BELGRADE – A few years ago, people queuing at banks in Serbia were there to get their money out before it melted away or the doors closed. Now, big-name foreign investors are lining up for a slice of a potential banking El Dorado. A tough reform launched four years ago, designed to break any link between politics and banks, good growth prospects and low per capita indebtedness seems to have worked fine, attracting big cash, analysts say. «The Serbian economy’s potential to grow steadily in the next 20 years to catch up with other transition economies is reason enough to make foreign banks pay high prices,» says Bozidar Djelic, Southeast Europe operations manager for Credit Agricole, which bought a Serb bank earlier this year. Out of 40 banks, 18 are now majority-owned by foreigners, who are attracted by high growth rates, a well-managed privatization process and solid supervision of the sector, said Mike Ahern, chair of the Serbian Foreign Investor Council. Restoring popular confidence in banks was hard work, too. Isolated by wars, sanctions and bouts of hyper-inflation under autocrat Slobodan Milosevic, Serbs spent the 1990s in limbo. As the economy atrophied and the banking system collapsed, they stashed savings under the mattress. Private savings were reported at 2 billion euros in September compared to 20 million in 2000. Only four years ago, the sector numbered 85 heavily indebted banks. The four biggest by assets were closed. The first foreign banks arrived in 2002, finding an economy desperate for investment and a nation hungry for Western comforts. More consolidation In 2005, Austria’s Erste Bank, Alpha Bank, Piraeus and EFG of Greece, Cyprus’s Laiki Bank, Slovenia’s Nova Ljubljanska Banka, Italy’s Findomestic Banca and Banca Intesa and France’s Credit Agricole bought banks in Serbia. With only a few banks left unsold to foreigners, analysts expect another year of consolidation. «We will see many more mergers and acquisitions. I expect the number of banks to fall to some 25,» Djelic said. The central bank governor, Radovan Jelasic, agrees. «Consolidation will continue, driven by tighter competition and reduced margins. But growth will slow down as we approach the limits.» Banks have enjoyed two consecutive years of double-digit growth. Assets grew 40 percent in 2004 and more than 30 percent until September this year hitting 7.9 billion euros ($9.25 billion) – a half of Serbia’s gross domestic product. They are forecast at 9 billion euros by end-2005. But the size of the sector is still only 20-25 percent that of mature economies, Djelic said. London-based Nomura says the market remains underdeveloped and fragmented but highly profitable with the average monthly spread between lending and deposit rates at 1.0 percent. «The market is… mainly focused on traditional lending and deposit activities. This leaves significant room for growth.» Vienna-based EPIC, European Privatization and Investment Corporation, says growth would come from credit activity. «The further expansion of bank assets, though a bit slower, can be expected in years to come as a result of strong credit activity. The arrival of foreign banks and tightening competition will represent the key drivers of the expansion.» To keep business going, banks would have to lower margins. «There will be a trade-off between higher lending costs (reflecting the tighter monetary policy) being passed on to the consumer against greater competition between the banks which should lower costs to the consumer,» Ahern said. Expansion Beside lending, bankers said the business would start expanding to private pension funds, life assurance, forfeiting, factoring and asset management as the economy advances. Goran Pitic, chairing the Belgrade branch of France’s Societe Generale, said inflation was his key concern. «The major risk is economic stability… If the government again fails to meet pledged economic policy targets, the central bank will be forced to tighten on top of the very restrictive policy measures in place,» Pitic said.