The global slowdown has not spared Bosnia-Herzegovina, but the conservative strategies of many local banks have given them some support and protection. Writer Philip Alexander
Memories of bank collapses and lost deposits during the turbulent break-up of Yugoslavia during the 1990s are still fresh in Bosnia-Herzegovina. But there was a new twist when they resurfaced in late 2008. It was foreign, rather than local banks that were under the microscope, as savers digested the implications of the liquidity squeeze for banks whose parents elsewhere in Europe were most exposed.
What once seemed a strength could now be interpreted as a weakness - most Bosnian banks are now foreign-owned, generally by the large Italian or Austrian groups. Depositors were unnerved by the declines in the share prices of these groups. In total, there were deposit outflows of about €400m in the final quarter of 2008, but Giulio Moreno, the head of office for the European Bank for Reconstruction and Development (EBRD) in Bosnia, says the impact was "manageable, and foreign exchange reserves are sufficient".
By January 2009, the flows reversed again, and the banking sector recorded an aggregate net profit of €46.9m for 2008, with no bank failures in prospect according to central bank governor Kemal Kozaric. Even so, he acknowledges that the country is in for a tough time as global demand falls. In the first quarter of 2009, "indirect tax fell by 12% and 10,000 people were laid off, which could endanger fiscal sustainability", he says.
Remittances by Bosnian workers abroad, which had accounted for as much as 30% of gross domestic product in the good times, are also under pressure, and some expatriates may return home, swelling local unemployment. Mr Moreno forecasts a GDP decline of about 2% in 2009, compared with 6% GDP growth the year before.
As part of the European Bank Co-ordination Initiative (also known as the Vienna Initiative) sponsored by multilaterals active in the region, the six largest foreign banks in Bosnia pledged in June 2009 that their subsidiaries' "current good financial standing will be preserved throughout the period of market turbulence and economic slowdown".
Of the six signatories, Hypo Alpe Adria's participation in the initiative is dependent upon the restructuring plan of its parent, Bayern Landesbank, winning approval from the European Commission. However, Petar Jurcic, the group's CEO in Bosnia, says: "Hypo Group Alpe Adria has built up a good, solid and sustainable financing business in the markets, and this will be maintained." Further expansion is not planned for now, but the bank already has a very full network of more than 100 branches and merchant outlets.
In practice, whatever their situation elsewhere, foreign banks tend to regard the risks in Bosnia as predictable and moderate. Even the late 2008 deposit outflow generally only affected the retail segment, says Michael Mueller, CEO of Raiffeisen Bank in Bosnia.
"The corporate deposits did not drop, partly because companies cannot take the money home and put it under the blanket, partly because of our own communication with the clients. And the central bank governor was very helpful, he understood early how serious this could be," says Mr Mueller.
Moreover, some of the foreign-owned banks were known for their more conservative lending and funding strategies. Sparkasse Bank (formerly ABS Banka) is part of the Sparkassen savings bank network. Its deposits rose 15% in the first half of 2009, and board member Nedim Alihodžic explains that an increase in interest rates offered was not the only reason for this rise.
"We offered a unique product on the Bosnia-Herzegovina market, which is the guarantee for savings deposits by our mother bank, Steiermärkische Sparkasse, which certainly increased the appeal of our offer," says Mr Alihodžic.
The parent bank was not one of the Vienna Initiative signatories, but Mr Alihodžic says that the name change from ABS to Sparkasse bank, completed in July 2009, is "a signal that our mother bank supports both us and the country of Bosnia-Herzegovina as a long-term sustainable strategic partner and investor". Mr Alihodžic wants to increase the bank's market share to 7% in the next five years, which would lift it into the top five in Bosnia.
However, the other foreign-owned banks are not necessarily showing any signs of retreating from the market. The parent of NLB Tuzlanska Banka, one of the Vienna Initiative signatories, is Slovenia's NLB, which was less active in international capital markets and therefore seen as less vulnerable to the credit squeeze.
"We are one of the few banks that saw an increase of 6% in deposits in the period of the greatest reflection of the crisis on our market, from October to the end of 2008, which confirms that our clients trust the bank and its safety. The tendency of retail and corporate deposit growth has continued in 2009," says NLB Tuzlanska Banka's CEO, Almir Šahinpašic. The bank has started offering "super deposits" with a higher rate of interest in return for a fixed term of 13 or 18 months.
In practice, the largest foreign-owned banks have also participated in the rebound in deposits in the first half of 2009. Berislav Kutle, the CEO of UniCredit Bank in Bosnia, took the decision "not to try too hard in convincing our clients that this international financial market turmoil has nothing to do with us. Our first priority was to provide enough cash in the branches while clients were confused," he says.
"We even took advantage of such a situation because we were the only bank on the local market with no delay in cash withdrawals. Clients surely recognised this and our market share in deposits has slightly increased since the beginning of this year."
Almir Krkalic, CEO of Intesa SanPaolo Banka Bosnia-Herzegovina, also says corporate deposits (excluding financial institutions) were up strongly, by 25% in the first seven months of 2009. Like NLB, the bank has focused its marketing efforts on term rather than sight deposits, to help attain "well-balanced maturity structures of assets and liabilities", he says.
And in any case, Intesa's commitment to the Vienna Initiative means "refinancing from Intesa was never disputable, and our bank still has a significant amount of granted unutilised credit lines and money market lines" from various sources, adds Mr Krkalic.
The central bank has consciously created an incentive for foreign banks to maintain credit lines to their subsidiaries. Mr Kozaric explains that, in addition to cutting reserve requirements three times, "all new foreign credit lines are now excluded from the calculation base for reserve requirements".
lmir Šahinpašic, chief executive at NLB Tuzlanska Bankalmir Šahinpašic, chief executive at NLB Tuzlanska Banka
Almir Krkalic, chief executive at Intesa SanPaolo BankaAlmir Krkalic, chief executive at Intesa SanPaolo Banka
Conservative risk profile
On the lending side, portfolio quality is deteriorating, with overdue loans for the sector as a whole growing by 20% in the first half of 2009. But most banks were starting from a strong position.
As of May 2009, Raiffeisen Bank had non-performing loans (NPLs) of about 1.5% on its corporate portfolio, and less than 1% on its retail portfolio. "There is room in our margins to cope with NPLs at least up to 6% in both segments, which is for me a worst-case scenario," says CEO Mr Mueller.
"Of course you can never see the future exactly, we are prepared for everything - the legal minimum capital requirement in Bosnia is 12% and we are at the moment above 14%, so we even have enough capital cushion to absorb a loss if it occurs, without having to call on our owner," he says.
Mr Kutle says UniCredit's cost of risk even declined slightly in the first half of 2009, but "as the consequence of the recession, we don't deceive ourselves that we will escape facing some increase of the write-downs for loan loss provisions in the days to come".
All the banks are seeking constructive ways to manage loan arrears where they arise, which is easier given the small total market size. UniCredit has also arranged credit lines from the EBRD to help maintain favourable conditions for commercial lending.
"We are ready to help our clients with difficulties to overcome hard times, whether it is restructuring their loans or expanding our tolerance period for collection measures, of course all within the limits of the law and the group standards," says Mr Kutle.
Mr Krkalic says that Intesa is looking to identify potential troubled loans well in advance, to give more time to formulate a response that maintains overall repayment on new terms.
"The bank paid special attention to the sectors of the car industry, wood industry, and construction industry in Bosnia, which were the first to show signs of economic weaknesses in this period," he says.
However, he is not anticipating a significant rise in NPLs overall - Intesa's overdue loans rose just 7% in the first half of the year. The conservative behaviour of lenders and borrowers alike, and the relatively straightforward range of credit products available, has limited the potential for further damage to portfolios.
Mr Mueller says most clients have reacted very responsibly to the recession, with requests for unsecured retail loans declining significantly of their own accord. "People are cautious about additional indebtedness given high unemployment and salary reductions," says Mr Mueller.
Similarly, Nejira Nalic, the head of specialist microfinance lender MI-Bospo, says the company's loan portfolio has declined by 12% since the start of 2009. "As we do not need so much money, we have repaid most of our funding from commercial banks, and we rely only on the funding from the International Finance Corporation and EBRD," says Ms Nalic.
Amer Bukvic, CEO of Bosna Bank International (BBI)Amer Bukvic, CEO of Bosna Bank International (BBI)
However, Ms Nalic is more concerned than the conventional bankers about the prospects for lending to microbusinesses, which are a major part of the country's agricultural sector in particular. Her company was founded as a World Bank project to provide microfinance to women in Bosnia through existing commercial bank branches, as part of the post-war reconstruction process in 1996.
At that time, the major commercial banks were reluctant to put their own money to work in the sector, and MI-Bospo now has 28,000 clients in a €32m portfolio. In recent years, however, the microfinance business had suddenly become more competitive.
"The commercial banks started lending more aggressively, and of course they can offer better terms than microfinance institutions. Clients felt if this money is being offered, then the banks must think the client could repay - they did not calculate their own risks. But when the crisis hit, the banks pulled back from this lending," says Ms Nalic.
As a result, while the long-term goal is universal access to full commercial banking services, she believes there is still a major role to play for microfinance institutions in providing sustained lending through the cycle, and in expanding access to savings products as well. And she is also working on a project with the UK Department for International Development, to establish an independent advice centre for microentrepreneurs, which can help improve financial literacy among borrowers and ensure that they can take a more realistic view of their repayment ability.
Another innovative model that is making headway is Islamic banking, pioneered by Bosna Bank International (BBI). As riba (interest) is forbidden under sharia, this is an inherently low-leverage bank, which clearly inspired customer confidence. Although still small, with total assets of Nm252m (€129m), the bank's deposit base rose an eye-catching 51% in 2008, while assets were up 28% in the first half of 2009.
Its CEO, Amer Bukvic, believes the bank, founded in 2000, is not only unique in Bosnia, but also in the international context. "It is a fully sharia-compliant bank incorporated in an environment where the national banking law has not been modified to accommodate such an institution, and is unlikely to be amended in the foreseeable future," he says.
This involved some significant legal complexity, because Bosnian regulations forbid universal banks from engaging in financial market trading activity. As a result, the murabahah structure (generally based around commodity trading) that is used to create sharia-compliant deposit accounts in other countries could not be applied in Bosnia.
The alternative mudaraba (profit-sharing) structure did not attract many investors, because there was no guarantee for the base amount of the deposits - its value could go down. From 2006, the bank finally made a breakthrough with the introduction of a wakala deposit, in which the bank agrees contractually not to invest deposit funds in projects with a lower yield than that offered on the wakala account.
While it can draw on Islamic heritage that stretches across the Balkans (there are 10 million Muslims in the former Yugoslavia, of which only 2 million live in Bosnia), Mr Bukvic is keen to emphasise that he sees BBI as a bank for all the region's residents. He aims to compete with conventional banks on the rates and services that BBI offers, especially thanks to the bank's strong correspondent banking relationships in countries that are members of the Islamic Development Bank - a major shareholder of BBI.
"We can offer our clients letters of credit with banks in the Middle East and Far East directly. This makes us competitive with foreign-owned banks in Bosnia that add an extra charge to provide trade finance through their parent banks," says Mr Bukvic.