“At Erste, in particular, we expect our NPLs at the end of this year to be half what we had on the books at the end of 2013 as a result of a robust balance sheet clean-up that is being finalized,” Slavko Caric told SeeNews in an phone interview.
He added the bank plans to raise its lending activity next year but did not elaborate further.
The total gross NPLs in the Serbian banking sector increased to 424.3 billion dinars ($4.27 billion/3.49 billion euro) by the end of June from 395.3 billion dinars at the end of last year, with the share of gross NPLs in the total gross loans rising by 1.6 percentage points to 23%.
The Serbian banking sector's capital adequacy ratio at the end of June stood at 20.4%, down from 20.9% at the end of December.
As of the end of June, a total of 29 banks were active in Serbia, a market of around 7.2 million.
“Because of regulations enforced in 2006-2007 that conditioned growth on quite substantial, for that time, capitalization level requirements, we now have a healthy banking system with a capital adequacy ratio that is one of the highest in Europe,” Caric said.
There was too much capital sloshing around in the years immediately preceding the start of the economic crisis in 2008, which fuelled a build-up of debt mostly in Serbia’s corporate sector and later led to the deterioration of the bad loan situation in 2012, 2013 and this year.
“However, a lot of big companies which were on shaky legs have since gone into bankruptcy or pre-agreed restructuring and this should help facilitate the NPLs resolution process,” the official said, adding that Serbian banks now have a good opportunity to start selling their bad loan portfolios.
Together with the European Bank for Reconstruction and Development, the World Bank and the International Monetary Fund (IMF), Erste alongside other banking groups with considerable presence in Southeast Europe are developing a coordinated approach to tackle NPLs in the region.
The NPLs workout solutions being considered for the region include setting up asset management companies, outright sale of bad loan portfolios and scaling up of NPL exposures.
“Working together with our peers and the international financial institutions, we are trying to determine the regulatory and otherwise changes needed to facilitate the NPLs resolution process,“ Caric said.
In his view, the first quarter of next year is a realistic target for an initiative to take shape on the needed legislative and regulatory changes in Serbia. “As far as I understand, the IMF is going to put additional pressure on the Serbian government to deliver that.”
In November, Serbia and the IMF agreed an economic program that could be supported by a 1.0 billion euro ($1.2 billion) 36-month stand-by arrangement.
In bid to raise the investor appeal of Serbian distressed assets, Caric advises to exempt from taxation their sale to institutional investors or asset managers.
The official noted that several major institutional investors have been on scouting missions in Serbia and have recommended scaling up distressed asset holdings. “The smart move would be if five or six of the bigger banks in Serbia pool their bad loans and offer them to investors.”
Recent moves by new-comers from Turkey and the United Arab Emirates underscore the existing investor interest towards Serbia’s banking sector.
Earlier this month, the central bank issued a permit to Mirabank, owned by United Arab Emirates-based Royal Group. In August, Turkey’s Halkbank placed a bid for a majority stake in Cacanska Banka put up for sale by a group of shareholders that includes the Serbian government.
Caric said Royal Group most likely opted for a greenfield investment because it is interested in trade financing and none of the Serbian banks that are potential acquisition targets have prior expertise in that business area.
On the much anticipated exit of the state from the banking sector, the official said he recommends pooling the government-owned equity in local lenders and seeking a strategic investor.
For Erste’s part, Caric said the bank would be interested to look at any attractive asset that comes up for sale.
(1 euro=121.6 Serbian dinars)