May the force be with you

The original trilogy by George Lucas follows Luke Skywalker on his journey to become a Jedi, his struggle against the evil Imperial agent Darth Vader, and the Rebel Alliance's fight to free the galaxy from the grip of the Galactic Empire. The original trilogy, and later the series that gained global fame, teaches us that the battle between good and evil is apparent on one side but sometimes requires someone from the "dark side" to prevail ultimately. The banking sector in Serbia is currently facing a similar battle. While it's not exactly "Star Wars," we found it interesting to provide this analysis.

The next five years are expected to be very challenging for banks in Serbia and globally. Significant losses are anticipated from the credit portfolios, which will suffer due to the post-pandemic crisis, and it's already clear that many banks will experience substantial drops in their revenues. The situation on a global scale will significantly reduce market activity while intensifying problems with loan repayments. These market dynamics will directly impact banks with reduced investment activity, decreased transaction volumes, and increased non-performing loans.

Profitability will be the main focus.

Although it's difficult to predict the exact magnitude of the problems banks will face, it's estimated that banks worldwide will lose between 1.5 and 4.7 trillion dollars by 2024. This is evident from the total reserves, which increased by a whole trillion dollars in the last quarter of 2020. Banks are simply aware that tough times are coming. When added to reduced interest rates and decreased transaction income, it's clear that bank profitability will be the primary topic in the financial industry worldwide.

The good news is that this time, the banking industry is not the cause of the crisis; it's COVID-19. Banks entered this period reasonably healthy, with good results and sufficient capital reserves. However, banks will use the upcoming period to increase their capital reserves, reduce costs, and look for ways to offset losses from their credit portfolios and decrease transaction income. The banking sector in Serbia remained profitable last year despite the challenges posed by the pandemic and reduced market activity. However, there was a noticeable decline compared to 2019. In the year of the pandemic, banks earned 46.1 billion dinars or 390 million euros. 2019, the profit was 573 million euros, indicating a 32% year-on-year drop. All central banks in the Serbian market experienced profit declines. For example, Intesa saw a 23.1% drop, Unicredit saw a 35.5% drop, and NLB and Komercijalna, now operating as one bank, experienced a combined 65.8% decline. OTP and Vojvođanska as a group had the most significant drop of 88.8%.

The banking sector in Serbia remained profitable last year despite the challenges posed by the COVID-19 pandemic and reduced market activity. However, there was a noticeable decline in profits compared to 2019. In the year of the pandemic, banks earned 46.1 billion dinars, which is approximately 390 million euros. In 2019, the total profit was 573 million euros, indicating a 32% year-on-year drop in profitability. This profit decline affected all central banks in the Serbian market. For example, Intesa saw a 23.1% drop, Unicredit a 35.5% drop, while NLB and Komercijalna, now operating as a single bank, experienced a combined 65.8% decline. OTP and Vojvođanska, as a group, had the most significant drop, with a decrease of as much as 88.8%.

These declines are attributed to reduced revenues from the COVID-19 crisis, loan moratoriums, decreased lending activity, low-interest rates, and increased provisions for potential credit losses. This inevitably led to reduced profitability across all banks. The reduction in profits in the banking sector always raises concerns. Banks will not sit idly by.

Over the last decade, the number of banks in Serbia has decreased from 36 to 22, with 6,400 fewer employees and 800 fewer branches. Banks are expected to continue reviewing their costs and attempting to minimize operational expenses in the coming period. Digitalization and online banking, which immensely helped mitigate the impact of the pandemic, will remain the main focus in the banking industry. More cost-effective digital models for customers and internal operations bring significant efficiency and cost reduction. While our market has yet to utilize all the potentials of digital banking fully, there has been considerable progress among Serbian banks. The COVID-19 crisis, if it hadn't already been the case, has placed digital banking as the number one topic on the executive boards of all banks in Serbia.

Unpopular but necessary move

In addition to this apparent trend, banks in Serbia have taken a highly unpopular but expected step in recent months. There's been an increase in banking fees, ranging from 15% to as much as 60%. As the law requires, many banks have notified their clients about these tariff changes. According to the principle of "take it or leave it," clients can either accept the new terms or switch banks. Since this wave of price changes has affected many banks, this trend will likely continue with banks that haven't adjusted their prices yet. Clients have yet to have a wide range of options to choose from.

While the broader public is filled with negative comments about this move by the banks, the banks didn't have many choices. Their limited manoeuvring space and precise assessments that their profitability would continue to be at risk, mainly due to loan repayment problems, didn't leave them with many alternatives. Their decision was to stick with the weapons they have in this "war" they find themselves in. The choice could have only gone in the direction of further cost-cutting through layoffs and reducing the number of branches, which, considering that banks have already gone through a period of significant cost reductions, could only come at the expense of service quality, something banks can't afford.

It must be acknowledged that the underdevelopment of alternative payment services and the fintech market in Serbia has significantly contributed to the banks having this option today. Banks in other markets with more developed alternative financial services, such as Revolut or N26, couldn't rely on this powerful weapon to maintain their profit.

In the triumphant finale of the famous film trilogy, the "empire" is finally defeated when Darth Vader turns away from the "dark side." Victory can largely be attributed to Luke Skywalker's decision. Despite what everyone else told him about Vader, he believed his father could do the right thing. Luke put his life on the line for what he thought would end the conflict. He stuck to what he knew, and his self-confidence inspired the end of the Galactic Civil War.

Managing banks is a challenging task, especially at times when it's clear that the economy is starting to falter. In moments when you're running a severe company like a bank, sometimes unpopular measures bring long-term stability and ultimate victory. Experience shows that in such situations, it's best to stick to what you're strongest at, your "tried and tested weapon."

Just as in the "Star Wars" series, the greatest battle is between good and evil, and just as Luke believed that his father hadn't completely turned to the Dark Side, which ultimately led to victory, we must believe that our bankers from the "dark side" must make these unpopular moves for the sake of the ultimate triumph and stability of the banking market, and thus the economy of Serbia.