The Serbian Banking System is Riskier than the Bulgarian and Croatian

Political uncertainties in Serbia pose a risk to the formulation of general economic policy, states an S&P analyst. The banking system in Serbia is considered riskier than the systems in neighboring countries, Bulgaria and Croatia, due to political and macroeconomic uncertainties, according to the report on the banking system in Serbia published by Standard & Poor’s (S&P) on Thursday.

– The Serbian banking sector has benefited significantly from the consolidation and privatization of the largest banks, which has greatly improved the sector’s creditworthiness. However, the political uncertainties arising from the complex short-term situation pose a risk to the formulation of general economic policy, more so than is the case with longer-standing countries in the Balkan region, says S&P analyst Francesca Sacchi.

Good macroeconomic prospects, strong GDP growth, high foreign direct investments, and falling inflation ease the position of Serbian banks, which are mostly foreign-owned. Currently, foreign owners control about four-fifths of the total assets of the local banking system. In the future, extensive economic and political reforms that should precede entry into the European Union (expected by 2015) should further improve the regulation and supervision of banks, which will in turn accelerate the modernization of the banking sector and reduce the gap compared to other Central and Eastern European countries, S&P adds.

The Serbian banking system lags behind the Union average as the level of financial intermediation is still low. The assets of the banking system were at 30% of GDP at the end of last year, and the system itself is moderately concentrated, with the largest 10 banks controlling about 68% of total assets. The Serbian financial system relies almost entirely on banks, as the capital market is underdeveloped and revolves around the Belgrade Stock Exchange. S&P expects that in the medium term, with the growing presence of foreign banks in the Serbian market, profitability and efficiency in local banks will continue to grow.

However, strong credit growth, particularly in consumer loans and loans denominated in euros, represents a significant risk, and this growth could continue due to improvements in macroeconomic conditions in the medium term. The quality of bank assets in Serbia is lower than in other countries in the region, which is an additional cause for concern, and this is a direct consequence of inadequate loan approval procedures, lack of collateral for loan recovery, inefficiencies in local courts, and rising household debts relative to disposable income, but also “what is even more important, the political and economic risks embedded in the Serbian economy,” concludes the S&P report. (Bankamagazin)