purchase” (17.3 %) and “real-estate
AVAB), combined with an improved regulatory framework and
purchase” (8.7 %), with the latter registering the fastest
better risk management on the part of banks, resulted in an
growth rate (+ 86.8 %) among the various purposes.
impressive decline in the share of non-performing loans in the
Loan maturities are developing favourably, with medium-
total loan portfolio from 58.5 % in 1998 to 2.8 % in 2002. The
and long-term loans gaining ground – especially during the last
introduction of stricter loan classification and provisioning re-
two years, due to the credit boom. This development not only
quirements at the beginning of 2003, however, touched off a
signals the population’s growing confidence in the banking sec-
renewed increase in the ratio of non-performing loans in total
Table 2: Overview of Romania’s banking sector (1995 – 2004)
1995
Number of banks
1996
1997
1998
1999
2000
2001
2002
2003
2004
31
40
43
45
41
41
41
39
38
39
Number of bank branches
n. a.
n. a.
n. a.
n. a.
2,923
2,747
n. a.
n. a.
2,921
n. a.
Number of bank employees
n. a.
n. a.
n. a.
n. a. 50,784 44,802
n. a.
n. a. 46,535
n. a.
Return on assets (ROA)1
n. a.
5.6
8.2
Return on equity
(ROE)1
Capital adequacy ratio (in %)
n. a.
48.8
75.1
n. a.
13.3
13.6
0.1
– 1.5
1.0 – 15.3
10.2
17.9
1.5
3.1
2.6
2.2
2.1
12.5
21.8
18.3
15.8
17.0
23.8
28.8
25.0
21.1
18.8
Non-performing loans (in % of total loans)
37.9
48.0
56.5
58.5
35.4
6.4
3.9
2.8
8.3
8.1
Spread (difference between lending and deposit rates)
12.1
17.7
12.1
18.6
20.5
20.8
19.6
18.3
15.4
14.5
Private sector2 deposits (in % of GDP)
19.4
22.3
20.1
21.3
20.5
18.9
19.0
21.0
20.5
23.1
Private sector FX deposits
(in % of private sector deposits)
25.9
26.7
30.6
35.1
40.9
44.3
46.4
42.8
40.2
39.2
deposits
Private sector
(in % of private sector deposits)
45.3
44.5
38.9
29.4
31.0
31.4
29.4
29.2
29.7
27.1
Corporate loans (in % of GDP)
22.2
23.9
13.6
15.2
10.0
8.8
9.4
10.4
12.1
12.5
Private sector loans (in % of GDP)
22.8
24.6
14.2
16.0
10.6
9.3
10.1
11.8
16.0
17.5
Private sector FX loans (in % of private sector loans)
29.6
36.9
54.8
58.9
57.6
59.5
59.8
62.7
55.4
60.8
Private sector short-term loans
(in % of private sector loans)
62.5
69.7
54.6
56.1
66.3
71.7
70.9
66.4
49.5
42.8
Private sector loans to private sector deposits (in %) 117.3
110.3
70.6
75.5
51.4
49.5
53.2
56.3
78.2
75.8
50.5
39.6
40.2
33.4
28.9
30.2
31.6
32.6
38.3
short-term3
Financial intermediation (total assets / GDP, in %)
45.0
Concentration ratio (C5 – total assets, in %)
n. a.
n. a.
70.6
67.3
66.7
65.4
66.1
62.8
61.5
59.8
Market share of foreign-owned banks (capital, in %)
n. a.
n. a.
n. a.
35.8
41.8
53.8
60.6
64.9
66.3
69.3
Market share of foreign-owned banks (total assets, in %) 8.5
11.2
17.2
20.0
47.8
50.9
55.2
56.4
58.2
62.0
Market share of state-owned banks (total assets, in %) 84.3
80.9
80.0
75.3
50.3
46.1
41.8
40.4
37.5
6.8
Source: NBR, IMF, EBRD, FBE, Bank Austria Creditanstalt Economics Department / 1) After tax / 2) Private sector includes corporates and households /
3) Demand deposits
Banking in SEE
51
Romania – Knockin’ on EU’s door
lending to some 8.1 % as of year-end 2004. To raise the effi-
Deposits’ currency structure shows a clear downward
ciency of credit checks and further reduce the share of non-
trend in foreign currency deposits since 2001 when they
performing loans, the National Bank of Romania (NBR) estab-
peaked at 46.4 % of GDP as a result of depositors’ lack of
lished a Credit Risk Bureau (CRB) in 2000, which delivers infor-
confidence in the national currency, the strong depreciation
mation on potential borrowers’ credit and repayment track
of the leu and the introduction of the euro in the euro area as
record. After four years of operation the NBR issued a new
a means of payment. The latter prompted the population to
regulation on the CRB’s organisation and functioning, which
convert its foreign currency mattress savings derived mainly
entered into force on 1 September 2004. Since then, in order
from workers’ remittances. Since then, the share of foreign
to further increase efficiency, credit information on non-resi-
exchange deposits in private sector deposits has fallen to
dent legal entities must also be reported to the NBR. Further-
39.2 % of GDP, reflecting not only a partial withdrawal of
more, reporting has been extended to loans below the previ-
foreign currency savings after euro conversion, but also the
ously required RON 20,000 threshold. Considering the current
recent appreciation of the leu. The maturity structure of
rapid pace of credit growth, this is an important step toward
deposits underscores the decreasing significance of demand
preventing deterioration in loan portfolio quality.
deposits, whose share fell from 45 % in 1995 to around 27 %
Both the population’s only slowly recovering confidence
in the banking sector and the healthy domestic economy
as of year-end 2004, indicating a decreasing risk from maturity
mismatch.
have slowed deposit growth in recent years. Indeed, strong
The banking sector’s capital adequacy has improved
investment activity and buoyant private consumption con-
noticeably since the mid-1990s. This is due mainly to the
tributed to two consecutive years of moderate growth, with
restructuring, recapitalisation and privatisation of state-
the share of private sector deposits to GDP even declining
owned banks and the continuous increase in minimum capital
somewhat in 2003, but rising again to 23.1 % of GDP as of
requirements, which resulted in a record high capital adequacy
year-end 2004. This strong recovery was primarily attribut-
ratio of 28.8 % at year-end 2001. This figure not only mir-
able to exceptional growth in corporate deposits (+ 56.7 %)
rored the banks’ strengthening capital base, but also their risk
on significant inflows from privatisation revenues (e. g.
aversion toward lending in the aftermath of the banking cri-
Petrom) as well as to banks’ ability to increasingly mobilise
sis. However, the lending boom observed in recent years indi-
household savings. The ratio of private sector loans to pri-
cates that in the fight for market share banks are increasingly
vate sector deposits consequently declined somewhat in
refraining from maintaining liquid assets. As of 2004 the cap-
2004 to 75.8 %. This figure indicates that banks are still able
ital adequacy ratio fell to 18.8 %, which is still well above the
to utilise customers’ deposits as their main source of refi-
legal requirement of 12 %.
nancing, and thus are not dependent on other sources such
After rising to 20.8 % in 2000, spreads followed a down-
as the repatriation of foreign assets or taking on debt
ward path as a result of increasing price stability, progress
abroad.
made in the field of bank restructuring and privatisation, decreasing loan loss provision requirements, as well as efficiency
gains due to fiercer competition resulting from the market
Banking sector profitability
entry of foreign banks. Given the considerable decline in in-
1996 – 2004, in %
terest rates in the first quarter of 2005 ahead of the partial
liberalisation of capital flows in April, this downward trend is
30
25
20
15
10
5
0
–5
– 10
– 15
– 20
48.8
also expected to continue in 2005.
75.1
The banking market’s growing efficiency is also reflected
in improving profitability. Indeed, Romania’s banking sector
profitability took a severe hit during the crisis-ridden years.
Due to increasing macroeconomic stability, however, and
(slow but steady) progress made in restructuring and privatising state-owned banks and enterprises, there has been a no1996
1997
1998
1999
2000
2001
2002
2003
2004
ticeable improvement in recent years. The closure of troubled
Bancorex was of key importance in this respect, as was the
Return on assets (ROA)
Return on equity (ROE)
successful restructuring of the deeply troubled Banca Agricola
in 1999 and its subsequent privatisation in 2001. Return on
Source: NBR, Bank Austria Creditanstalt Economics Department
52
Banking in SEE
assets (ROA) rose from – 1.5 % in 1999 to 2.1 % in 2004.
Romania – Knockin’ on EU’s door
Likewise, over the same period return on equity (ROE) in-
a bank’s own funds or up to 60 % for the sum of all holdings
creased from – 15.3 % to 17.0 %, with profitability growth
in non-bank undertakings. Furthermore, 2001 saw the intro-
remaining modest due to stricter provisioning requirements as
duction of a liquidity indicator (actual liquidity / prescribed
of 2003. The banking sector’s profitability is expected to in-
liquidity) and a regulation limiting open foreign exchange po-
crease in the coming years due to a positive economic out-
sitions to a maximum of 10 % of own funds in a single cur-
look, progress made in privatisation and restructuring (includ-
rency and up to 20 % in the sum of all currencies. Prevailing
ing the enterprise sector), as well as evolving economies of
loan classification regulations entered into force in January
scale in the aftermath of imminent mergers and acquisitions.
2003 and call for provisions of 5 % for special mention, 20 %
This should hold true even if one-off costs (e. g. transposition
for substandard, 50 % for doubtful and 100 % for loss loans.
of ATMs) associated with the redenomination (1:10,000) of
A Bank Deposit Guarantee Fund (BDGF) was established in
the national currency as of 1 July 2005 (new ISO-Code: RON)
1996 to raise the population’s confidence in the banking
may temporarily hurt the banking sector’s profitability.
system and to protect depositors from losses in the case of
bank insolvency. This inherently positive development did, how-
Legal Framework
ever, have negative consequences as well. On the one hand it
The introduction in 1990 of a two-tier banking system
entailed the creation of a dual deposit protection scheme, as –
that clearly separated central and commercial banking activi-
contrary to private banks – deposits at the State Savings Bank
ties was followed in spring 1991 by the creation of a new
(CEC) remained (and until its privatisation will remain) secured
legal and regulatory framework intended to align Romania’s
by a state guarantee, thereby adversely affecting competition
financial system with international norms. This included the
among banks. On the other hand, the foundation of the Deposit
Law on Banking Activity and the Law on the National Bank of
Guarantee Fund proved to be a financial disaster, as owing to
Romania (NBR), with the latter defining the implementation of
its undercapitalisation the Fund became nearly insolvent after
money and exchange rate policy, issuance of notes and coins,
the collapse of the first banks (e. g. Bancorex) and had to resort
management of official reserves and regulation and prudential
to bridge loans from the NBR, with the repayment obligations
supervision of credit institutions as the central bank’s core
impairing the accumulation of funds.
competencies. In a further step toward market conformity two
A new law which is in force since 1 July 2004, put the
subsequent laws relating to the NBR and banks, respectively
deposit protection scheme on a new footing. Banks’ partici-
were enacted in 1998, which strengthened the central bank’s
pation in the scheme is obligatory, with the BDGF to be financed
supervisory powers and closed a number of legal loopholes
via banks’ initial contributions amounting to 1 % of their sub-
with respect to banking activity. The Romanian parliament in
scribed capital, borrowings from credit institutions (except the
December 2003 adopted a new Banking Act, which together
NBR) or debt securities issued by the Fund and financial
with regulations of the NBR are intended to achieve full com-
means resulting from the Funds’ capacity as the credit institu-
patibility with EU norms in the run-up to EU accession. Eventu-
tions’ special administrator or liquidator. Furthermore, banks
ally, a new Law on the NBR – adopted by parliament in mid-
fund the BDGF also by means of annual contributions amount-
2004 – in line with EU requirements considerably enhanced
ing to 0.5 % of total guaranteed deposits as of 2005, with
the central bank’s functional independence.
the contribution rate gradually to decline to 0.4 % in 2006
An analysis of the regulatory framework for commercial
and 0.3 % in 2007. A higher annual contribution is to be paid
banking operations indicates that Romanian regulations com-
by banks pursuing unhealthy and risky business policies
ply for the most part with EU standards and Basel Committee
(2005: 1.0 %, 2006: 0.8 %, 2007: 0.6 %). The minimum cov-
recommendations, and are in some cases even stricter. Mini-
erage at 2002 year-end stood at EUR 3,500 (RON 11,000)
mum capital of RON 37 mn (EUR 10.2 mn) has been required
and was raised to the RON equivalent of EUR 6,000 as of
in Romania since 31 May 2004 for setting up a credit institu-
1 July 2004 and further to EUR 10,000 as of 1 January 2005.
tion (previously RON 32 mn). This is twice as high as the EU
Given the EU requirement of EUR 20,000 the new deposit in-
standard of EUR 5 mn. Moreover, in 1999 the capital adequacy
surance law calls for a further increase in the minimum cover-
ratio for Romanian banks was raised to 12 %, which is far
age level to EUR 15,000 as of the beginning of 2006, with
above the 8 % advocated by the Bank for International Settle-
full compliance with EU standards to be reached upon EU
ments. The same applies for legal norms with respect to risk
entry on 1 January 2007. The Fund guarantees resident and
diversification. Ceilings for large exposures and connected
non-resident deposits in domestic and foreign currency, with
lending are at 20 % of a bank’s own funds. Holdings in non-
(as of 1 July 2004) not only deposits of private households,
bank undertakings are allowed up to a maximum of 15 % of
but also those of legal entities covered by the scheme.
Banking in SEE
53
Romania – Knockin’ on EU’s door
With a view to tightening the supervision of credit insti-
such networks, plans call for gradually increasing the minimum
tutions’ activities, the NBR took the following measures in re-
capital requirement up to the EU standard of EUR 5 mn by
cent years:
1 January 2006. The new statutory framework is not just in-
◆ The creation of two departments within the NBR (Depart-
tended to put credit co-operatives on a sound financial footing
ment of Banking Supervision, Department for the Regula-
by reorganising and restructuring the co-operative banking sys-
tion and Licensing of Banks) with clearly defined duties to
tem; it also makes the NBR responsible for the regulation,
ensure a more effectively organised banking supervision;
licensing and supervision of popular banks. Moreover, since last
◆ Further harmonisation of accounting standards with IAS
year credit co-operative networks are now also obliged to par-
(full compliance in 2005);
ticipate in the deposit insurance system.
◆ Implementation of a standardised rating and early warning
system (CAMEL), along with its further development and
Conclusion
adjustment to the features of the Romanian banking sector;
Although Romania has made impressive progress in re-
◆ Stepped-up co-operation with the National Securities Com-
forming its banking sector, the banking system’s efficiency still
mission and the Insurance Supervisory Commission in line
lags that of developed market economies, highlighting the ne-
with consolidated supervision of credit institutions;
cessity to press forward with reforms, especially in view of the
◆ Broadening the Deposit Insurance Fund’s competencies in
bankruptcy proceedings;
country’s upcoming EU membership. In particular, the privatisation of state-owned banks needs to be carried out in order
◆ More efficient design of on-site inspections and their ex-
to increase the efficiency of financial intermediation. With for-
tension to the State Savings Bank, which still occupies a
eign banks’ already dominant position expected to rise further
special position in the banking sector.
and markets becoming increasingly saturated, fiercer competition among banks is expected to trigger a further wave of
Credit co-operatives
consolidation via mergers and acquisitions, which bodes well
Popular banks are a special feature of the Romanian bank-
for further efficiency gains. Nevertheless, the future of Roma-
ing system. These institutions are small credit co-operatives,
nia’s banking sector cannot be viewed in isolation from the
which were established according to the 1996 Act on Credit
progress made in restructuring the enterprise sector. High po-
Co-operatives. The fact that these popular banks were not sub-
litical and social costs have to date tempered the pace of cor-
ject to any licensing or operating restrictions led for a long time
porate sector reform. However, there are already indications
to the spread of dubious business practices and to a marked
that corporate restructuring is gathering momentum (e. g. en-
undercapitalisation of such institutions in the second half of
ergy sector), which in turn should have a positive impact on
the 1990’s. The crisis of the credit co-operative sector finally
the banking sector’s future development.
became apparent with the insolvency of Banca Populara Ro-
The degree of financial intermediation remains low, de-
mana in June 2000. The collapse of the largest popular bank
spite an impressive revival of lending in recent years, as low-risk
prompted the NBR to take action to ensure the adequate su-
forms of investment (e. g. securities) have become increasingly
pervision of these institutions, resulting in a new legal frame-
unattractive for the banks. This shift in activities signals increas-
work for credit co-operatives at the end of 2000. Accordingly,
ing confidence, both on the part of the population as well as
existing credit co-operatives must now register with the Nation-
the banks. In light of the credit boom in recent years and the
al Bank. Thereafter they have two options: assuming all of the
economy’s strong dynamic, the most important challenge for
statutory requirements are fulfilled (e. g. capital requirements),
Romania’s banking system is to deepen financial intermediation
they can either continue their operations as commercial banks,
while maintaining the banking sector’s soundness, particularly
or join a network of at least 100 credit co-operatives under the
with regard to credit and foreign currency risk.
supervision of a central institution. Given credit co-operatives’
Given Romania’s impending accession to the EU in 2007,
limited financial strength it is relatively unlikely that even one
far-reaching progress has been achieved in harmonising Ro-
institution will choose to go with the first option. In fact, dur-
mania’s banking legislation with international standards. Nev-
ing 2001 to 2004 numerous applications were submitted to
ertheless, further alignment of legal regulations would appear
the NBR to set up a network. However, only one network
to be on the agenda, not only with respect to EU standards,
(Creditcoop Central House) has received a licence so far. Its
but also to Basel II.
network comprises 565 credit co-operatives and as of year-end
2004 its market share was approximately 0.5 % in terms of the
banking sector’s total assets. To strengthen the capital base of
54
Banking in SEE
Serbia and Montenegro – Back to the future
Sándor Gardó
Serbia and Montenegro
Back to the future
Yugoslavia’s banking market was considered to be
the face of the UN’s economic embargo – a massive imbalance
the most progressive and liberal of its kind as early as the
in foreign trade, which adversely affected the banking sector
1960s, a reputation which it retained until the late 1980s.
for many years to come. The banking sector’s precarious finan-
Ten years of military conflict, geopolitical disputes, as
cial situation was further exacerbated by the economic embargo,
well as political and economic isolation ultimately resulted
which deprived the banks of most of their core activities (e. g.
in the loss of the banking market’s pioneer role, and in
investment and trade finance), thereby preventing the acquisi-
the emergence of various monetary, banking, regulatory
tion of new business. The freezing, i. e. the virtual confiscation
and supervisory regimes in the territory of the State
of foreign currency deposits located in commercial banks
Union Serbia and Montenegro. It is within this new con-
(foreign currency-denominated deposits of private individuals
text that the pioneers of the past and the stragglers of
resulting from workers’ remittances or tourism revenues) by the
the present, are trying to catch up with their counter-
state for the purpose of filling its war chest, adversely affected
parts in Central and Eastern Europe.
the liquidity of most banks while also increasing distrust toward
the banking sector in general. At the same time, the sharp
decline in the national currency’s value made it impossible for
Serbia’s Banking Market
banks to service their foreign currency loans granted by Paris
and London Club Creditors, which aggravated the problem of
non-performing loans. In addition, the practice of directed
In the 1960s Yugoslavia’s banking market already bore
lending as a result of political interference in day-to-day man-
several characteristics of a market-oriented, two-tier banking
agement of banks and the related crowding out of private
system. Consequently, before the collapse of the Iron Curtain
investment projects, combined with an intricate ownership
it was generally considered to be one of the most advanced
structure and the resulting conflict of interest (connected lend-
banking sectors in Central and Eastern Europe. Through the
ing), made it difficult for banks to operate on a profitability-
inclusion of private elements, it was possible to found “quasi-
oriented basis and to adapt to prudent banking principles. In
private” banks, even if the main purpose of such socially-
the end, inadequate internal and external control mechanisms
owned credit institutions (whose owners were usually state-
created ideal conditions for moral hazard.
owned companies) was to fund the owners’ interests. A new
In 2000, a turnaround in political thinking in the form of a
Banking Act introduced in 1989 finally gave private banks
new government and the related easing in the country’s eco-
access to the market and at the same time called on existing
nomic isolation heralded the beginning of the banking reform.
banks to take a further step toward commercialisation by
The revitalisation of the banking sector commenced with the
changing their legal status to that of a joint stock company.
ratification of two new laws: the “Law Governing the Rela-
However, Yugoslavia (and as from 1992 its legal successor,
tions between the Federal Republic of Yugoslavia and Banks
the Federal Republic of Yugoslavia) was able to enjoy the bene-
within the Territory of the Federal Republic of Yugoslavia,
fits of a – by Central and Eastern European standards – well-
being the original Debtors or Guarantors toward the Paris
developed banking sector only for a brief period. The transition
Club and London Club Creditors” and the “Law on the Settle-
shock and the military conflicts that erupted in 1991 and con-
ment of the Public Debt of the Federal Republic of Yugoslavia
tinued for most of the remaining part of the decade, led to an
arising from the Citizens’ Foreign Exchange Savings”. These
economic downturn (reflected in a sharp contraction of GDP
two laws constituted the legal basis for solving the problem of
following the collapse of old production structures), hyperinfla-
non-performing loans, and for providing compensation to pri-
tion, high exchange rate volatility, severe fiscal problems, high
vate individuals whose foreign currency deposits had been
unemployment and – insofar as foreign trade was possible in
confiscated, thereby clearly defining the legal framework for
Banking in SEE
55
Serbia and Montenegro – Back to the future
banks’ balance sheet restructuring. In addition, the Law on the
demands placed on banks through the steady strengthening
Agency for Deposit Insurance and Bank Rehabilitation, Bank-
of the legal framework (e. g. higher capital requirements
ruptcy and Liquidation (BRA) of 1989 was amended. The
proved to be a hurdle for smaller banks, as was recently the
amendment officially named the BRA as the agency
case with Kreditno-Eksportna banka) are accelerating the
responsible for overseeing the reform of the banking sector,
consolidation process.
and specifically outlined its competencies in regard to the
The restructuring process is also reflected in bank staffing
restructuring, insolvency and liquidation of banks. The Law on
levels. Bank closures, as in the case of the four major banks in
the National Bank and the Banking Act were also amended.
2002 resulted in high fluctuations in the number of bank em-
An extensive screening of the banking sector began in
ployees. However, due to the strong demand for banking
the context of the new legal framework. This included the
services and the repositioning of banks in the fight for market
classification of the commercial banks into four groups ac-
share, the number of employees rose sharply in the boom years
cording to their liquidity and solvency, and prompted the BRA
2003 and 2004 reaching nearly 23,500 at year-end 2004. Most
to close 19 smaller insolvent banks in 2001, which accounted
of the employees that were laid off have been reabsorbed by
for about 10 % of the banking sector’s total assets. At the be-
other market participants.
ginning of 2002 this was followed by the closure of the four
The list of the largest Serbian banks at the end of 2004 was
largest Serbian banks (Jugobanka, Beobanka, Beogradska
headed by Austria’s Raiffeisenbank with a market share of
banka, Investbanka) on account of fiscal restrictions. Based
13.6 % in terms of total assets. It was followed by Delta banka
on the banking sector’s total assets, these banks had a mar-
(10.8 %), with Komercijalna banka (10.2 %), in which the state
ket share of 57 % and a recapitalisation requirement of an es-
still holds a significant minority interest of 33.9 %, ranking
timated EUR 4 bn. Within the framework of portfolio restruc-
third. This results in a concentration ratio of 47.3 % for the five
turing, the state furthermore acquired majority or significant
largest banks, which is low in comparison to other countries in
minority interests in sixteen banks through debt-equity swaps
Central and South-East Europe. Market concentration is likely to
pursuant to the new laws of 2001 and 2002, i. e. the state as-
rise in the coming years, however, as a result of an increase in
sumed the obligations of ailing Serbian banks (most of them
mergers due to consolidation and privatisation. Furthermore,
socially-owned) towards Paris and London Club creditors, and
the foreign-owned banks, which are meanwhile strongly repre-
in return received equity in the banks involved. These restruc-
sented among the top ten banks, are growing much faster than
turing measures were followed by the initiation of the privati-
domestic banks, which are still burdened by the legacies of the
sation process. Initial privatisation successes and the growing
past and have to win depositors’ confidence.
presence of foreign-owned banks in the market have in the
Banking sector reform was accompanied by far-reaching
last few years strengthened confidence in the banking sector,
changes in the banks’ ownership structure. State involvement
while changing the market’s structure and specific features.
Banking Market Structure
Number of banks
As in other transition countries in Central and South-East
Europe, the opening of the market to private banks, lax
1997 – 2004
licensing regulations and low capital requirements led to a
sharp rise in the number of banks in Serbia at the beginning
of the 1990s, peaking at 112 in 1995. Almost ten years and
the first round of banking reform later, the number of banks
has dropped by two-thirds, but at 43 at the end of 2004 it
remained high. The fact that about half of these banks have a
market share of less than one per cent, points to the need for
further consolidation. Bulgaria, which is comparable with
Serbia in terms of area and population and is also considered
to be overbanked, had only 35 banks at the end of 2004. The
110
100
90
80
70
60
50
40
30
20
10
0
1997
1998
1999
2000
2001
2002
ongoing privatisation and restructuring process, as well as the
growing competition on the banking market are, however,
likely to prompt a wave of mergers and acquisitions in Serbia’s
banking sector in the coming years. In addition, the higher
56
Banking in SEE
Source: NBS, Bank Austria Creditanstalt Economics Department
2003
2004
Serbia and Montenegro – Back to the future
(including socially-owned enterprises) in the banking sector
The privatisation process is, however, making only slow
has declined sharply since 2000, even if the state’s holdings
progress. The state has privatised only three banks since the
remained a significant 34.7 % of total assets at the end of
beginning of banking sector reforms. At the end of January
2004. The decline in the state’s influence is, however, attrib-
2005 the state sold an 88.6 % stake in Jubanka, the country’s
utable less to progress made in privatisation, than to restruc-
eighth-largest bank, to Greece’s Alpha Bank for EUR 152 mn.
turing measures, market penetration by foreign banks and in-
Alpha Bank already maintains a branch office in Serbia. Two
creasingly strong (foreign) competition, which was unaffected
other banks were tendered for sale in September 2004: the
by banking sector reform and enjoys a confidence bonus.
state’s 83 % stake in Novosadska banka (no. 12) and 98 % in
Foreign-owned banks gained market share as the market
Continental banka, which were acquired in July 2005 by
position of state-owned banks gradually eroded. Serbia
Austria’s Erste Bank and Slovenia’s NLB, respectively. The pri-
increasingly attracted the attention of foreign investors
vatisation of 88.6 % of the state’s holdings in Niska banka
following a change in government in 2000, which ended the
(no. 33) was launched in January 2005. Other banks slated
country’s political and economic isolation and initiated bank-
for privatisation in 2005 are Vojvodanska banka (no. 4),
ing sector reform in 2001. The government’s decision to give
Panonska banka (no. 16) and Credy banka (no. 34).
priority to the privatisation method of direct sales to foreign
But more is happening in the banking sector apart from the
strategic investors, with the objectives of recapitalising banks,
privatisation of state-owned banks. Foreign banks seem to pre-
providing a basis for the transfer of technology and know-
fer to strengthen their market positions via mergers with and
how and strengthening corporate governance, has further in-
acquisitions of other private, foreign participants, without wait-
creased the interest of foreign banks in Serbia’s banking mar-
ing for bank restructuring to be completed. Bank Austria Credit-
ket. In individual cases (e. g. Komercijalna banka), however,
anstalt (HVB Group), for example, acquired a 98.3 % interest in
other privatisation strategies such as an initial public offering
Eksimbanka in November 2004, thereby raising its market share
(IPO) are also planned to help deepen the domestic capital
in terms of total assets to 5.6 % as of year-end 2004, making it
markets. The admission of new banks, i. e. greenfield invest-
the fifth-largest bank in Serbia. Italy’s Intesa Group pursued a
ments, as an indirect form of privatisation will be strictly limited
similar strategy with the purchase of a 90 % stake in Delta
until the privatisation process has been concluded.
banka for EUR 333 mn in July 2005, and Piraeus Bank acquired
Table 1: The 15 largest Serbian banks ranked by total assets as of 31 December 2004
Bank
Main shareholders
Total assets
(in EUR mn)
Market share
(in %)
1
Raiffeisenbank
Raiffeisen International (90 %), IFC (10 %)
877.0
13.6
2
3
Delta banka
Hemslade Trading Ltd (86.4 %)
695.4
10.8
Komercijalna banka
Republic of Serbia (33.9 %), Galenika a. d. (7 %)
662.0
10.2
4
Vojvodanska banka
Republic of Serbia (99.2 %)
463.5
7.2
5
HVB banka Srbija i Crna Gora1
Bank Austria Creditanstalt (99 %)
361.9
5.6
6
Hypo Alpe-Adria-Bank
Hypo Alpe-Adria-Bank International AG (99.7 %)
360.6
5.6
7
Société Générale Yugoslav Bank
Société Générale S. A. (100 %)
292.0
4.5
8
Jubanka
Republic of Serbia (82.7 %), Jugobanka a. d. (6 %)
233.9
3.6
9
AIK banka
Irva (14.7 %), PP “Nini” (9.3 %), Vojvodanska banka (5.6 %)
208.0
3.2
10 ProCredit banka
Commerzbank AG (16.7 %), EBRD (16.7 %), IFC (16.7 %)
175.8
2.7
11 Postanska stedionica
JP PTT (83.5 %), RF PIO (8.5 %)
141.6
2.2
12 Novosadska banka
Republic of Serbia (83 %)
132.6
2.1
13 Kulska Banka
Invej doo. (5.4 %), Dijamant Banka (8.3 %), BIP (4.9 %)
132.6
2.1
14 PB Agrobanka
Republic of Serbia (18.9 %)
125.1
1.9
15 National Bank of Greece S. A.
National Bank of Greece (100 %)
122.9
1.9
Source: NBS, Bank Austria Creditanstalt Economics Department / 1) Including Eksimbanka acquired in November 2004
Banking in SEE
57
Serbia and Montenegro – Back to the future
an 80 % stake in Atlas banka (no. 23) at the end of February
age was about 200 %. The level of financial intermediation
2005. In May 2005 France’s Crédit Agricole bought a majority
declined sharply, mainly as a result of restructuring measures
71 % stake in Meridian banka (no. 31).
(closure of insolvent banks) in 2001 and 2002. This indicator
The market share of foreign-owned banks, at 37.7 % al-
with respect to the past does not, however, paint a true pic-
though for the first time higher than that of the state in terms
ture in light of the high inflation and exchange rate volatility
of 2004 total assets, was still fairly low compared with other
that has characterised previous years.
transition countries and reflects the moderate progress in bank
The mix of restructuring measures, inflation and exchange
privatisation. Measured in terms of capital, the market share of
rate developments also had a decisive impact on deposit and
foreign-owned banks was somewhat lower at around 30 %.
loan volumes. Private sector deposits, for example, first
The regional origin of foreign capital reflects the dominance of
climbed to almost 15 % of GDP in 2000, and one year later
EU member states, with Austrian banks taking the lead on the
declined to 13.4 %. This downward trend did not, however,
Serbian banking market. Foreign-owned banks’ market share in
persist. The introduction of the single currency in the euro
lending is similarly low, which, given numerous elements of
area and the consequent necessity to convert the DM-denomi-
uncertainty (e. g. a lack of collateral, difficulties in the enforce-
nated savings from workers’ remittances counteracted the
ment of claims), points to a cautious lending policy. In this re-
downward trend and provided a temporary boost to financial
spect, 90 % of the loans granted by foreign-owned banks are
intermediation. The growing presence of foreign-owned banks
short-term (maturity less than one year). In terms of deposits,
on the Serbian banking market has also increased the popula-
foreign-owned banks claim a market share of over 40 %,
tion’s saving propensity. In 2004, for example, the third con-
reflecting the public’s confidence in foreign banks.
secutive sharp rise in savings occurred both in absolute terms
and in relation to GDP. Despite these initial successes, there is
Banking Sector Profitability and Efficiency
an enormous amount of work to be done to regain the confi-
Serbia’s banking sector is still in a state of infancy. The
dence of depositors and to facilitate the mobilisation of sav-
extent to which the banking market is underdeveloped is
ings. The bulk of the population still keeps savings under the
apparent both in absolute and relative terms. At the end of
mattress. But even if savings find their way to the bank, peo-
2004 the banking sector’s total assets amounted to a mere
ple prefer to place their money in short-term deposits (95 % of
EUR 6.5 bn. At 38.8 %, the level of financial intermediation
private sector deposits) and – given the origin of workers’ re-
(banking sector’s total assets as a percentage of GDP) was
mittances – to invest savings in foreign currency (two-thirds of
consequently a little over one-third of GDP. In comparison, in
all private sector deposits), primarily in euros, indicating a lack
Austria the figure was 270 % of GDP, and the EU-15’s aver-
of confidence in Serbia’s national currency, the dinar (CSD).
Financial intermediation
Maturity and currency structure
of private sector loans
1997 – 2004, in % of GDP
1997 – 2004, in %
200
180
160
140
120
100
80
60
40
20
0
90
80
70
60
50
40
30
20
10
0
1997
1998
1999
Total assets
2000
2001
Private sector deposits
2002
2003
Private sector loans
Source: NBS, Bank Austria Creditanstalt Economics Department
58
Banking in SEE
2004
1997
1998
1999
Short-term loans
2000
2001
2002
2003
FX loans
Source: NBS, Bank Austria Creditanstalt Economics Department
2004
Serbia and Montenegro – Back to the future
Banks hold most of their customers’ foreign currency deposits
regard to foreign currency loans, and limiting monthly repay-
with the National Bank of Serbia (NBS) for the purpose of en-
ments to a maximum 30 % of the borrower’s net income.
suring structural liquidity.
Loan applicants are furthermore required to make a down
The closure of numerous banks, coupled with measures to
payment of at least 20 % of the purchase price of the goods
solve the bad debt problem in 2001 and 2002 led to a sharp
acquired. In order to stop the strong growth in foreign currency
contraction of loans to the private sector to 16 % of GDP in
loans, the central bank as of 1 January 2005 also extended the
2003 (EU-15: 101 % of GDP). The turnaround came in 2004
base for computing minimum reserve requirements by includ-
with a revival of domestic demand and the accompanying
ing the commercial banks’ foreign borrowings stock with a
credit boom. Indeed, lending volumes, boosted by robust
maturity of up to four years, and in the case of new foreign
private consumption and strong investment activity, grew by a
borrowings, regardless of maturity. In order to curb strong
nominal 56 % in 2004, with corporate loans expanding at a
growth in foreign currency loans, the NBS as of beginning
below-average rate of 43 %, and loans to households jumping
June 2005 also raised the minimum foreign currency reserve
by 126 %, although from a significantly lower base. The
requirement from 21 % to 26 %. As a result of strong loan
National Bank of Serbia has already planned some corrective
growth, the ratio of private sector loans to private sector de-
measures to curb strong domestic demand in order to prevent
posits again rose above the 100 %-mark after touching its
inflationary pressures, a further widening of the current
lowest level in 2003.
account deficit and a possible deterioration in loan portfolio
Banking sector reform also significantly changed the loan
quality. The central bank’s measures to curb credit activity
portfolio’s currency and maturity structures. The change was at-
include provisions for more detailed analyses of the creditwor-
tributable to the market exit of banks and to the removal of
thiness and debt repayment abilities of potential borrowers in
claims based on obligations toward Paris and London Club
Table 2: Overview of Serbia’s banking sector (1997 – 2004)1
1997
1998
1999
2000
2001
2002
2003
2004
Number of banks
106
104
75
86
50
50
47
43
Number of bank employees
n. a.
n. a.
n. a. 26,075 14,482 18,914 22,319 23,463
Return on assets (ROA)2
n. a.
n. a.
n. a.
– 8.7
– 0.3
– 1.0
(ROE)3
n. a.
n. a.
n. a. – 78.5 – 26.0 – 34.5
– 1.2
– 5.0
n. a.
n. a.
n. a.
0.7
21.9
30.6
31.3
27.9
Return on equity
Capital adequacy ratio (%)
– 6.2
– 3.6
Non-performing assets (in % of total classified assets)
n. a.
n. a.
n. a.
13.7
12.7
24.3
22.5
23.3
Spread (difference between lending and deposit rates)
52.7
44.2
42.1
71.6
28.4
16.5
12.1
11.0
Private sector deposits (in % of
GDP) 4, 5
9.2
10.4
9.7
14.7
13.4
15.5
17.7
20.7
Private sector FX deposits (in % of private sector deposits)
34.8
42.5
35.7
61.6
60.1
56.9
62.1
67.4
Private sector short-term deposits (in % of private sector deposits)
98.1
96.1
90.2
94.4
96.7
98.4
97.4
94.4
Corporate loans (in % of GDP)
27.9
31.0
28.3
54.5
29.7
15.2
13.2
16.2
Private sector loans (in % of GDP)
29.7
32.5
29.6
56.6
31.7
17.2
16.0
21.5
Private sector FX loans (in % of private sector loans)
56.9
58.7
55.0
81.2
75.2
41.7
29.8
23.2
Private sector short-term loans (in % of private sector loans)
42.5
43.6
45.6
27.5
28.2
49.8
52.9
47.1
323.0
313.6
305.6
385.0
237.3
111.4
90.3
104.1
Financial intermediation (total assets/GDP, in %)
95.6
91.2
79.8
185.2
126.7
36.4
31.5
38.8
Concentration ratio (C5 – total assets, in %)
n. a.
n. a.
n. a.
n. a.
n. a.
46.6
39.5
47.3
Market share of state-owned banks (total assets, in %) 6
89.8
90.0
89.0
91.4
65.5
49.4
46.7
34.7
Market share of foreign-owned banks (total assets, in %)
n. a.
n. a.
n. a.
1.4
13.2
27.0
22.9
37.7
Market share of foreign-owned banks (capital, in %)
n. a.
n. a.
n. a.
n. a.
15.7
19.4
26.3
n. a.
Private sector loans to private sector deposits (in %)
Source: NBS, EBRD, IMF, Bank Austria Creditanstalt Economics Department / 1) Not including banks in Kosovo and Montenegro / 2) Estimate – ratio of net profit or
loss to total assets / 3) Estimate – ratio of net profit or loss to equity capital / 4) GDP data are estimates for Serbia not including Montenegro / 5) Private sector
includes corporates and households / 6) Including socially-owned enterprises
Banking in SEE
59
Serbia and Montenegro – Back to the future
creditors from banks’ balance sheets. These claims were for the
was now reversed through excess liquidity. In this context, the
most part of a long-term nature and denominated in foreign
banks’ risk aversion toward extending loans and the back-
currency, which considerably distorted the real situation. As a
wardness of the interbank market for a long time underpinned
result of portfolio restructuring, the share of short-term loans as
the banking market’s high liquidity. Given the credit boom in
a percentage of total private sector loans reached some 50 %.
2004 and the anticipated continued strong loan growth, the
This compared with a contraction of foreign currency loans – as
problem of excess liquidity will be solved on its own.
a percentage of private sector loans – to less than 25 %. This
In the 1990s, the profitability of the banking sector was
downward trend was reinforced by the credit boom, as the
greatly affected by problems inherited from the planned
Foreign Exchange Act of 2002 designates the dinar as the
economy, state interference in lending decisions and the
currency for business transactions, and therefore essentially
resulting lack of profitability orientation, as well as the
prohibits granting foreign currency loans to the private sector.
absence of discipline on the part of market participants. The
In order to prevent any currency mismatch, the banks, as in
banking sector still recorded high losses in the years 2000 to
Croatia, resort to foreign currency indexing of loans.
2002. Restructuring measures and the consequent reduced
The banks’ loan portfolio was burdened by problem
need for provisioning showed initial signs of a change for the
loans from the beginning of the transition process. This was
better in 2003. However, the sector continued to book losses
both the heritage of the centrally-planned economy and the
in 2004, which translated into an ROA of – 1.0 % and an
inefficient lending policy of the 1990’s. The true extent of
ROE of – 5.0 %. Given the current credit boom and high
the problem was, however, only apparent in 2002, following
spreads, results for the first quarter indicate that the banking
the introduction of more rigorous standards for loan classifi-
sector could start generating profits in 2005.
cation and provisioning. At the end of 2004, almost onequarter of the loan portfolio was considered to be non-per-
Legal framework
forming pursuant to the new standards. In order to improve
In accordance with a two-tier banking system, the National
this situation and to enable banks to obtain higher-quality
Bank of Serbia (legal successor to National Bank of Yugoslavia)
information on potential borrowers, the National Bank of
stands at the top of the Serbian banking sector. Pursuant to the
Serbia established the Central Credit Registry (CCR) in mid-
Law on the National Bank of Serbia of 2003, the NBS is vested
2002. At present, however, the CCR only records loans of
with the classical functions of a central bank, i. e. is responsible
over CSD 5 mn (approx. EUR 70,000), which limits its
for the formulation of monetary and exchange rate policy, the
efficiency. As from March 2005, with a view to preventing a
management of foreign exchange reserves, issuance of bank-
deterioration of loan portfolio quality in the current credit
notes and coins, regulation and monitoring of payment trans-
boom, the information provided by the Credit Registry has
actions, and the licensing, regulation and supervision of the
been extended to leasing activities, tax arrears and arrears to
activities of banks and insurance companies.
utility companies.
The first Banking Act dates back to the 1970s, and was
The interest rate spread (difference between the deposit
replaced by two others in 1989 and 1993, respectively.
and lending rate), although still relatively high compared
Subsequent years saw amendments to the Banking Act,
with other countries in Central and Eastern Europe, is gradu-
which were more of a cosmetic nature in light of the in-
ally narrowing. While this is explained partly by growing price
fluence exerted by the state on the central bank and the
stability, the falling spreads also reflect the steady increase in
commercial banks. As the reform of the banking sector has
banks’ efficiency following restructuring measures, the
gathered momentum, the NBS has made great efforts to
reduced need for provisioning and stronger competition as a
align the Banking Act with international standards and to
result of the growing presence of foreign banks.
strengthen banking supervision.
The past few years have seen a marked improvement in
According to the Law on Banks, commercial banks can be
the banks’ capitalisation, especially in the wake of the
founded in Serbia as a joint stock company with a minimum
restructuring-related debt-equity swaps and higher capital
capital of the dinar equivalent of EUR 10 mn. Banks which
requirements. Reform measures thus brought the banks’ long-
were already licensed prior 2002 were required to meet these
standing undercapitalisation to an end, as reflected in a signifi-
criteria by the end of 2003. In accordance with international
cant rise in capital adequacy from only 0.7 % in 2000 to
banking law, the capital adequacy requirement for banks was
27.9 % in 2004. The situation of former years – massive illi-
8 % until recently. The NBS, however, raised this requirement
quidity due to the large share of frozen deposits and claims
to 10 % as of March 2005. Other credit institutions authorised
based on obligations toward London and Paris Club creditors –
to operate on the banking market are savings banks, savings
60
Banking in SEE
Serbia and Montenegro – Back to the future
and credit organisations, and savings and credit cooperatives.
However, on account of legal loopholes, the undercapitalisa-
The capital requirements for such institutions are lower. When
tion of the deposit insurance agency and a coverage level of
founding a savings bank, the owners must have a minimum
CSD 5,000 (approx. EUR 65), the system only exists on a pro
share capital of EUR 2 mn. In the case of savings and credit or-
forma basis. In light of the banks’ experiences with the
ganisations, and savings and credit cooperatives the minimum
central bank in the context of the confiscation of their foreign
requirements are EUR 1.2 mn and EUR 200,000, respectively.
currency deposits, the deposit guarantee system also suffers
In order to avoid the concentration of risk and ensure a
from a serious credibility problem. The system is in the
balanced portfolio structure, credit institutions are subject to
process of being reformed, and a new deposit guarantee law
numerous restrictions in regard to the size of individual expo-
with an initial minimum coverage level of EUR 3,000 is to be
sures. Large loans, i. e. loans which exceed 10 % of a bank’s
passed by parliament in 2005.
equity capital, may as individual items amount to not more
than 25 % of the bank’s capital. Such individual items on an
aggregate basis may not exceed 400 % of the bank’s capital.
Conclusion
In the 1970s and 1980s Serbia achieved pioneer status in
In addition, loans to related borrowers may not exceed
the field of banking reform, which gave it an excellent head
5 % of the bank’s capital, whereas banks are not permitted to
start at the beginning of the political and economic turn-
grant loans to their shareholders for a period of one year
around in Central and Eastern Europe in 1989. Socio-political,
from the date when the bank was entered in the trade regis-
military and economic obstacles, however, prevented Serbia
ter. Given that the ownership structure of enterprises is often
from making use of these advantages. Consequently, in the
unclear (especially in the case of offshore companies), it is,
1990s, Serbia not only lost its pioneer status but also fell far
however, not always easy to verify compliance with these
behind most other countries in Central and Eastern Europe.
legal provisions.
Today it lags behind the model countries of banking reform
In order to prevent structural illiquidity and connected
(e. g. Hungary, Estonia) by about ten years.
lending (with the inherent danger of supporting ailing com-
Only after the political sea change in 2000 did the bank-
panies), the participation of a bank in the capital of legal enti-
ing sector again become a focal point. In light of the signifi-
ties may in each case not exceed 15 % of the bank’s capital,
cant nexus between financial intermediation and economic
and such investments may together not exceed 60 % of the
growth, banking reform became the key element of Serbia’s
bank’s capital. For open currency positions there is a ceiling of
economic restructuring process. Hence, the country’s banking
30 % of the bank’s capital.
sector has in the meantime experienced far-reaching changes.
The regulations for loan classification and provisioning
Important restructuring measures have been implemented
were tightened in terms of quality and quantity through a
with the liquidation of insolvent banks, portfolio restructuring
decree issued by the NBS in July 2002. This applies not only to
and dealing with the problem of non-performing loans. The
provisioning requirements, but also to the classification of
simultaneous granting of market access to foreign banks was
banks’ claims on clients on the basis of loans approved by Paris
thereby not only significant with respect to increasing bank-
and London Club creditors. These claims were previously auto-
ing market competition, but also by accelerating banking sec-
matically classified as standard (A) loans. The main criterion for
tor reform by importing western business and supervisory
the classification of loans is their default probability, based on
practices. In addition, the legal framework was strengthened
the length of time the claims are overdue. Depending on the
by the gradual alignment of banking legislation to EU stan-
credit category (A, B, C, D, E), the banks are required to make
dards. In this regard, the adoption of IAS norms, starting with
loan loss provisions of 2 %, 5 %, 25 %, 50 % and 100 %.
the 2004 annual report, represented an important step to-
Liquidity rules require credit institutions to maintain a
ward providing greater transparency. Similarly, the specifica-
ratio of a minimum of one in monthly average terms for
tion of core competencies of the NBS and the clear definition
liquid claims to sight deposits plus obligations with a mini-
of the nuts and bolts for sanctioning non-prudent banks im-
mum maturity of one month.
proved the quality of banking supervision. The privatisation of
In Serbia, a deposit guarantee scheme, which is managed
banks also got underway in mid-2004. Although progress in
by the Deposit Insurance and Bank Rehabilitation Agency
this area has been curbed by limited administrative capacities,
(BRA), is in place since 1989. The Banking Act and the Law
the first privatisation successes at the beginning of 2005 were
governing the BRA make it mandatory for banks to partici-
important milestones in banking sector reform, and it is con-
pate in the system, which is to be financed by premiums
ceivable that a number of other privatisation projects may still
amounting to 0.1 % of the guaranteed deposits annually.
be completed this year.
Banking in SEE
61
Serbia and Montenegro – Back to the future
Despite numerous achievements, there is still a considerable amount of work to be done in regard to banking reform
Kosovo’s Banking Market
and improving efficiencies. The banking market is overbanked but underserviced. The first phase of consolidation
Kosovo enjoyed the status of an autonomous province
(2001 – 2004) is therefore likely to be followed by two others
within the Socialist Federal Republic of Yugoslavia, a position
– one in the form of privatisation and another in the form of
which was negated by the Serbian central government in
mergers and acquisitions. During the consolidation process it
spring 1989. The subsequent collapse of Yugoslavia, the related
is important to optimise not only the quantity but also the
breakdown of production structures, UN sanctions and the ab-
quality of banking services, thereby moving from the mainly
sence of public transfers not only led to a failing economy, but
basic banking products currently offered, to more sophisti-
also to a flourishing shadow economy and the emergence of a
cated services.
cash society. At the same time, growing ethnic tensions finally
The major challenge remains public confidence in regard
erupted in an armed conflict in 1999, sweeping away the
to both the banking system and the national currency. Mea-
banking market’s already weakened means of existence
sures to strengthen public confidence would help to channel
through the destruction of most of the public infrastructure.
workers’ remittances into the monetary system, as well as to
On 11 June 1999 the UN Security Council adopted Resolu-
develop a healthier balance sheet structure (avoidance of
tion 1244 under which Kosovo was placed under UN-led admin-
currency and maturity mismatch), with positive effects for
istration by “respecting the sovereignty and territorial integrity of
domestic demand, and consequently the economy. The lack
the Federal Republic of Yugoslavia”. However, the structural and
of confidence in the banking sector is reflected in the fact
institutional reforms initiated by the UN mission in Kosovo
that the most important financing methods employed by
(UNMIK) led to the creation of a de facto autonomous economic
SMEs aside from own funds, are financing provided by family
policy, including a largely independent fiscal, monetary and for-
members or workers’ remittances, with funding by banks
eign trade policy. The same holds true for the banking sector.
coming only in third place.
The cornerstone for the banking sector’s reorganisation
Banking reform must also be accompanied by reform of
was laid with UNMIK Regulation No. 1999 / 20 of 15 Novem-
the enterprise sector, which continues to operate within a
ber 1999, with the main objective of establishing a Banking
framework of soft budget constraints. In this respect, reform
and Payments Authority of Kosovo (BPK). In practice, BPK
measures that create a sound basis for banking operations
functions as Kosovo’s central bank, which also embodies the
are inevitable. The lack of collateral and the tedious process
characteristic features of an integrated financial supervisory
of enforcing creditors’ rights remain an obstacle to lending
agency. Its responsibilities cover the licensing, regulation and
(especially in regard to loans to corporates), even if the
supervision of financial intermediaries (banks, micro-finance
situation is expected to improve with the introduction of the
institutions, insurance companies, pension funds) and ensur-
new and more flexible Insolvency Law, which took effect on
ing the proper functioning of the payment system. With the
1 February 2005.
euro the general means of payment in Kosovo, the possibili-
Similarly, the creation of a risk-adequate legal framework
ties for the BPK to enforce monetary policy are limited. Cur-
based on international and European standards must continue
rently, UNMIK Regulation No. 1999 / 20 as amended in 2001
to be given top priority. The consistent enforcement of legal
constitutes the legal basis for BPK’s activities.
standards to lower the high-risk behaviour of individual
BPK’s primary objective was to establish a basis for the sup-
banks is equally important. One of the key challenges regard-
ply of basic financial services, and then to rapidly develop a func-
ing the creation of a strong legal framework is the reform of
tioning banking market. However, initially BPK was confronted
the deposit guarantee scheme, which would facilitate the
with a massive lack of financial and human resources, so that it
mobilisation of savings. Further issues that need to be more
had to rely on the support of international financial organisations
properly addressed are the wrapping up of the bad debt
(e. g. EBRD, IFC, IMF, USAID), a situation which has remained un-
problem, completion of the privatisation process, strengthen-
changed. Two additional external factors impeded the develop-
ing of corporate governance and regaining public confidence
ment of the banking sector. First, the war which lasted 78 days in
in the banking sector. These issues are all the more impor-
Kosovo, destroyed most of the public and banking infrastructure.
tant, as the domestic economy’s current robust condition and
Second, the economic and socio-political uncertainty of the
bright growth prospects, coupled with the progress made in
1990s, which eroded public confidence, was reflected in the
enterprise restructuring, provide favourable conditions for
emergence and strengthening of the structures characteristic of a
dynamic banking market growth in the coming years.
cash society, as well as in restrained foreign investment.
62
Banking in SEE
Serbia and Montenegro – Back to the future
In view of these conditions and the dearth of banking
seven banks operating in Kosovo, it is the micro-finance
services (in 2000, Kosovo had only one bank with eight
institutions (MFIs) – mainly supported by international lenders
branches), the BPK also performed the functions of a com-
– which play a key role in rebuilding Kosovo’s financial sys-
mercial bank (mainly by accepting deposits) in the first two
tem. Their primary function is to finance small and medium-
years after it was founded. However, as the number of banks
sized enterprises (SMEs). At the end of 2004, Kosovo had
qualifying for operational activities increased and the banking
eighteen such institutions. The number of MFIs will probably
system’s development progressed, the agency discontinued
decline and their significance will diminish as the banking
these functions in mid-2002 by giving up its 22 branch offices
market’s development gathers momentum.
as well. By the end of 2001 seven banks were operating in
With a market share of 43.3 %, ProCredit Bank (previ-
Kosovo; this number has remained unchanged due to the
ously Micro-Enterprise Bank) was by far the largest bank in
BPK’s restrictive licensing policy. The rapid rise in the number
Kosovo at the end of 2004 in terms of total assets. It was fol-
of branches and employees nonetheless shows that the bank-
lowed in second place by Raiffeisenbank Kosovo (previously
ing sector grew strongly in the years 2001 – 2004. The num-
the American Bank of Kosovo) with 18.9 %, with Kasabank
ber of branches climbed from only eight in 2000 to 207 at
ranking third with a share of 11.8 %. The banking sector
the end of 2004, and that of bank employees grew from 139
therefore is highly concentrated, with the three largest banks
to 2,068, resulting in a significantly higher rate of market
controlling about three-quarters of the market. Foreign-
penetration for banking services. Above and beyond the
owned banks account for 60 % of the banking market’s capi-
Table 3: Kosovar banks ranked by total assets as of 31 December 2004
Bank
Main shareholders
Total assets
(in EUR mn)
Market share
(in %)
1
ProCredit Bank – Kosovo1
Commerzbank (16.7 %), EBRD (16.7 %), IFC (16.7 %),
IMI (16.7 %), FMO (16.7 %), KFW (16.7 %)
344.4
43.3
2
3
Raiffeisen Bank Kosovo
Raiffeisen Zentralbank (100 %)
150.2
18.9
Kasabank
n. a.
94.2
11.8
4
5
Bank for Private Business
n. a.
57.0
7.2
Credit Bank of Pristina
n. a.
56.6
7.1
6
7
New Bank of Kosovo
n. a.
55.9
7.0
Banka Ekonomike
n. a.
37.3
4.7
Source: BPK, Bank Austria Creditanstalt Economics Department / 1) FMO: Netherlands Development Finance Company, IMI: Internationale MicroInvestitionen AG,
KFW: Kreditanstalt für Wiederaufbau
Table 4: Overview of Kosovo’s banking sector (2000 – 2004)
2000
2001
2002
2003
2004
Number of banks
1
7
7
7
7
Number of bank branches
8
28
110
147
207
139
637
1,393
1,676
2,068
6
15
16
17
18
Number of bank employees
Number of micro-finance institutions
Number of branches of micro-finance institutions
10
29
40
30
35
Return on average assets (ROAA)
3.7
1.3
0.6
1.3
1.9
Return on average equity (ROAE)
53.8
22.9
9.9
17.3
21.7
Financial intermediation (total assets/GDP, in %)
7.5
30.3
27.2
32.5
43.2
Deposits (in % of GDP)
6.8
28.7
24.6
28.7
37.5
Loans (in % of GDP)
0.2
1.5
5.0
13.0
20.3
100.0
63.0
62.0
61.0
n. a.
Market share of foreign-owned banks (capital, in %)
Source: BPK, Bank Austria Creditanstalt Economics Department
Banking in SEE
63
Serbia and Montenegro – Back to the future
tal. This relatively high figure has been fairly constant since
In 2000, lending volume totalled about EUR 3 mn or
2001 due to the leading role played by international financial
0.2 % of GDP, but increased 120-fold to EUR 373 mn by the
institutions in rebuilding Kosovo’s financial infrastructure,
end of 2004 (corresponding to about 20 % of GDP) due to
notwithstanding a number of changes in the ownership
the growing number of market participants, the expansion of
structure of foreign-owned banks in the last few years. Aus-
their branch network and the easier access to banking ser-
tria’s Raiffeisen Zentralbank, for example, acquired a 76 % in-
vices. High consumption and investment demand, rebuilding
terest in the American Bank of Kosovo (founded in Novem-
the infrastructure, and housing-related reconstruction mea-
ber 2001) from USAID 2002 and purchased the remaining
sures will probably also cause loans to expand at a similar
24 % in the following year. The state’s holdings in the bank-
pace in the coming years. The services sector accounted for
ing sector total some 5 %; these are not direct equity inter-
some 85 % of outstanding loan volumes, with the trade sec-
ests, but indirect stakes held via state-owned enterprises. The
tor (55 %) having the largest share (wholesale and retail
remaining 35 % is owned by private domestic investors with
trade, hotels and restaurants). With a weighting of 35 % for
a broadly diversified and (especially in regard to changes in
short-term loans (term of less than one year), the loan port-
capital requirements) inconsistent structure.
folio’s maturity structure is relatively favourable.
The nearly five-year period since the beginning of the
The banking sector is adequately capitalised. Capital ade-
banking reforms in 1999 was characterised by the growing
quacy of 16.7 % in 2004 was well above the statutory 12 %.
monetarisation of the economy. This is reflected in an in-
The sector is operating profitably. At year-end 2004 return on
crease in the level of financial intermediation to as much as
average assets was 1.9 % and return on average equity 21.7 %.
43.2 % of GDP at the end of 2004, up from just 7.5 % in
Pursuant to UNMIK Regulation No. 1999 / 21, BPK, as the
2000. The significant jump is attributable primarily to the in-
bank supervisory body, is responsible for licensing, regulating
jection of liquidity that accompanied the introduction of the
and supervising the business activities of credit institutions. As
euro at the beginning of 2002, which prompted depositors
the agency is supported by international organisations in carry-
wanting to convert their D-Mark savings into euros to de-
ing out these responsibilities, Kosovo has high regulatory and
posit their savings with banks. Due to the lack of confidence
supervisory standards, which are generally interpreted more
in banks, some of these deposits were again withdrawn im-
strictly than the requirements of the Basel Committee or the
mediately, which was mirrored in a sharp decline in the vol-
EU. The minimum capital requirement is EUR 5 mn, in line with
ume of deposits from 28.7 % of GDP in 2001 to 24.6 % of
that of the EU. A deposit guarantee system, however, still
GDP in 2002. Banks, however, succeeded in attracting new
needs to be established. In 2003 BPK started to found a credit
deposits totalling EUR 250 mn in 2003 and 2004, which
reporting agency (KCIS). Access to data on the repayment be-
pushed deposit volume up again to 37.5 % of GDP.
haviour of debtor companies should facilitate the risk assessment process, thereby paving the way for the optimal allocation of scarce resources. Bookkeeping and accounting procedures are based on International Accounting Standards (IAS).
Overall, Kosovo’s banking market has made considerable
Financial intermediation
progress since the new start in 1999, both in terms of the
2000 – 2004, in % of GDP
availability of banking services and the remonetisation of the
economy. High regulatory and supervisory standards and
their strict implementation have created a legal environment
45
40
35
30
25
20
15
10
5
0
that meets international standards. There are still issues to be
addressed in many areas, despite all that has been accomplished to date. Top priority must be given to measures
aimed at rebuilding confidence, with a view to facilitating
the mobilisation of savings and to speeding up the monetisation of workers’ remittances, which at the end of 2004 ac2000
2001
2002
2003
2004
counted for some 15 % of GDP. In order to attract additional
foreign investment, Kosovo will need to focus on raising the
Total assets
Deposits
Loans
qualification level of bank managers and supervisors, the definition of property rights, and reforming the enterprise sec-
Source: BPK, Bank Austria Creditanstalt Economics Department
64
Banking in SEE
tor, not to mention clarifying Kosovo’s future political status.
Serbia and Montenegro – Back to the future
Montenegro’s
Banking Market
sector. Montenegro already had a banking infrastructure, unlike Kosovo, where parts of the banking sector had to be completely rebuilt. Banking reform therefore had to address problem areas such as the frozen deposits inherited from the for-
Montenegro was a republic within the former Socialist
mer Yugoslavia, interference from the state and political circles
Federal Republic of Yugoslavia until 1992 and later within the
in the day-to-day management of banks, the behaviour of
Federal Republic of Yugoslavia (FRY), when in February 2003
banks in an environment characterised by soft budget con-
it was reconstituted as a state within the State Union Serbia
straints, connected lending and lax banking supervision. Con-
and Montenegro. Indeed, even while a part of the FRY,
sequently, banking reform had to deal not only with the symp-
Montenegro was more determined to follow its own course
toms (bad debt problem, undercapitalisation, moral hazard),
in both political and economic terms. This resulted in the
but also the root causes of the banking market’s inefficiency.
creation of a largely autonomous economic policy, mainly in
The CBCG embarked on the restructuring process with
the areas of fiscal, foreign trade and monetary policy. In
an extensive screening of all banks operating in Montenegro.
1999, monetary independence culminated in the introduction
This relicensing process pinpointed serious liquidity and sol-
of the D-Mark as the legal tender, followed by the euro as
vency problems at some banks, triggering their closure (e. g.
from 2002. Despite the increasing degree of autonomy,
Jugobanka, Montenegro Development Bank). Other banks
Montenegro’s economic development – especially in the
were the target of a rehabilitation programme (including
1990s – closely followed the Serbian model. Montenegro’s
portfolio restructuring by trying to resolve the issue of non-
economy was adversely affected by the military conflicts in
performing loans, frozen deposits and debt-equity swaps)
the Balkan region for almost ten years, even if the country
lead-managed by the central bank. One of the candidates for
itself was not involved in the conflicts, and it was no less
the programme was Montenegrobanka, easily the country’s
affected by the UN’s economic sanctions than Serbia. In view
largest bank: assets and liabilities amounting to more than
of the slow progress in implementing economic reforms,
EUR 650 mn were removed from the bank’s balance sheet
Montenegro’s economy still has many of the characteristics
under a carving out process. The restructuring of the banking
typical of a planned economy, which for many years also
market was successfully completed in 2003. The debt-equity
adversely affected the banking market’s development.
swaps, however, led to a significant increase in the govern-
The establishment of a monetary authority, i. e. the found-
ment’s holdings in the banking sector. Although the sale of a
ing of the Central Bank of Montenegro (CBCG) in 2000, and
91.5 % share package in Montenegrobanka to Slovenia’s
subsequently the realisation of an autonomous monetary poli-
Nova Ljubljanska Banka (NLB) for EUR 11.1 mn in mid-2003
cy went hand in hand with the reorientation of the banking
represented an initial privatisation success, the state still has a
Table 5: Montenegrin banks as of 31 December 2004
Bank
Main shareholders
1
Crnogorska Komercijalna Banka1
DEG (22.1%), FMO (22.1%), Telekom Montenegro (11.8 %)
2
Montenegrobanka
3
Podgoricka Bank
Bank2
Total assets
(in EUR mn)
Market share
(in %)
136.9
30.8
Nova Ljubljanska Banka (91.5 %)
68.9
15.5
State (55.3 %), State-owned enterprises (20.3 %)
59.0
13.3
4
Euromarket
SEEF (48 %), DEG (21.5 %), EBRD (19.7 %)
43.2
9.7
5
Atlasmont Bank
State (19.2 %), State-owned enterprises (6.2 %)
35.5
8.0
6
Hipotekarna Bank
State (4 %), State-owned enterprises (22.3 %)
31.8
7.2
7
Opportunity Bank
Opportunity International, Rabobank Group
25.8
5.8
8
Commercial Bank
n. a.
18.0
4.0
9
Niksicka Bank
State (26.7 %), State-owned enterprises (37.2 %)
13.8
3.1
State-owned enterprises (32.0 %)
11.6
2.6
10 Pljevaljska Bank
Source: CBCG, Bank Austria Creditanstalt Economics Department / 1) DEG: Deutsche Investitions- und Entwicklungsgesellschaft, FMO: Netherlands Development
Finance Company / 2) SEEF: Southeast Europe Equity Fund (Soros Private Funds)
Banking in SEE
65
Serbia and Montenegro – Back to the future
majority holding in two banks (Podgoricka Bank and Niksicka
already high level of market concentration, which at the end
Bank) through direct and / or indirect interests, and minority
of 2004 was 77.3 % based on total assets of the five largest
holdings – mostly indirect – in five banks.
banks. The top five banks were shown to have a similarly high
level of concentration in terms of deposits and loans (82 %
Banking Market Structure
and 76 %, respectively), while their market share measured by
While the government’s reform measures have initiated a
capital was much lower, at 69 %.
recovery process in the banking market, the sector’s present
Montenegrin Commercial Bank (MCB) was the market
structure is still suboptimal. The number of banks operating
leader as of year-end-2004, controlling 30.8 % of total assets.
in Montenegro has been constant at ten since 2001, as in the
With the successful privatisation of one of MCB’s shareholders,
years 2002 – 2004, those banks leaving (Development Bank of
Telekom Montenegro, which was sold to Hungary’s Matáv for
Montenegro, Jugobanka, Ekos Bank) equalled the ones enter-
EUR 114 mn, the bank passed into 100 % private ownership at
ing the market (Atlasmont Bank, Opportunity Bank, Commer-
the beginning of 2005. Second place was claimed by
cial Bank). With a population of 620,000 this figure, however,
Montenegrobanka (15.5 %), which had been sold in mid-2003
seems high, although the 92 branches and other offices at
to Slovenia’s NLB. Podgoricka banka, whose privatisation
year-end 2003 is an indication for an underserviced banking
process was initiated at the end of 2004, ranked third with
market. At the end of 2003 there were some 6,800 inhabi-
13.3 %. The bank’s privatisation tender commenced in the
tants per branch, which is considerably more than the EU-15
spring of 2005, and the government intends to have Podgoricka
average of 2,060 inhabitants, notwithstanding an approxi-
banka fully privatised by the end of the year. A 10 % stake in
mately twofold per annum increase in the number of branches
the bank was acquired by the IFC, a subsidiary of the World
in Montenegro since 2001. At the end of 2003 the ten
Bank, via a debt-equity swap in mid-April 2005.
licensed banks together employed 1,237 employees, as com-
A number of other important events have led to significant
pared with 751 in 2001, with employment in the banking
changes in the banking market’s structure in the first several
sector fluctuating substantially in the period 2001 to 2003,
months of 2005. In mid-April NLB acquired an 80.3 % holding in
given both the restructuring measures and expansion efforts.
Euromarket Bank, ranked fourth as of year-end 2004, which to-
The increasing market saturation and the consequent
gether with its holding in Montenegrobanka, increased NLB’s
fiercer competition for market shares will – with respect to
market share in Montenegro to about 25 %. A further develop-
the number of banks operating in the country – probably give
ment concerns Montenegro’s sixth largest bank, Hipotekarna
way to consolidation through mergers and acquisitions, a
banka, which was placed in receivership at the end of March due
process which will also make it possible to take advantage of
to massive solvency and liquidity problems. Following this move,
economies of scale. This will result in a further increase in the
it is uncertain whether the bank will remain in the market.
Two micro-finance institutions (Agroinvest, Alter Modus)
have also been operating in Montenegro since 2003. Such companies can be founded either as a joint stock company or as a
Banking market structure
limited liability company, and they are normally engaged in
as of 31 December 2004, in % of total assets
financing the investment projects of private households or SMEs.
Banking Sector Profitability and Efficiency
The banking market is highly underdeveloped due to events
Pljevaljska Bank 2.6 %
Niksicka Bank 3.1 %
in the country’s recent history. The degree of financial intermedi-
Commercial Bank 4.0 %
Opportunity Bank 5.8 %
Crnogorska
Komercijalna Banka 30.8%
Hipotekarna Bank 7.2 %
ation was only 35 % of GDP (94.5 % of GDP including Montenegrobanka) at the end of 2001, and following the restructuring measures taken by the CBCG (carving out frozen assets, solving the bad debt problem, closure of a number of banks) it
Atlasmont Bank 8.0 %
shrank to a meagre 25.4 % of GDP until 2003 (EU-15: 200 % of
Euromarket Bank 9.7 %
Montenegrobanka 15.5%
GDP). The completion of the balance sheet restructuring process
Podgoricka Bank 13.3%
in 2003, however, reversed the downward trend in 2004, and
the degree of monetarisation climbed to 30.1 % of GDP.
Total deposit volume was just over 18 % of GDP at year-
Source: CBCG, Bank Austria Creditanstalt Economics Department
66
Banking in SEE
end 2004. Private sector deposits grew strongly in the years
Serbia and Montenegro – Back to the future
2001 to 2004 on increasing public confidence in the banking
in 2003. Given Hipotekarna banka’s solvency problems, non-
market and accounted for 10.7 % of GDP in 2004 – still only
performing loans rose slightly, however, to 8 % in 2004, in
some one-seventh of the EU-15 average of 75 %. On the
conjunction with higher provisioning requirements (3.8 % of
contrary, the deposits of the state and state-owned enter-
total average assets).
prises were subject to considerable fluctuations as a result of
The banking sector is experiencing an upward trend in
bank restructuring. There are signs, however, that the volume
profitability. With an ROAA of – 0.7 % and an ROAE of – 4.4 %,
of state-owned deposits is declining. This is because the state
the sector was still operating at a loss in 2001. The losses were
intends to withdraw its funds held with commercial banks,
considerably higher with the inclusion of Montenegrobanka
and to deposit them in an account with the central bank spe-
(EUR 60 mn instead of EUR 1.2 mn). But CBCG’s restructuring
cially created for this purpose. The shift will require the banks
measures enabled the sector to achieve a turnaround in 2002,
concerned to upgrade their liquidity management processes.
and with an ROAA of 1.6 % and an ROAE of 6.5 % it continued
There has been a significant revival in lending in recent
to operate profitably in 2003. A striking feature on the earnings
years. Boosted by strong, pent-up demand for investments
side is an average increase of 65 % in net interest income for
and consumer goods, loans to the private sector expanded by
2001– 2003. But net fee and commission income also grew
a nominal 65 % on average for the period 2001 to 2004.
strongly at around 60 %. The banking sector’s improved perform-
Notwithstanding these developments, private sector credit
ance was in the same period accompanied by a 46 % rise in op-
volume amounted to just over 16 % of GDP in 2004, com-
erating expenses, largely on account of an increase in employees.
pared to 100 % in the EU-15. Short-term loans continue to
But the banks’ profitability will further improve in the next few
dominate lending activity, although this trend is weakening.
years with the progress made in restructuring the banking sector
Loans by type of industry show the dominance of trade and
and privatising state-owned banks, as well as with greater opera-
services / tourism with an aggregate share of almost 50 % of
tional efficiency, and growing demand for banking services. This
total loans. This portfolio structure, especially in the case of
should hold true even if the solvency problems experienced by
sectoral shocks, bears significant risks, pointing to a need to
Hipotekarna banka in 2004 temporarily hurt the sector’s overall
further diversify the loan portfolio.
profitability, resulting in an ROAA of – 0.3 % and an ROAE of
The CBCG’s restructuring measures throughout recent
years have been successful, as is apparent in the gradual
– 1.2 %. Excluding Hipotekarna banka, the banking system
recorded a profit, translating into an ROAA of 1.9 %.
decline in non-performing loans (as a percentage of total
In light of the cautious lending policy pursued by banks,
loans) from 14.8 % in 2001 to 7.4 % in 2003. The decline
Montenegro’s banking market is at present characterised by mas-
was accompanied by reduced provisioning, which fell from
sive excess liquidity. This is reflected in the high 24.2 % share allo-
4.6 % of average total assets in 2001 and 2002 to only 1.9 %
cated to the 2004 balance sheet item “cash funds and deposit
accounts with depository institutions”, and in a capital adequacy
ratio of 31%, which is well above the statutory 8 %. The fiercer
competition on the banking market, continued strong credit
Financial intermediation
growth and the banks’ improved risk evaluation capabilities will,
however, prompt a gradual decline in surplus liquidity.
2001 – 2004, in % of GDP
Legal framework
40
The CBCG, which was founded in 2000 and commenced
35
30
operations on 15 March 2001, is responsible for structuring the
25
legal framework for the banks’ activities. In light of the limited
20
monetary competencies within the framework of a de facto cur-
15
rency board, one of the central bank’s main tasks is to act as the
10
regulatory and supervisory authority for the banking sector.
5
0
The Banking Law, which replaced the previous Yugoslav
2001
Total assets
2002
Deposits
2003
Loans
2004
legislation, took effect in 2000. After being amended a number of times, most recently in 2002, the law now in large part
corresponds to international standards. The quality of banking
supervision has improved significantly with the enhancement
Source: CBCG, Bank Austria Creditanstalt Economics Department
of the legal framework as well as the clarification of compe-
Banking in SEE
67
Serbia and Montenegro – Back to the future
tencies of the CBCG and its manoeuvring room in light of the
exposures combined may not exceed three times the bank’s
possibility of sanctions. Through the strict interpretation of
capital (EU: 800 %). Depending on the closeness of the rela-
legal texts and the consistent implementation of the legal
tionship, loans to persons connected with the bank are limited
provisions, reflecting CBCG’s resolute approach to closing in-
to one to ten per cent of the bank’s capital. Investments in
solvent banks, the central bank has in the last few years
non-banks may not exceed 20 % of the bank’s capital.
made a considerable contribution toward combating the
The last amendment to the Banking Law also revised the
banks’ moral hazard behaviour. Furthermore, the central bank
provisioning regulations. Instead of covering only loans,
employed a restrictive licensing policy with a view to prevent-
which was previously the case, the regulations now apply to
ing adverse selection. Banks are required to use IAS for their
all asset items. Assets are classified in five categories: A –
bookkeeping and for the preparation of financial statements.
standard, B – watch, C – substandard, D – doubtful, and E –
Since 2002, newly-founded banks are required to have
loss. Banks are required to make loan loss provisions of 1 %,
minimum capital of EUR 5 mn. Banks already operating in the
2 % – 10 %, 20 % – 30 %, 50 % – 75 % and 100 %, pursuant
country were granted a transitional period until the end of
to the above risk categories.
2004 for meeting this requirement. At EUR 100,000, the
The law on the establishment of a deposit insurance fund
capital requirements for micro-finance institutions were much
in Montenegro was passed in 2003 and took effect in 2004. As
lower. In line with the recommendations of the Basel Commit-
this is still fairly recent, it will be some time before the deposit
tee, banks are moreover required to comply with a solvency
insurance system becomes fully operational. The system guaran-
ratio of 8 %; in this connection the Banking Law permits the
tees deposits of both private individuals and legal persons in do-
central bank to raise this ratio for individual banks in case of
mestic (EUR) and foreign currency. It covers deposits up to EUR
higher risk exposures. The requirements for the diversification
5,000 (EU: 20,000). The Deposit Insurance Fund is financed by
of the loan portfolio are stricter than international standards on
banks, whose participation in the system is mandatory. Banks
account of the country’s past experiences. The ceiling for large
are required to pay an initial contribution of EUR 10,000 if the
exposures has been set at 20 % of a bank’s capital, and large
bank is newly founded, or 0.3 % of the insured deposits, but
Table 6: Overview of Montenegro’s banking market (2001 – 2004)
2001 1
2002
2003
2004
Number of banks
10
10
10
10
Number of bank branches
21
57
92
n. a.
Number of bank employees
751
951
1,237
n. a.
Return on average assets (ROAA)
– 0.7
4.0
1.6
– 0.3
Return on average equity (ROAE)
– 4.4
15.7
6.5
– 1.2
4.1
4.0
5.8
6.1
Capital adequacy ratio (in %)
38.6
42.0
39.3
31.0
Non-performing assets (in % of total classified assets)
14.8
11.9
7.4
8.0
Net interest income (in % of average assets)
Private
sector2
deposits (in % of GDP)
Private sector loans (in % of GDP)
8.5
6.6
9.5
10.7
5.3
7.4
11.8
16.2
Private sector short-term loans 3 (in % of private sector loans)
76.3
72.8
70.4
57.4
Financial intermediation (total assets / GDP, in %)
35.0
27.9
25.4
30.1
Concentration ratio (C5 – total assets, in %)
85.8
79.8
77.8
77.3
Concentration ratio (C5 – loans, in %)
90.5
75.9
76.5
76.0
Concentration ratio (C5 – deposits, in %)
93.5
86.3
84.9
82.0
Concentration ratio (C5 – capital, in %)
85.7
69.2
70.8
69.0
Market share of state-owned banks (capital, in %)
43.0
31.1
22.6
25.8
Market share of foreign-owned banks (capital, in %)
16.0
25.3
33.1
37.9
Source: CBCG, Bank Austria Creditanstalt Economics Department / 1) Excluding Montenegrobanka / 2) Private sector includes corporates and households /
3) Maturity of less than one year
68
Banking in SEE
Serbia and Montenegro – Back to the future
not less than EUR 10,000 in the case of licensed banks, plus an
is performing its function as the supervisory authority with
annual premium of 0.3 % of the insured deposits.
the necessary rigour. The issue of offshore banks has also
The CBCG has also undertaken efforts to gain responsibility for a segment that has been a grey area of the banking
been resolved. These achievements are also reflected in a return of public confidence.
sector for many years. The Finance Ministry had granted
In light of the banking market’s future development, the
licences to an estimated 400 offshore banks, mostly in the
existence of a large number of banks in a relatively small mar-
latter half of the 1990s. The amendment to the Banking Law,
ket will probably result in a wave of consolidation and merg-
which in Section 94f required the registration and licensing of
ers similar to that seen in Estonia, and consequently, growing
offshore banks by 1 August 2002, reduced the number of
market concentration. The low level of financial intermedia-
offshore banks to around twelve by the end of 2003. Further-
tion points to significant catch-up potential, while the bank-
more, in the fight against money laundering the amendment
ing market’s high liquidity promises dynamic credit growth for
to the Law On Companies Which are Founded and Operated
the coming years. Greater efficiency (and therefore higher
Under Special Conditions, passed on 12 November 2002
profitability) in the banking sector will require the modernisa-
prohibited the founding of offshore banks.
tion of IT-systems, an improvement in banks’ risk management capabilities and the state’s withdrawal from the banking
Conclusion
sector. The state’s substantial indirect holdings call for consist-
Montenegro’s banking market can look back on a short,
but to a great extent successful recent past. Undoubtedly, the
ent reform of the enterprise sector and speedy privatisation
of state-owned companies.
country has displayed great energy and vigour in reforming
The principal risks for Montenegro’s banking market are
the banking sector since the new millennium. The restructur-
the high sectoral concentration of the loan portfolio and the
ing process is largely completed, and initial successes in the
conceivable lemming behaviour of banks with respect to
privatisation of banks were discernible. The legal framework
lending in the fight for market share, possibly at the expense
was aligned with international standards and the central bank
of proper risk management and loan portfolio quality.
Table 7: Comparison of regulatory and supervisory standards
Supervisory norm
Capital requirements
Minimum capital (EUR mn)
Capital adequacy (in % of risk-weighted assets)
Risk diversification
Large exposures (in % of bank’s capital)1
Lending to connected parties (in % of bank’s capital)
Holdings in non-banks (in % of bank’s
capital)1
Open foreign exchange position (in % of bank’s capital)1
Liquidity
requirements2
Portfolio quality
Loan classification
Provisioning requirements (in %)
Deposit insurance scheme
Administration
Membership
Funding (admission fee and annual premiums)
Minimum coverage
Serbia
Kosovo
Montenegro
10
5
5
10
12
8
25 / 400
10 / 300
20 / 300
5
20
1 – 10
15 / 60
max. 50
max. 20
max. 30
20 / 40
n. a.
min. 1
30 %
10 %
A/B/C/D/E
A/B/C/D/E
A/B/C/D/E
2 / 5 / 25 / 50 /100
0 / 5 / 20 / 50 /100
1/ 2 – 10 / 20 – 30 / 50 – 75 /100
State
n. a.
Commercial banks
Compulsory
n. a.
Compulsory
Annual premium: 0.1 %
of insured deposits
CSD 5,000 (~ EUR 65)
n. a. Initial contribution: EUR 10,000;
Annual premium: 0.3 % of
insured deposits
n. a.
EUR 5,000
Source: NBS, CBCG, BPK, Bank Austria Creditanstalt Economics Department / 1) On an individual and aggregate basis / 2) Serbia: Ratio of liquid claims to sight deposits
plus liabilities with a term of one month, Montenegro: Liquid assets as a percentage of short-term liabilities, Kosovo: Liquid assets as a percentage of equity capital
Banking in SEE
69
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Banking in SEE
71
Bank Austria Creditanstalt Network
in South-Eastern Europe
Romania
€ 1,442 mn
13 branches
Serbia and
Montenegro1
€ 404 mn
41 branches
Total assets
as per 30 June 2005
1) incl. Eksimbanka
2) incl. Hebros Bank
Croatia
€ 3,075 mn
112 branches
Bosnia and
Herzegovina
€ 434 mn
35 branches
Bulgaria2
€ 1,454 mn
218 branches
Macedonia
BA-CA Representative Office
Headquarters
Bosnia and Herzegovina
Hebros Bank
Macedonia
Serbia and Montenegro
HVB Central Profit Banka d. d.
Zelenih beretki 24,
BA-71000 Sarajevo
Tel. + 387 33 533 688
Fax + 387 33 238 340
www. hvb-cpb. ba
37, Tzar Boris III Obedinitel Blvd.
BG-4018 Plovdiv
Tel. + 359 32 905 773
Fax + 359 32 902 211
www. hebros. bg
Bank Austria Creditanstalt
Representative Office
Dimitrie Cupovski 4 – 2 / 6
MK-1000 Skopje
Tel. + 389 2 3215 130
Fax + 359 2 3215 140
HVB Bank Serbia and Montenegro
Rajiceva 27 – 29
SCG-11000 Belgrade
Tel. + 381 11 3204 500
Fax + 381 11 3342 200
www. hvb. co. yu
Bulgaria
HVB Splitska banka d. d.
R. Boskovica 16
HR-21000 Split
Tel. + 385 21 304 304
Fax + 385 21 304 034
www. splitskabanka. hr
Romania
Eksimbanka
HVB Bank Romania S. A.
Charles de Gaulle Square 15
RO-011857 Bucharest
Tel. + 40 21 203 2222
Fax + 40 21 230 8485
www. hvb. ro
Trg. Nikole Pasica 10
SCG-11000 Belgrade
Tel. + 381 11 302 8686
Fax + 381 11 323 1935
www. eksimbanka. co. yu
HVB Bank Biochim AD
1, Ivan Vazov Str.
BG-1026 Sofia
Tel. + 359 2 9269 210
Fax + 359 2 9269 440
www. biochim. com
Croatia
Bank Austria Creditanstalt, a member of HVB Group, op-
many occasions. In 2004 “The Banker” named BA-CA
erates the leading international banking network in Central
“Bank of the Year in CEE”. “Euromoney” awarded the
and Eastern Europe. Within HVB Group, BA-CA is responsible
bank the title “Best Bank in CEE” for the fifth time in suc-
for these markets. The network of BA-CA comprises more
cession. In 2005 BA-CA was named “Best Loan House in
than 1,000 offices in 11 countries. 18,500 emplyees serve
CEE”, “Best Project Finance House in CEE” and “Best Debt
more than 4.7 million customers.
House in Romania”. In addition, BA-CA subsidiary in Bul-
BA-CA’s commitment to Central and Eastern Europe has
been recognized by international financial magazines on
garia, HVB Bank Biochim, has won the award “Best Bank in
Bulgaria”.