This year, Serbian banking sector has piqued a lot of interest, primarily due to two reasons:  the sale of the share of Republic of Serbian in Komercijalna Banka and NLB Group’s interest in acquiring the bank. As a result, we decided to present you with a brief overview of the Serbian banking sector.

As of H1 2019, the banking sector in Serbia consist of 26 banks, with cumulative assets of EUR 32.4bn. Of those, 19 are foreign banks, 4 are privately owned domestic banks and 3 are state owned banks. The largest bank by total assets is Banca Intesa with 15.6% of the market share, followed by Unicredit Bank Srbija with 11.5%. Next comes Komercijalna Banka with 10.8% of the market share. Note that NLB currently has 1.6% of the market share, making it the 16^th largest bank in Serbia.

Market Share by Total Assets (H1 2019)

Source: National Bank of Serbia, InterCapital Research

P&L

It is important to note that as the National Bank of Serbia lags with their reports, their latest extensive report regards the Q3 2018.    

At the end of the Q3 of 2018, the banking sector’s total operating income stood at RSD 136.0bn, down by 1.4% YoY. Of that, net interest income has, in the past 5 year, accounted for roughly 70% of the total operating income (net banking income). Meanwhile, in the same period, net fee and commission income accounted for 20.6%.

Turning our attention to operating expenses, the Serbian banking sector recorded RSD 82.2bn in Q3 2018 (-0.1% YoY). Within operating expenses, Other expenses account for 54%, followed by salaries, compensations and other personal expenses (39%) and depreciation (7%).

Going further down the P&L, the banking sector’s profit before tax in Q3 2018 amounted to RSD 53.9bn, (+0.8% YoY). In that period the banking sector consisted of 28 banks, so the structure of the net profit was as follows: 24 banks operated with a total profit of RSD 55.5bn, while 4 banks accounting for 2.9% of the market share posted a negative financial result of RSD 1.6bn.

Balance Sheet

As above-mentioned, cumulative assets of the Serbian banking sector as of H1 2019 amount to EUR 32.4bn. However, since the National Bank of Serbia did not publish a detailed report regarding this period, the further comments regard Q3 2018.

Loans and receivables (to banks and other clients) held a dominant share of 63.0% in banking sector’s assets (RSD 2,246bn) which came, as a result of banks’ orientation towards traditional banking activities.  Of that, RSD 2,074bn refer to loans from customers.

The banks also hold a significant share of assets in item Securities (19.4%) and item Cash and balances with the central bank (13.4%). Banks’ investments in securities were mostly related to investment in securities issued by the Republic of Serbia.

In Q3 2018, gross loans of the Serbian banking sector reached RSD 2,178.2bn. Of that, loans to companies and households account for 45% and 41%, respectively and have both observed solid YoY growth. The increase in loans to households is largely attributable to the rise in dinar cash loans and housing loans with an FX clause.

When observing the loan portfolio by the currency structure, one can notice that foreign currency still dominates, with 68% of loans being FX and FX-indexed. Of that 94.5% relate to EUR loans, followed wih CHF and USD loans which account for 4.5% and 1%.

Gross Loans of the Serbian Banking Sector (Q3 2018) (RSD m)

Source: National Bank of Serbia, InterCapital Research

Turning our attention to deposits, total deposits with banks amounted to RSD 2,501.9bn (+2.1% YoY). The increase stemmed mainly from a rise in deposits of foreign persons, namely foreign banks and households (by RSD 28.6bn and RSD 23.6bn, respectively).

At end of Q3 2018, dinar deposits grew by RSD 13.2bn and FX deposits by RSD 42.7bn, while FX-indexed deposits went down by RSD 4.0bn. The share of FX and FX-indexed deposits in total deposits stood at 68.5%. Note that the EUR made up for 91.1% of total FX and FX-indexed deposits. The rest of FX and FX-indexed deposits were mainly in USD (5.1%) and CHF (2.8%).

In terms of initial maturity, demand deposits lead the list (62.1%), followed by deposits maturing in up to one year (25.5%), while 12.4% of all deposits were agreed for over one-year term. On the other hand, short-term deposits (observed by the remaining maturity) made up the most of bank deposits in Serbia. Demand deposits made up over a half of all deposits (62.2%), followed by deposits with the remaining maturity of up to one year with 30.3%, while deposits with the remaining maturity of over one year accounted for 7.3% of total deposits.

Breaking down deposits by sector, household deposits account for 52%, followed by deposits from Companies (23%).

Deposits of the Serbian Banking Sector (Q3 2018) (RSD m)

Source: National Bank of Serbia, InterCapital Research

NPL Development

Monitoring the level of NPLs is crucial for identifying potential problems in the collection of receivables and monitoring of credit risk, as these loans and the indicators related with them may signal deterioration in the quality of the loan portfolio of the banking sector.

The fall in gross NPLs, along with a rise in total loans lead to a further decrease in NPL ratio which as of H1 2019 stands at 5.2%. The ratio is at a new historic low, since the introduction of the uniform definition of NPL and mandatory reporting in 2008.

NPL Development (2014 – H1 2019) (%)

Source: National Bank of Serbia, InterCapital Research

As of Q3 2018, Gross NPLs amounted to RSD 141.2bn. The majority of gross NPLs could still be observed in the corporate segment (RSD 57.0 bn), which accounts for 43% of the gross NPLs. Of that, the biggest share in total corporate NPLs continued to be held by manufacturing (38.4%), followed by trade (18.2%) and real estate (16.9%).

Furthermore, NPLs of Companies in bankruptcy and other legal persons in bankruptcy amounted to RSD 28.8bn. In the household sector, gross NPLs stood at RSD 42.2bn, which represents 29.9% of total gross NPLs.

Capital Adequacy

Although the Serbian banking sector observed a steady growth of risk-weighted assets, capital adequacy ratio (CAR) has been gradually increasing since 2011 (19.1%) and as of H1 2019 stands at 23.2%. The CAR is quite above the regulatory minimum of 8%, indicating that the banks in Serbia are well capitalized. In the same period, the banking sector observed a stable growth of Tier 1 capital, which as of H1 2019 stands at 22.1%. As of H1, regulatory capital consists of: Tier 1 capital, which made up 95.3% and Tier 2 capital accounting for 4.7%.

Capital Adequacy Ratio (2014 – H1 2019) (%)

Source: National Bank of Serbia, InterCapital Research