Bosnia and Herzegovina is an unusual economy. It is neither big nor particularly rich — indeed, on a per capita basis, only four other European nation states are poorer. Unemployment, despite falling slowly in recent years, remains elevated at eye-watering levels. Most skilled workers leave to seek a better and richer life abroad. The economy is dependent on transient sectors like tourism, and on the export of minerals, energy, and heavy goods such as defence equipment and furniture.
Yet there is one standout sector where the country excels and does so to an extent that will likely surprise the casual observer: banking.
Gunter Deuber, head of economics, fixed income and foreign exchange research at Raiffeisen Bank International, says Bosnia and Herzegovina’s banking sector is “one of the country’s most overlooked stories, and one of its biggest success stories.”
As is the case across much of southeastern Europe, as well as the wider CEE region, the banking sector is dominated by foreign players, notably Italy’s UniCredit, Vienna-based Raiffeisen, and Turin-headquartered Intesa Sanpaolo, along with Russia’s Sberbank and NLB Group, the largest banking and financial group in Slovenia. UniCredit, the largest lender by assets, revenues, deposits and customer numbers in Bosnia and Herzegovina, posted consolidated profit of €43m ($48.2m) in the market in the first nine months of the calendar year 2018, up 5% year-on-year. (It has yet to publish its full-year results for the Balkan state). Net fees and commission jumped 8.8% over the same period, with operating income up 4.8% and outstanding customers loans rising 12.2%.
Like most lenders with a national presence, the Italian lender has to operate separate banking groups in the Federation of Bosnia and Herzegovina and Republika Srpska, an additional cost that everyone has to endure and absorb.
Raiffeisen Bank, the third largest onshore lender by assets and revenues, posted after-tax profit of €43m in the full year 2018, an annualised increase of 13.1%, with total assets rising 6.5% year-on-year and total outstanding customer loans up 9.3%, to €1.29bn.
In September 2018, the Brussels-based European Banking Federation said the banking sector was a valued “generator of business” to the local economy. It noted that sector-wide banking assets grew 8% year-on-year in the previous full financial year, with total deposits rising 12.2%, to €10.8bn, and total outstanding loans expanding 7.1%, to €9bn. “All banks,” it said, ended the year “with historically good results”.
Income growth
Wherever you go, you hear the same positive stories and good news. Vedran Obuc´ina, an analyst at Central European Financial Observer, an information provider overseen by Poland’s central bank, describes a banking sector that is “safe and stable and… well capitalised and highly liquid”.
Raiffeisen Bank’s Deuber points to the lender’s success in regularly posting “double digit growth in income and in return on equity, which we have been doing here for several years in a row. There are very few markets anywhere in Europe where that kind of return is possible.” Most of the growth, he says, stems from a belief in the country’s future, and from citizens who leave for work purposes, but who also repatriate a large share of their income and savings.
He adds: “The real story here is on the consumer side. You see a lot of people wanting to invest here, talking to us about credit financing, and taking out a mortgage to build a house.”
That view is shared by Sendad Softic´, governor of the Central Bank of Bosnia and Herzegovina. He tells GlobalMarkets in an interview that the banking sector is “broadly sound”, and benefits from a “strengthened institutional, regulatory and supervisory framework that is addressing remaining potential vulnerabilities. This is being done in line with best-in-class European and global practices.”
Softic´ also points to the importance of promoting financial inclusion and also innovation in financial technology. In April 2019, Sarajevo hosted the fourth annual FinConf conference, attracting delegates from across the world, including senior economists at UniCredit and the Jeddah-based Islamic Development Bank.
Positive spillovers
Financial inclusion in Bosnia and Herzegovina has risen strongly in recent years, though the authorities still have plenty of work to do. According to World Bank data, published in its 2017 Findex report, 59% of citizens have access to a formal financial institution, a higher level than Albania (where the ratio is just 40%) but lagging neighbouring Serbia (71%) and Croatia (86%).
Not all markets in central and eastern Europe are equally welcoming to heavy inward investment from foreign lenders. Over the past decade Hungary has returned a sizeable slice of its financial sector to local hands, while foreign ownership in several other markets, including Bulgaria, Czech Republic and Poland has been slowly inching down in recent years.
Yet central bank governor Softic´ has no compulsion about allowing the sector to be owned or controlled by foreign institutions, noting: “[W]e expect positive spillovers from changes in the banking system in the EU to have impact on our own systems.”
Of course, there are challenges to operating in one of Europe’s smaller banking markets. Raiffeisen Bank’s Deuber points to the complexities involved in operating in a country that, due to its split nature, has two industry regulators. “You have one central bank but two financial regulators, which makes it a little odd for an institution like ours, operating in a relatively small market.”