Fluctuations of the Bosnian banking sector

Sarajevo, Bosnia and Herzegovina (Josep Renalias, CC BY-SA)

The banking sector in Bosnia and Herzegovina (BiH) continually records an increase in assets. Last year, they increased by 8.2 per cent and amounted to EUR14.447bn.

Data suggest that the banking sector of BiH is safe and stable and that it will continue in the forthcoming period. The banking sector is well capitalized and highly liquid, so there are good predispositions to make a step forward. According to the balance sheets of the banking sector the growth of total assets was 9 per cent, deposits about 10 per cent. The increase of loans is significantly strengthening the capital of banks in the structure of assets. In 2018, however, this trend stopped, mostly due to bad business climate and lack of investments. Banks achieved a net profit in the Q1’18 of EUR56.4m and it was lower by 7.8 per cent than in the same period last year when it amounted to EUR61.7m. The weak result contributed lower revenues than in the same period last year, despite the fact that credit growth in January-March 2018 was about 1.5 per cent. Total revenues of banks fell by about 4.5 percent.

A larger sector stability can be attributed to the implementation of the Basel III project, which deals with banks’ calculation of capital, internal capital adequacy assessment and the formation of additional capital assets, all in order to make the banking system as stable and secure as possible. The results are clearly visible and based on the realized profit. It gives an optimistic outlook that the banking system of Bosnia and Herzegovina, ever under a perception of financial problems, is stable and secure.

Banking transactions also recorded a growth of 2.7 to 8.9 per cent. A significant growth of credit cards and the number of transactions was recorded, which leaves the possibility of developing digitization in banking with other electronic business. Banking is moving into the digitalization process. Digital banking is already in close neighborhood, but in Bosnia itself.

Major banks

UniCredit Bank Mostar was the biggest earner in BiH last year. This bank had a profit after EUR45.8m. It found itself in front of its biggest competitor — Raiffeisen Bank Sarajevo, which had a profit of EUR38m. These two banks have been dominating for a number of years in BiH, although several other players are increasingly pushing the market. Net interest income of UniCredit Bank last year amounted to EUR83.1m, and net fee and commission income was EUR38.5m. In the case of Raiffeisen Bank Sarajevo, net interest income amounted to EUR67m, while net fee and commission income amounted to EUR39m. When it comes to Republic of Srpska, the most profitable was NLB Bank, which has earned EUR23m.

As in other economic and political fields, Bosnian banking system is viewed upon in contrasts between the two autonomous entities: Federation of Bosnia and Herzegovina (FBiH) and Republic of Srpska (RS). The RS reported that 54 banking organizations from the FBiH have been operating in the RS, and in the nine months of 2017 they had given credits in the amount of EUR111m or 20.32 per cent of total loans placed in RS. These loans are 10 per cent higher than by the end of 2016, when they amounted to EUR500m, accounting for 19.5 per cent of total RS loans. The RS capital adequacy is slightly higher than the FBiH and it amounts to 6.24 per cent. Still, the RS Banking Agency reports that the banking sector continues to have a negative impact on limited access to new and more stable sources of financing, relative to inadequate economic growth and political uncertainty in BiH.

There are currently 25 banks operating in BiH, out of which 17 are in FBiH and 8 in RS. Four banks have central offices in both entities. This means better market placement but also double costs. These are Addiko bank, NLB bank and UniCredit Bank, while Sberbank argues that in their case they are not two units but two separate administrative units. This turned out to be an interesting and quite positive banking decision. The advantage of this model is a better coverage of the market, stronger local presence and respect for all the local specificities that are present in the market. This is a significant competitive advantage that gives a better market placement. The main disadvantage of this model is the cost or duplication of certain functions, activities and costs.

Regulations

The banking sector in Bosnia and Herzegovina is regulated by Entity Banking Laws, which are largely harmonized, regulating the establishment, operation, management and supervision of commercial banks in Bosnia and Herzegovina. The Central Bank of Bosnia and Herzegovina (CBBH) has a coordinating role in banking supervision, which is realized through cooperation with the Banking agency and is based on regular exchange of information and consultations on the banking sector and on financial stability issues. In June 2009, in order to support the banking system in the domestic economy The Memorandum of Understanding, under the name of “Vienna Initiative”, was signed in Vienna with representatives of six-banking groups (Raiffeisen International, Hypo Alpe Adria, UniCredit Bank Austria, Volksbank International, Intesa Sanpaolo International, NLB group) operating in Bosnia and Herzegovina. They have agreed that these banks in BiH will keep the level of exposure and continue their activities as they did before the financial crisis. In 2009, the banking sector in BiH, in addition to the pronounced consequences of the global economic crisis, managed to maintain stability and successfully respond to customer requirements, thus maintaining confidence in the banking system. The consequences of the global financial crisis of 2008 and 2009 were manifested through the withdrawal of deposits in foreign currencies and through the conversion of cash and deposits in domestic currency into cash in foreign currencies. This outburst jeopardized the banking sector’s liquidity, so the CBBH undertook a series of measures to help banks solve the liquidity problem. Another consequence of the economic downturn in the banking sector is the employment reduction.

Difficulties

In the Q1’18, demand for securities investment fell due to the restructuring of the BiH’s budget, which opened new banking opportunities related to lending to SMEs. In this segment, the limiting factor is the level of risky placements that has largely marked this type of activity over the past few years. In the coming cycle, attention will be paid and support will be given for the further development of the public-sector economy through specific development projects, while the interest rate fluctuations are currently in the most historically low period so far. The plan is to continue to reduce interest rates. A problem of reduced lending in the economy sector is that there are not enough quality projects to be funded.

Banks from the FBiH in the period of nine months of 2017 collected total deposits in RS of EUR368m or 12 per cent of total deposits of the banking sector with a growth rate of 6 per cent. At the level of the RS banking sector, seven banks showed a net unrealized gain of EUR44.6m for the nine months of 2017, while one bank had a negative financial result of BAM0.5m [convertible marks]. According to all indicators in the last year, the trend of business improvement in all segments of banking is evident, confirming that the banking sector is the most advanced, stable and self-sustaining part of the BiH’s economy, which will continue in the forthcoming period. Banking sector is the second most interesting investment sector of Bosnian economy, with 24 per cent of foreign investments, after production (34 per cent) and prior to telecommunications (13 per cent).

However, the real amount of investments is small, due to the conflictual political situation and negative business climate. Potential investors are generally under impression of secession referendums, war, and lack of good investment possibilities. The complication of the procedure, the dysfunctional and dispersed Bosnian market, the ineffective legal and judicial system are all limiting factors for faster progress. The World Bank on its Doing business list moved BiH from 79th to 86th place, signaling to potential investors that the business environment in the country was not what should be expected. The biggest investors in banking business, however, are not Europeans, but Turks and Arabs.

Vedran Obućina is an analyst and a journalist specializing in the Croatian and Middle East domestic and foreign affairs. He is the Secretary of the Society for Mediterranean Studies at the University of Rijeka and a Foreign Affairs Analyst at The Atlantic Post.

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