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Analysis of the Banking Sector Performance in Bosnia and Herzegovina, Montenegro and Serbia Before and After the Global Financial Crisis

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The focus of this study is the banking sector of the three neighbouring countries Bosnia and Herzegovina; Montenegro; and Serbia. These are former communist countries which have been going through the transition from centrally-planned economies to open market economies over the past 25 years. During the transition process, structural reforms were conducted to transform the banking sector into a sector suitable for open market economy. These reforms are considered to be the most successful ones in the region. Before the Global Financial Crisis of 2008-09, the economies of the three selected countries were experiencing credit booms. The aim of this research was to examine how the banking sector is performing on an aggregated level years after the crisis and whether the performance is better or worse compared to the pre-crisis period. The findings show that the banking sector was performing better before the crisis in all three countries. After the crisis, the three countries experienced prolonged slow credit growth and had higher nonperforming loans.
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DE DE GRUYTER
OPEN
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83
SUMMARY
e focus of this study is the banking sector of the three neighbouring countries Bosnia and
Herzegovina; Montenegro; and Serbia. ese are former communist countries which have been
going through the transition from centrally-planned economies to open market economies over
the past 25 years. During the transition process, structural reforms were conducted to transform
the banking sector into a sector suitable for open market economy. ese reforms are considered
to be the most successful ones in the region. Before the Global Financial Crisis of 2008-09, the
economies of the three selected countries were experiencing credit booms. e aim of this research
was to examine how the banking sector is performing on an aggregated level years aer the crisis
and whether the performance is better or worse compared to the pre-crisis period. e ndings
show that the banking sector was performing better before the crisis in all three countries. Aer
the crisis, the three countries experienced prolonged slow credit growth and had higher non-
performing loans.
Keywords: Banking sector; Bosnia and Herzegovina; Global Financial Crisis; Montenegro; Non-
performing loans; Post-communism; Serbia.
INTRODUCTION
GENERAL INTRODUCTION
e topic of this research study is banking sector development in three neighbouring countries
in South-eastern Europe namely Bosnia and Herzegovina; Montenegro; and Serbia. As with
other former planned economies, these three countries had to undergo a transition process to be
transformed into open-market capitalist economies. Part of that process involved transformation
of the banking sectors.
Structural reforms, as part of the transition process, have attempted to transform the banking
systems of former communist countries into modern banking systems suitable for open-market
economies. Domestic state-owned banks were mostly privatized by foreign private-capital or
were closed due to undercapitalization. New regulatory frameworks were introduced and bank
supervision enhanced. ese changes generally had positive eects on public trust in the banking
ANALYSIS OF THE BANKING SECTOR PERFORMANCE IN BOSNIA
AND HERZEGOVINA, MONTENEGRO AND SERBIA BEFORE AND
AFTER THE GLOBAL FINANCIAL CRISIS
Antonija Bošnjak, Abeer Hassan, Kieran James
University of the West of Scotland, Paisley, Scotland
date of paper receipt:
23.11.2017.
doi:
10.1515/eoik-2017-0029
UDK: 339.9:338.124.4
(497.11+497.6+497.16)
date of sending to review:
04.12.2017.
date of review receipt:
08.12.2017.
Review paper
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systems. Before the Global Financial Crisis (hereaer GFC) of 2008-09 was felt, credit activity was
intense and the protability of the banking sectors in all three countries was satisfactory or better.
However, the GFC changed the environment and conditions under which the banks operate. In
2009, the negative eects of the GFC spilt over into these three countries causing recession. Since
the banking systems were not directly exposed to ‘toxic assets’, the GFC was transmitted to the
region indirectly. e eects of these indirect transmissions included a contraction of international
trade; a sudden cessation of credit growth; a fall in inow of foreign direct investment; and a fall
in remittances from migrant workers. ese reected the impact of the GFC on nancial markets;
goods markets; capital markets; and labour markets (Bartlett and Monastiriotis, 2010).
e aim of this research was to investigate whether the banking sectors of the three selected
countries are performing better now as compared to the pre-GFC period.
RESEARCH QUESTION
e authors’ goal was to investigate the conditions of and changes to the banking sectors in the
2008-16 period in South-eastern Europe by analysing data for the three countries mentioned
previously: Bosnia and Herzegovina; Montenegro; and Serbia. e aim was to examine the latest
available data related to the banking sector; compare it to the pre-GFC period; and answer the main
research question which is as follows:
Research Question 1: Have the banking sectors in Bosnia and Herzegovina, Montenegro and Serbia
recovered from the Global Financial Crisis (GFC) of 2008-09 and do they currently perform better?
To be able to adequately answer this question, the following areas had to be researched and
analysed: the intensity of credit activity; the sources of funding of the banking sector; the quality of
credit portfolio; the intensity of deposit activity; and protability of the banking sector. Credit and
deposit activity had to be analysed because they are core business areas of commercial banks (Van
Horne and Wachowicz, 2008).
RESEARCH METHOD AND LIMITATIONS
Due to the nature of the research question, the authors’ only possible option was quantitative
analysis of numerical data collected from secondary sources (e.g. monetary authorities of the
selected countries; the World Bank; and the International Monetary Fund). Variables compared pre-
GFC and post-GFC period were: level of credit activity compared to gross domestic products and
total bank assets; trends of total loans and sectoral structure of loans (household sector and sector
of non-nancial corporations) measured as annual growth rates and shares in total; total assets
compared to GDP and to total assets of nancial systems; quality of assets and credit portfolios
measured as share of non-performing loans in total credit portfolios; ownership structures of
banking sector capital and numbers of banks; deposit activity and sectoral structures of deposits
measured as annual growth rates and shares in total sources of funding of bank activities; shares of
non-performing loans; returns on assets (hereaer ROA); and returns on equity (ROE).
e data was collected from the central bank statistical database websites of each of the selected
countries; the International Monetary Fund (IMF); the World Bank; and the United Nations (UN).
In addition, data from dierent reports and publications by the above-mentioned institutions were
utilized, as well as information obtained from banking supervisory agencies.
e authors were faced with the challenging issue of limited availability of data for the analysed
countries, which impeded the full review of longer time series and comparative analysis of the
banking sectors in the selected countries. Most publicly-available data for the banking sectors of
Bosnia and Herzegovina and Serbia refer to periods beginning from 2000 and 2002, respectively,
until 2016, which is the most recent year observed for this study. However, most data for the banking
sector of Montenegro is only available from 2006 onwards.
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STRUCTURE
e present article is organised into the following four sections. e rst section (presented above)
introduced the topic; the research question; and the research method. e second section presents
a review of prior literature and is divided into two sub-sections. e rst sub-section gives a brief
overview of the importance of the nancial sector and the roles of banks; while the second sub-
section discusses banking sector developments specic to the former centrally-planned selected
countries, as well as the inuence of the GFC on the banking sectors. e results and discussion are
presented in Section 3; whilst Section 4 concludes.
LITERATURE REVIEW
Importance of a functional nancial system and the role of banks
Before introducing banking sector development in Bosnia and Herzegovina; Montenegro; and
Serbia, a brief overview of the importance of a functional and stable nancial sector is provided,
and the main roles of banks are explored.
e nancial sector is a complex industry comprised of nancial institutions, markets, and
instruments, whose main purpose is to eciently allocate funds to those projects which will yield
the highest rate of return for a given risk. e main function of nancial system intermediation
is to utilize the advantage of economies of scale, i.e. pooling funds together from various lenders
(investors, savers) and transferring them to borrowers; this, in turn, lowers transaction costs
compared to direct nancing, and reduces the exposure of lenders to risk because their investments
will be dispersed across various borrowers (Mishkin, 2012). Much of the risk is diversiable
(idiosyncratic).
As Karl Marx might have pointed out, the functionality of the nancial system of a country is
determined by the economic development of that country. However, the nancial system itself also
has a signicant (reverse) impact on economic growth. A number of studies document a strong
positive correlation between a functioning nancial system and economic growth (Eschenbach,
2004; Levine, 2005). Duisenberg (2001) emphasizes the important role that nancial intermediaries
play in overcoming the problems of adverse selection and moral hazard that exist between lenders
and borrowers, and they ensure that funds are reallocated to the most promising projects.
Owing to its vital role in eciently allocating funds and supporting economic growth, stability
of the nancial system is of utmost importance, a fact brought to the forefront of peoples
consciousness following the GFC of 2008-09. Schinasi (2004, p. 10) denes nancial stability as
a condition under which an economy’s mechanisms for pricing, allocation, and management of
nancial risks are functioning well enough to contribute to the performance of the economy. e
World Bank denition is more specic regarding performance of the economy, and states that:
a stable nancial system is made of nancial intermediaries, markets and market infrastructure,
is capable of eciently allocating resources, assessing and managing nancial risks, maintaining
employment levels close to the economy’s natural rate, and eliminating relative price movements of
real or nancial assets that will aect monetary stability or employment levels’ (Financial Stability,
n/d). Most modern denitions of nancial system stability focus on the nancial system as a whole
operating as it does as part of the real economy (Borio and Drehmann, 2009). e GFC started in
the U.S.A. and then aected the world economy. It was a result of the failure of nancial markets to
full their purposes especially the failure to prevent adverse selection and moral hazard (Mishkin,
2004).
e main purpose of banks is to provide deposit and loan services to other nancial and non-
nancial companies; the government; households; and other economic entities. By providing
deposit services, banks allow the liquidity of savings from lenders to be channelled to borrowers for
their consumption or business investment needs in the form of loans. By providing fundamental
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deposit-loans services, banks participate in a process called multiple deposit creation which aects
the money supply (Mishkin, 2004). When commercial banks lend money to a client, they do not
provide it in the form of cash, but rather they credit it to the customer’s account, and thus create
deposit money (McLeay et al., 2014).
TRANSITION AND BANKING SECTOR REFORM PRIOR TO GLOBAL
FINANCIAL CRISIS
A transition process refers to structural changes which transform a centrally planned economy
to a market economy, a process which started at the end of the eighties and the beginning of the
nineties of the last century in those countries which abandoned communism. e transition process
included: liberalization of prices, trade, and foreign exchange through legal and regulatory changes;
privatization of small businesses and large-scale privatization; competition policy; governance
reform; and enterprise restructuring (Roaf et al., 2014).
e banking sector of most countries in South-eastern Europe had to undergo major structural
reforms during the decades surrounding the turn of the 21st-century. Under communist rule,
central banks were functioning as commercial and central banks, a form of banking known as
a mono-banking system. e role of banks in centrally-planned economies was administrative /
bureaucratic, i.e. the banks were vehicles to carry out government plans and decisions regarding
capital allocation to dierent businesses and sectors (Živko and Kandžija, 2013). e mono-banking
system was abandoned aer the collapse of the communist regimes in Eastern Europe and the two-
tier banking system was adopted, meaning separation of the functions of central banks (monetary
authorities) from those of commercial banks (or any other type of bank).
Barisitz (2009) recognizes two waves of banking system reform in the move towards a market-
oriented system that most of the former communist countries underwent: (a) an initial wave mainly
focused on liberalization of the banking market regulations, which allowed undercapitalized
private banks to enter the market and led to further deterioration of banking sector assets and
destabilization; and (b) a second wave mostly focused on restructuring and institutionalization,
which included stricter regulation; privatization of banks by large foreign-owned companies; and
accelerated credit activity.
e results of the banking sector reforms may be summarized as follows (Živko and Kandžija,
2013): (a) entry of foreign capital into the banking system; (b) growth in domestic lending, in
particular to the household sector; (c) increase in the exposure to foreign currency risk; (d) increase
in protability and a satisfying rate of capital adequacy; (e) credit expansion and growth of risk
assets; (f) improvement of the supervisory framework; and (g) implementation of International
Accounting Standards Board (IASB) or other high-quality accounting standards.
Although Živko and Kandžija (2013) carried out their analysis of the banking sector in Croatia,
most of these results were also achieved in neighbouring countries (Montenegro; Serbia; and
Bosnia and Herzegovina) that followed the same path.
Entry of foreign capital into the banking system led to better credit supply and higher quality
bank services; improved management of banks; greater satisfaction of clients; entry of new business
technologies; improvement of nancial system infrastructure; advancement in the competitive
environment; and attraction of foreign direct investments (Bajraktarović, 2009; Mešić, 2006).
e transition process and transformation of the banking sectors was mostly completed before the
GFC in our three selected countries. Bosnia and Herzegovina, Montenegro, and Serbia modernized
their banking systems to comprise commercial (mostly privately-owned) banks, whose business
and performance are subject to supervision of independent institutions. ese national banking
systems were established with the European Union (hereaer EU) as a role model (Bajraktarović,
2009).
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Monetary and banking supervisory authorities in selected countries
In Bosnia and Herzegovina, the banking sector is overseen by two regulatory bodies, namely the
Federal Banking Agency of Bosnia and Herzegovina and the Banking Agency of Republic Srpska1.
e Central Bank of Bosnia and Herzegovina is responsible for monetary policy and for the support
and maintenance of appropriate payment and settlement systems; it also co-ordinates the activities
of the two supervisory agencies (General Information about the Bank, n/d).
In Montenegro and Serbia, central banks are responsible for both monetary policy and supervision
of banks. Nevertheless, regardless of which public body(ies) is / are responsible for banks’
supervision, these responsibilities include: bank licensing and revoking bank licences; control of
bank performance; enactment of laws and bylaws regarding the banking sector; and generation and
dissemination of banking statistics.
IMPACT OF GLOBAL FINANCIAL CRISIS ON BANKING SECTOR IN
SELECTED COUNTRIES
Barjaktarović et al. (2013), in their study of the impact of the GFC on the development of the
banking sector in Central-eastern Europe, analyse in great detail the countries of South-eastern
Europe. ey conclude that there was an upward trend in the share of loans and deposits in GDP
in 2009 and that the banking sector managed to adequately respond to the negative eects of the
GFC by implementing more conservative credit policies; improving the classication of clients;
increasing the level of equity; and maintaining and planning liquidity positions.
Cocozza et al. (2011), in their work analysing the GFC’s impact on South-eastern Europe, which
includes six countries from the region, claim that the main feature of the GFC in the region was
the absence of a large-scale banking crisis thanks to high capital and liquidity buers that were the
result of supervisory actions taken by central banks. Živković (2011) shares the opinion that the
banking sector in South-eastern Europe remained stable, liquid, and relatively protable thanks to
adequate levels of capital and eective measures taken by monetary authorities. However, it is not
clear what is meant by the phrase ‘relatively protable banking sector’.
Roaf et al. (2014) consider the main issue during and aer the GFC to have been the slow credit
growth resulting from the rise of non-performing loans and the deleveraging process. Furthermore,
they emphasize their opinion that governments should take a more proactive role in nding
solutions for resolution of bad credits. Nurboja and Košak (2017) nd that banking eciency in
South-eastern Europe actually improved over the period 2008-2013 with regard to costs, which was
probably the result of pressures imposed on banks’ managements.
Sanfey (2010) argues that the impact has been better than expected and that this resilience can
be attributed to a great extent to the mature and sensible reaction of the region itself and to the
nancial support of international nancial institutions. Whilst the second part of Sanfey’s (2010)
claim seems credible enough, the rst part, regarding the mature and sensible reaction of the
region, is debateable.
In conclusion, researchers appear to agree that the GFC did not have an overwhelmingly negative
impact on the banking sectors or the nancial stability of the region. However, the eect of the GFC
may have been underestimated due to comparisons being made with the U.S.A.
Having reviewed the literature related to the banking sector in general and the three selected
1 Not to be confused with Republic Serbia. Republic Serbia is an independent sovereign country. Republic
of Srpska is a part of Bosnia and Herzegovina. Administrative division of Bosnia and Herzegovina is quite complex.
e country is comprised of two autonomous entities, Federation of Bosnia and Herzegovina and Republic of
Srpska and each has its own government and governmental bodies. e central state government has limited power
over institutions. While the monetary policy is conducted on the state level, nancial supervision is conducted on
the entity level. Although two banking agencies exist in Bosnia and Herzegovina, their responsibilities, laws, and
regulations are harmonized.
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countries in particular, the authors are not aware of any study that covers longer time series of
indicators of banking sector conditions following the GFC and specically focused on our three
countries. erefore, this research study will try to ll this research gap.
RESULTS AND DISCUSSION
BANKING SECTOR SOURCES OF FINANCING
Banks in the discussed countries were mostly privatized by foreign banking groups coming mainly
from EU countries. Foreign banks were attracted to the region as the high returns provided them
with an opportunity for gain in these transitioning economies (Bartlett and Prica, 2012). Banks
could meet demand owing to stable nancing from parent banks from abroad. As a result, foreign
liabilities were quite an important source of funding for banks in Bosnia and Herzegovina, and
Montenegro, and to a much lesser extent for Serbian banks. is was a cheap form of nancing for
foreign-owned banks that dominate banking markets in the region. Similarly to emerging markets
of Central-eastern Europe, which did not engage in wholesale markets to access funds, banks in
South-eastern Europe did not do this either (Wiesiołek and Tymoczko, 2015).
FOREIGN LIABILITIES
Foreign liabilities of the banking sector in Bosnia and Herzegovina made up 28.9% of total sources
of funding in 2008, which was close to the ve-year average. In Montenegro that share was even
higher, comprising 38.0% of total sources of funding. On the other hand, Serbian banks seemed
to be less dependent on foreign funding, at least in 2008, when foreign liabilities made up 19.0%.
During 2003-2008, foreign liabilities recorded a two-digit growth rate y/y in all three countries,
showing how intensive the nancing from foreign parent companies was. Bartlett and Prica (2012)
nd that capital inows to the region were signicant and mainly related to rise in capital and
liabilities of foreign-owned banks which entered into the regional market during restructuring and
reforming of the banking sector. e results of the present study conrm that liabilities of foreign
owned banks had an accelerated increasing trend before the GFC.
However, in the years following the GFC, the trend of foreign liabilities as a source of nancing
changed completely. From 2009 onwards, the banking sector of Bosnia and Herzegovina has been
recording negative annual growth of foreign liabilities, meaning that banks are not taking new
loans and deposits from abroad, but rather deleveraging. is can also be conrmed by observing
the share of foreign liabilities in total sources of nancing, which has seen a constant decreasing
trend since 2008. For Serbia, a similar conclusion can be reached. Following 2009, a slowdown
began and in 2011 the annual growth turned to negative and stayed negative until the end of the
observed period, with the exception of 2012. Only the banking sector of Montenegro has recorded
growth in the last two years, but the share of foreign nancing is much lower than it was in 2008.
CAPITAL
From 2009 onwards, the share of capital as a source of nancing seems to be more stable than
the share of foreign liabilities. Before the recession, capital nancing showed a decreasing trend
in Bosnia and Herzegovina, and Montenegro, while in Serbia it displayed a more volatile trend.
However, following the GFC, there have been no major changes in the share of capital in total
sources of nancing, proving that foreign owned banks had support from parent companies.
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Tabl e 1 Share of foreign liabilities in total sources of funding and annual growth rates of stocks of
foreign liabilities
Year Bosnia and Herzegovina Serbia Montenegro
Share in
total
Growth
rate
Share in
total
Growth
rate
Share in
total
Growth
rate
2003-2008 aver-
age
28.3% 28.3% 23.4% 37.3% 22.5% 100.8%
2008 28.9% 24.5% 19.0% 15.9% 38.0% 57.4%
2009 26.1% -10.2% 26.3% 69.0% 34.4% -17.3%
2010 21.2% -18.4% 28.5% 27.0% 31.6% -10.4%
2011 17.6% -14.0% 25.0% -6.9% 28.6% -13.7%
2012 16.2% -5.8% 23.6% 2.8% 24.9% -13.0%
2013 14.4% -6.4% 18.4% -22.3% 24.4% 3.3%
2014 12.3% -11.1% 13.3% -24.4% 21.9% -5.0%
2015 10.5% -11.7% 11.5% -10.2% 21.4% 8.3%
2016 9.5% -5.3% 9.9% -9.6% 21.6% 10.0%
Source: authors’ calculation based on data from Central bank of Bosnia and Herzegovina, 2017;
Central bank of Montenegro, 2017; National bank of Serbia, 2017.
Tabl e 2 Share of capital in total sources of nancing of banking sector and annual growth rate of
stocks (%)
Year Bosnia and Herzegovina Serbia Montenegro
Share in
total
Growth
rate
Share in
total
Growth
rate
Share in
total
Growth
rate
2003-2008 aver-
age
13.2% 11.4% 19.5% 34.1% 15.1% 25.2%
2008 11.0% 15.4% 22.6% 41.4% 8.4% 17.9%
2009 11.2% 2.1% 288.7% 19.6% 11.0% 18.7%
2010 12.1% 8.1% 390.0% 19.4% 10.6% -6.3%
2011 14.2% 21.4% 440.5% 19.5% 10.9% -1.8%
2012 14.6% 4.8% 465.2% 18.8% 10.3% -5.4%
2013 14.5% 4.9% 497.3% 17.8% 13.2% 35.1%
2014 14.2% 1.8% 0.0% 17.1% 14.0% 12.9%
2015 14.2% 4.3% 0.0% 0.0% 13.4% 5.6%
2016 14.5% 6.2% 0.0% 0.0% 13.1% 6.9%
Source: authors’ calculation based on data from Central bank of Bosnia and Herzegovina, 2017;
Central bank of Montenegro, 2017; National bank of Serbia, 2017.
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Tabl e 3 Number of banks and share of foreign capital in banking sector
Year
Country Banks with
foreign
capital
Banks with
domestic
private
capital
Banks with
domestic
state capital
Total num-
ber of banks
Share of
foreign cap-
ital in total
capital
2008 Bosnia and Her-
zegovina 21 7 2 30 87.2%
Montenegro 9 2 - 11 78.0%
Serbia 20 6 8 34 75.0%
2016 Bosnia and Her-
zegovina 16 8 2 26 82.4%
Montenegro 7 5 0 12 n/a.
Serbia 22 6 2 30 79.4%
Source: authors’ work based on data from Banking Agency of Federation of Bosnia and Herzegovina
Publications (n.d.); Banking Agency of Republic Srpska Publications (n.d.), National Bank of Serbia
Quarterly Reports (n.d.), International Monetary Fund (2008) and International Monetary Fund
(2016).
In 2008 the share of foreign capital in banks was high, 87.2% in Bosnia and Herzegovina, 78.0% in
Montenegro, and 75.0% in Serbia. e dominance of foreign-owned banks can be seen in Table 3.
As is evident from Table 3, the banking sectors of the observed countries were mainly foreign
owned before the GFC and this remains the case. For Montenegro, the exact share of foreign capital
was not available, but the number of foreign owned banks has remained higher than the number of
domestic banks throughout the observed period.
In late 2008 and early 2009, there was a fear that foreign owned banks would withdraw from the
region so as to decrease their exposure. is would have caused a complete collapse of the nancial
system in South-eastern Europe. Fortunately, this did not occur. e European Investment Bank,
European Bank for Reconstruction and Development, European Commission, World Bank, and
International Monetary Fund all lent their support to the banking sectors of South-eastern Europe.
Under an agreement commonly known as the Vienna Initiative, foreign banks committed to
maintaining their levels of exposure at 2008 levels and to support their subsidiaries (European
International Bank, n/d).
One of the most important indicators of banking sector health is the capital adequacy ratio. Capital
adequacy ratio is calculated by putting capital in relation to risk weighted asset (Van Greuning
and Brajovic-Bratanovic, 2009). e regulatory requirements for minimal capital adequacy ratio
did not change aer the GFC and in Bosnia and Herzegovina and Serbia it is 12.0%, while in
Montenegro it is 10.0%.
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Figure 1 Capital adequacy ratio of banking sector
As presented in Figure 1, through all the observed period, the banking sectors at the aggregated
level did not have problems with adequate capitalization. is is in line with Cocozza et al. (2011)
who show that during the GFC the banking sector in the region had solid capital buers.
DEPOSITS
Domestic deposits represent the largest source of nancing for the banking sectors of the selected
countries. In 2008, deposits made up 57.2% of banking sector nancing sources in Bosnia and
Herzegovina. e gure was 58.1% in Serbia and it was 60.1% in Montenegro.
In the period from 2003-2007, the countries experienced strong growth in deposits. e average
annual growth of total deposits ranged from 22.0% in Bosnia and Herzegovina and 29.2% in Serbia
to 64.9% in Montenegro. However, one of the rst signs of the GFC spilling over to the region was
a deposit outow in the last quarter of 2008, which caused a slowdown in deposit growth or even
negative growth depending on the country. Bosnia and Herzegovina and Montenegro experienced
sharp declines and negative growth rates, -1.8% and -4.8% respectively, while Serbia recorded a
slowdown from 54.5% to 6.8%. A probable reason for this deposit outow was the not-so-distant
memory of billions worth of savings, mostly denominated in German marks, being lost during the
collapse of Yugoslavia. Fortunately, the outow was of a temporary nature and did not have a major
eect on banking systems.
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Tabl e 4 Share of deposits in total sources of nancing and growth rates of stocks (%)
Year Bosnia and Herzegovina Serbia Montenegro
Share in
total
Growth
rate
Share in
total
Growth
rate
Share in
total
Growth
rate
2003-2008 aver-
age
59.2% 22.0% 64.3% 29.2% 65.0% 64.9%
2008 57.2% -1.8% 58.1% 6.8% 60.1% -4.8%
2009 58.6% 1.8% 52.7% 7.1% 60.3% -8.3%
2010 60.3% 3.6% 53.4% 4.3% 60.8% -1.9%
2011 60.5% 3.7% 54.4% 10.4% 64.7% 1.5%
2012 60.1% 1.4% 59.1% -0.5% 70.5% 9.0%
2013 61.8% 8.1% 58.4% 3.3% 70.9% 5.9%
2014 63.9% 7.9% 63.2% 3.8% 73.6% 10.0%
2015 66.3% 7.5% 72.0% 3.5% 75.6% 13.7%
2016 68.0% 7.4% 67.8% 9.2% 75.8% 9.4%
Source: authors’ calculation based on data from Central bank of Bosnia and Herzegovina, 2017;
Central bank of Montenegro, 2017; National bank of Serbia, 2017.
Table 5 Sectoral structure of total deposits in Bosnia and Herzegovina and annual growth rates of
stocks (in %)
Year Household deposits Non-nancial corpora-
tions deposits
Other deposits
Share in
total
Growth
rates
Share in
total
Growth
rates
Share in
total
Growth
rates
2006 46.8 28.6 30.5 24.5 22.6 29.1
2008 43.8 0.8 25.6 13.1 25.7 -18.0
2010 51.8 14.5 24.7 0.2 20.3 -13.2
2012 57.1 6.7 21.1 -4.3 18.0 -5.7
2014 58.8 8.1 22.0 2.4 17.6 15.4
2016 60.1 8.1 23.3 5.6 17.4 7.4
Source: authors’ calculation based on data from Central bank of Bosnia and Herzegovina, 2017.
Table 6 Sectoral structure of total deposits in Serbia and annual growth rates of stocks (in %)
Year Household deposits Non-nancial corporations
deposits
Other deposits
Share in
total
Growth
rates
Share in
total
Growth
rates
Share in
total
Growth
rates
2006 51.7 37.2 40.3 36.8 7.9 46.1
2008 52.6 9.4 35.7 -10.1 11.7 100.1
2010 63.2 15.2 28.8 -5.8 8.1 -22.9
2012 65.3 4.2 28.5 -8.0 6.1 -9.2
2014 66.9 4.0 28.7 10.4 4.3 -27.1
2016 63.1 5.8 33.2 16.6 3.7 6.6
Source: authors’ calculation based on data from National Bank of Serbia, 2017.
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Table 7 Sectoral structure of total deposits in Montenegro and and annual growth rates
of stocks (in %)
Year Household deposits Non-nancial corporations
deposits
Other deposits
Share in
total
Growth
rates
Share in
total
Growth
rates
Share in
total
Growth
rates
2006 46.4 184.1 34.6 19.0
2008 43.0 -16.0 35.3 -4.5 21.7 28.4
2010 53.2 12.8 28.0 -16.8 18.8 -11.0
2012 57.9 11.0 29.7 10.3 12.4 -1.9
2014 57.7 7.6 32.1 20.2 10.2 -3.4
2016 53.4 6.6 39.2 22.3 7.3 -20.0
Source: authors’ calculations based on data from Central bank of Montenegro, 2017.
As shown in Table 4, between 2009 and 2013, deposit activity was quite modest or even negative.
From 2013, until the end of the observed period, the banking sectors of all three countries recorded
accelerated growth rates. In addition, they all saw increases in the shares of domestic deposits
in total nancing sources in the banking sector balance sheets compared to 2008. At the end of
2016, the share of domestic deposits in the banking sector balance sheet was 68.0% in Bosnia and
Herzegovina, 67.8% in Serbia, and 75.8% in Montenegro.
e results show that household sector deposits have the biggest share in total deposits in all three
countries (Tables 5-7). Despite the deposit outow of the last quarter of 2008, household deposits in
Bosnia and Herzegovina did not record a negative growth in any year during the observed period,
and both stocks of the household deposits and their share in total deposits kept an increasing trend.
On the other hand, comparing 2008 and 2016, deposits of non-nancial corporations and other
deposits decreased their shares in total deposits, but recorded positive annual growth rates recently.
Similarly, the banking sector in Serbia recorded lower positive annual changes (9.4%), but kept an
increasing trend in terms of the stocks of the household deposits and their share in total deposits.
But, unlike the banking sector in Bosnia and Herzegovina where the household sector is the main
driver of total deposits, in Serbia it appears that sector of non-nancial corporations is recording
much higher annual growth of deposits then households in the last few years, giving higher
contribution to growth of total deposits.
However, the banking sector of Montenegro was faced with a declining trend of household deposits
two years in a row, -16.0% in 2008 and -1.5% in 2009, aer which the growth turned positive again.
Similarly to trends in Serbia, deposits of non-nancial corporations are recording much faster
annual growth then household sector deposits.
Although the intensity of deposit activity is lower compared to pre-GFC period, it is still better than
credit activity. Domestic deposits recorded increasing shares in balance sum, meaning that they
are a more important source of nancing aer the GFC than before. e main driver of expanding
deposit base in Bosnia and Herzegovina is household sector. However, in the last few years it seems
that in Serbia non-nancial corporations had higher contribution to total deposit growth than
household sector. e Montenegro situation is similar. is means that besides households’ deposits,
the driver of total deposit growth in these two countries is deposits of non-nancial corporations,
which is a surprising result of this research.
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CREDIT ACTIVITY AND BANKING SECTOR ASSETS
BANK LOANS TO DOMESTIC SECTORS
Prior to the GFC, the banking sector of South-eastern Europe was experiencing a credit boom.
e average annual credit growth rate in the 2003-2008 period for Bosnia and Herzegovina was
22.1%, for Serbia 37.3%, and for Montenegro 77.9%. e main driver of the credit growth was high
demand from the private sector (households and non-nancial corporations).
Table 8 Annual growth rate of total loan stocks in %
Period Bosnia and
Herzegovina
Serbia Montenegro
Average 2003-2008 22.1% 37.3% 77.9%
2008 23.0% 36.0% 24.8%
2009 -3.2% 16.3% -13.7%
2010 3.4% 27.2% -7.9%
2011 5.4% 8.0% -9.7%
2012 4.3% 9.5% -4.6%
2013 3.1% -4.1% 7.7%
2014 2.8% 3.4% -3.0%
2015 2.4% 2.9% 1.9%
2016 2.0% 2.6% 6.7%
Source: authors’ calculation based on data from Central bank of Bosnia and Herzegovina, 2017;
Central bank of Montenegro, 2017; National bank of Serbia, 2017.
e GFC had a serious impact on credit activity. In 2009, credit activity was negative on annual
level in Bosnia and Herzegovina and Montenegro, -3.2% and -13.7%, respectively (Table 8). In
Serbia, a slowdown was recorded, from 36.0% in 2008 to 16.3% in 2009. Credit activity following
2009 has been very dierent in the observed countries. While in Bosnia and Herzegovina recorded
modest growth, Serbia has witnessed signicant volatility. On the other hand, Montenegro has seen
a very slight, but steady, decline in credit activity. However, at the end of the observed period, all
countries recorded low, but positive, annual growth. Nevertheless, it is evident that credit activity
did not return to pre-GFC levels. Prolonged weak macroeconomic conditions continuing during
the following years inuenced behaviour and creditworthiness of borrowers and behaviour of
banks. Households are more prone to saving then spending, which decreased demand for bank
loans.
NONPERFORMING LOANS
e banking sector in Bosnia and Herzegovina had a clear decreasing trend before the GFC hit
the region when non-performing loans started to rise. High share of poor loans can be credited to
negative or low economic activity aecting the ability of companies to meet their obligations and
decreased income of households.
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Figure 2 Non-performing loans in Bosnia and Herzegovina
Source: authors’ work based on data from Central Bank of Bosnia and Herzegovina, 2017
Figure 3 Share of non-performing loans in Serbia
Source: authors’ work based on data from e World Bank Data, 2017
Following a sharp decline in 2006, the quality of credit portfolios started to deteriorate again in
Serbia. Data on non-performing loans for Montenegro is available from 2004. Similarly, to Serbia,
improvement in the quality of loan portfolios was recorded only in 2006. e rst signs of the
GFC appeared in the last quarter of 2008, which might have triggered an upward trend. It seems
that aer 2013 banks became better at managing their credit portfolios and began clearing out bad
assets.
Results regarding non-performing loans and decreased nancing from abroad in the form of foreign
liabilities of banking sectors conrm the ndings of the previous study by Roaf et al. (2014) of
credit activity limitations. e rise of non-performing loans can be related to economic conditions
in the country that aect borrowers’ repayment capacity (Klein, 2013). Banking sectors of all three
countries are operating in worse economic conditions than prior to 2009, and persistently have non-
performing loans higher than in the pre-GFC period. However, there is a convincing improving
trend in Bosnia and Hercegovina and Montenegro, which cannot be said for the banking sector in
Serbia.
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BANKING SECTOR ASSETS SIZE AND ANNUAL GROWTH
Table 9 Total assets to GDP and annual growth rate of stocks (in %)
Year Bosnia and Herzegovina Serbia Montenegro
% of GDP Growth rate % of GDP Growth rate % of GDP Growth rate
2008 81.3% 7.8% 69.8% 30.5% 106.6% 11.2%
2009 83.3% -0.5% 81.1% 18.1% 100.8% -8.6%
2010 82.0% 0.7% 89.4% 2.9% 94.2% -2.7%
2011 82.0% 3.4% 85.2% 8.4% 86.1% -4.5%
2012 83.7% 2.0% 88.1% -8.4% 88.3% -0.1%
2013 86.3% 5.2% 81.2% 4.5% 88.0% 5.4%
2014 88.1% 4.3% 84.6% -4.0% 90.7% 6.0%
2015 87.1% 3.7% 84.8% -9.3% 95.8% 10.7%
2016 88.9% 4.6% 85.6% 16.0% 101.6% 9.2%
Source: authors’ calculations based on data from National Accounts Main Aggregates Database,
2016; IMF Data Accesses to Macroeconomic and Financial Data. (n.d.); Central Bank of Bosnia
and Herzegovina, 2017; National Bank of Serbia, 2017; Central Bank of Montenegro, 2017.
Table 10 Foreign owned bank assets in total bank assets
Year Country Banking assets in foreign owned
banks, % of total bank assets
2008 Bosnia and Herzegovina 95.0%
Montenegro n.a.
Serbia 67.0%
2016 Bosnia and Herzegovina 85.7%
Montenegro 79.2%
Serbia 69.9%
Source: authors’ work based on data from Federal Banking Agency of Bosnia and Herzegovina
Publications (n.d.); Banking Agency of Republic Srpska Publications (n.d.); National Bank of
Serbia Quarter and Annual Report. (n.d.); International Monetary Fund Financial System Stability
Report (2008) and International Monetary Fund (2016).
Structural reforms in the banking sectors prior to the GFC resulted in fast growth of banking sector
assets. From 2003-2008 the average annual growth rate of banking sector assets in Bosnia and
Herzegovina was 22.1%, 30.7% in Serbia, and 61.7% in Montenegro. Naturally, 2009 was a year of
change brought about by the GFC. e rapid rate of annual growth of the banking sectors’ assets
prior to the GFC was replaced by sluggish and unstable growth aer the crisis (see Table 9).
Comparing ratio on banking sector assets to GDP between 2008 and 2016 one can conclude
that there was a continuous trend of nancial deepening in Bosnia and Herzegovina and Serbia.
However, this is not because of convincing growth of banking sector assets and nancial sector
deepening, but rather because economic growth was poor. It should be kept in mind that using
only ratios of banks’ asset to GDP to measure size and depth of banking sector does not give us
too much information. e size of banking sector should be assessed from a wider industry policy
perspective (Schoenmaker and Werkhoven, 2012). However, this is a topic for some other research.
e analysis of the ownership structures of the banking sectors conrms earlier ndings that major
portions of them are foreign-owned.
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RETURN ON ASSETS AND EQUITY
Finally, the question of whether protability recovered to its pre-GFC levels will be answered. Return
on assets and return on equity (hereinaer ROA and ROE) were used as indicators of protability.
Although ROA and ROE cannot provide sucient grounds for a deep analysis, they can serve as
indicators of general trends.
Table 11 Return on assets and return on equity
Year Bosnia and Herzegovina Serbia Montenegro
ROA ROE ROA ROE ROA ROE
2006 1.1 10.6 1.8 9.6 0.6 5.5
2007 1.0 10.5 1.9 8.9 0.5 5.6
2008 0.5 4.9 1.6 7.1 -0.3 -4.2
2009 0.2 2.3 0.7 3.4 0.3 3.5
2010 -0.6 -4.9 0.8 4.0 -2.5 -23.4
2011 0.7 5.8 0.9 4.4 -0.7 -6.2
2012 0.7 5.1 0.6 2.9 -2.5 -23.4
2013 -0.1 -0.5 -0.4 -1.9 0.0 0.4
2014 0.8 5.4 0.6 2.9 1.0 6.9
2015 0.3 2.0 0.3 1.6 0.3 1.7
2016 1.1 7.3 0.7 3.4 0.7 5.0
Source: authors’ work based on from Global Financial Development, 2017; Central Bank of Bosnia
and Herzegovina, 2017; National Bank of Serbia, 2017; Central Bank of Montenegro, 2017.
e banking sectors’ protability started to decline in 2008, though in Bosnia and Herzegovina and
Serbia it was just lower compared to the previous year, while in Montenegro it was actually negative,
so Živković’s (2011) ndings related to protability and crisis could not be conrmed. It seems that
the banking sector in Montenegro experienced the biggest hit on protability compared to the
other two neighbouring countries. e worst period was 2010-2012 when, for three years in a row,
nancial result on aggregated level was negative. Aer this period, the banking sectors managed to
generate positive ROAs and ROEs, but results are still weak. High share of non-performing loans
and lower level of protability are characteristics of the banking sector in Serbia since 2008, as well
as in Bosnia and Herzegovina. e banking sector in Bosnia and Herzegovina had a particularly
disastrous 2010 and 2013 when it comes to protability, while in Serbia a negative nancial result
was registered only in 2013. is fall in protability can be related to the rises in non-performing
loans in all three countries and poor credit growth.
Findings on protability lead to the overall conclusion that the banking sectors’ protability has
been low since 2008 and this could be related to higher shares of non-performing loans in credit
portfolios. Alper and Anbar (2011) examine the case of the ten biggest banks in Turkey and nd
that quality of assets had signicant impact on return on assets. Dumičić and Ljubaj (2017) reach a
similar conclusion for the banking sector in Croatia for the period 2009-2015 when ROA started to
drop as soon as non-performing loans given to the corporate sector started to rise.
For many consecutive years, the banking sectors have a share of non-performing loans higher than
10% in all three countries.
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CONCLUSION
e aim of this research was to examine data related to the banking sectors, compare them to
the pre-GFC period, and answer the main research question: Have banking sectors in Bosnia
and Herzegovina, Montenegro and Serbia recovered from the global nancial crisis and do they
perform better currently?
Findings show that credit activity did not recover aer the GFC. e rapid rate of annual growth
of bank loans prior to the GFC was replaced by sluggish and unstable growth aer the GFC.
Factors could be found on demand and supply side of bank loans. Lower demand for banks loans is
primarily caused by the change of household attitudes towards consumption. Lower supply of bank
loans is primarily caused by more cautious lending due to high level of non-performing loans aer
the GFC meaning that the credit risk is high and due to limited funding from abroad. However, the
weak economic performance in all three countries is the underlying cause of these trends.
e results show that aer the GFC the sources of funding changed. Before the GFC, foreign
liabilities in form of loans and deposits from parent companies from abroad were important sources
of nancing for the banking sectors in Bosnia and Herzegovina, Montenegro, and Serbia since
foreign-owned banks make up large parts of the banking sectors. Aer the GFC, foreign-owned
banks started to deleverage, meaning banks were repaying foreign obligations to parent companies,
without issuing new ones. On the other hand, the shares of capital in total sources of funding did
not experience major changes. Parent companies did not withdraw capital from subsidiaries in the
region. e share of deposits in total sources of nancing increased, meaning that banks more rely
on domestic deposits.
Every following year aer the GFC, the banking sector in Bosnia and Herzegovina recorded much
higher levels of non-performing loans then in pre-GFC period. However, there is a promising
downward trend during the last few years. e results describe a similar scenario for banking sector
in Montenegro. On the other hand, it seems that the banking sector in Serbia has a prolonged
problem with non-performing loans in their assets. Even before the GFC this was a major problem,
except for 2006. It is recommended for all three countries that regulation related to resolution
of non-performing assets should be improved in a way that helps banks to better deal with this
problem.
e results show that deposit activity is not as low as credit activity. Nevertheless, it is not as intense
as it was before the GFC. If comparing annual growth rates of total deposits recorded in years
before the GFC to the ones recorded aer the GFC, it becomes evident that the growth is much
lower aerwards.
e main driver of deposit growth in Bosnia and Herzegovina before and aer the GFC is household
sector. However, in Montenegro and Serbia, the household sector was the major driver until the
last few years, when deposits on non-nancial corporations started to record much higher annual
growth rates compared to deposits of households. is is an interesting nding and it would be
interesting to investigate it with more detailed data on factors that inuence behaviour of non-
nancial corporations and households. is is a worthwhile topic for future research.
e results regarding protability show that protability has been low since 2008. For years aer the
rst wave of GFC, banking sectors in selected countries were recording either negative protability
or lower than before the GFC, depending on the country. However, results for 2016 are promising,
but it is not clear whether this improvement is a one-time event, since there is no clear trend aer
the crisis.
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