AIK Banka, Serbian Lender, May Tap Foreign Markets With Bond or Loan Issue

AIK Banka AD, Serbia’s second-most profitable lender in the first half of 2010, may hold off on plans to tap foreign markets with a five-year bond or loan issue until the cost of borrowing becomes “reasonable.”

AIK is working with a London-based investment bank to borrow as much as 150 million euros ($189 million) and use the money to co-finance big road and power projects or aid large corporate clients in Serbia, Djordje Djukic, a member of AIK’s executive board, said in a telephone interview today.

“We want to expand our corporate banking activity,” Djukic said.

AIK Banka is 20 percent owned by Agricultural Bank of Greece SA, or ATE, the only Greek bank to have failed the European Union stress tests. Nis, Serbia-based AIK was the second-most profitable bank in the Balkan country after Banca Intesa AD Beograd, Bloomberg data show.

“A Eurobond would not be a problem in terms of liquidity, the problem we have is the cost of borrowing,” Djukic said. “If we were to borrow at a variable interest of 12-month EURIBOR plus an 800 basis-point risk premium, we are already talking about the initial cost of 9.42 percent. That’s too much.”

Risk Premium

The high risk premium reflects Serbia’s ‘BB-’ credit rating by Standard & Poor’s, he said.

“Plus, any foreign borrowing is subject to a 25 percent reserve requirement and that adds up to a cost,” said Djukic, a former board member of the central bank.

Djukic called on monetary authorities to exempt foreign borrowing from mandatory reserves.

Earlier this year, the National Bank of Serbia unified a series of different reserve requirement rates and abandoned exemptions from the rule to simplify the system. Banks currently set aside a 5 percent reserve requirement on dinar assets and 25 percent on foreign-exchange assets.

Djukic said exempting funds raised through a Eurobond would encourage banks, currently relying on mostly one-year deposits, to look abroad for longer-term financing, improving the structure of their balance sheets at a time of still scarce foreign investment inflows to Serbia.

Investments stood at 419 million euros in the first half of 2010. While banks and companies were actively repaying their debt in the first six months of the year, the government stepped up borrowing, with public debt rising by 15.56 percent year- on-year and external debt up 9.87 percent in the same period.

Serbian issuers also face a “liquidity premium” to be paid on top for cashing in the debt in a secondary market, as borrowers from Serbia are still new to foreign markets and lenders and face higher costs from the companies they are working with, Djukic said. He would not disclose how much more his bank might have to pay.

To contact the reporter on this story: Gordana Filipovic in Belgrade at gfilipovic@bloomberg.net

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