Financial Stability in the Republic of Belarus 2016

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2 This analytical survey has been prepared by the Financial Stability Department in concert with the Monetary Policy and Economic Analysis Directorate, Banking Supervision Directorate, Financial Markets Operations Directorate, Banking Operations Regulation Directorate, Balance of Payments and Banking Statistics Directorate, Non-bank Operations Regulation Department, Payment System and Digital Technologies Directorate, and Securities Market Development Department of the National Bank of the Republic of Belarus 2

3 CONTENTS EXECUTIVE SUMMARY... 4 CHAPTER 1. EXTERNAL AND INTERNAL MACROECONOMIC RISKS... 9 CHAPTER 2. NON-FINANCIAL SECTOR CHAPTER 3. FINANCIAL SECTOR BANKING SECTOR INSURANCE SECTOR OTHER FINANCIAL INTERMEDIARIES SECTOR CHAPTER 4. FINANCIAL MARKETS FOREIGN EXCHANGE MARKET CREDIT AND DEPOSIT MARKET INTERBANK CREDIT MARKET SECURITIES MARKET BANK MANAGEMENT FUNDS CHAPTER 5. PAYMENT SYSTEM OF THE REPUBLIC OF BELARUS CHAPTER 6. MACROPRUDENTIAL MEASURES SYSTEMIC RISKS FINANCIAL SECTOR ASSESMENT PROGRAM ASSET QUALITY REVIEW INSTITUTIONAL MEASURES APPENDICES

4 EXECUTIVE SUMMARY Financial stability is the state of the financial system, at which banks and non-bank financial institutions and other financial intermediaries, the financial market and the payment system carry out the activities inherent thereto in a due manner and are capable to carry out such activities in the case of the destabilizing impact of domestic and external factors. In 2016, financial stability in the country was ensured and the country s financial sector remained stable versus the major risks. The key financial stability indicators were within acceptable ranges. Regulatory capital adequacy in the banking sector as a whole totaled 18.6% as at January 1, It is higher than the minimum value set with respect to a separate bank and is in line with the regulatory capital adequacy level in the neighboring countries and the countries which are the trade partners of the Republic of Belarus. In 2016, all banks met the minimal regulatory capital requirement. The positive dynamics of the absolute values of the insurance sector development in the Republic of Belarus is being preserved. The segment of leasing organizations is being actively developed. The stable and smooth functioning of the country s payment system was ensured, key risks were limited, and the threats of their transformation into the systemic risk was prevented from happening. As at July 1, 2016, the official monetary unit of the Republic of Belarus the Belarusian ruble was redenominated. The corresponding decision was made by Edict of the President of the Republic of Belarus No. 450 dated November 4, The redenomination was carried out by means of replacement of circulating banknotes of the 2000 series by the banknotes and coins of the 2009 series in proportion of 10,000 Belarusian rubles of the 2000 series versus 1 Belarusian ruble of the 2009 series. The main external challenges for the stability of the financial system were the instability in the global oil commodity markets and reduction of oil deliveries from the Russian Federation in 2016 H2. A sharp reduction in the price for oil in the global markets at the beginning of 2016 led to the depreciation of the Russian ruble exchange rate versus the US dollar and resulted in the depreciation of the national currency with a view to maintaining the competitiveness of the national goods in the external 4

5 markets. Taking into account the high level of assets dollarization it caused a considerable growth of the banking sector s credit risk. In 2016, the growth of the global economy slowed down to a slight degree compared with 2015 due to the deceleration of the growth rates of the industrialized economies. At the same time, in the Russian Federation the major trade partner of the Republic of Belarus the economic situation was gradually improved. Macroeconomic situation in the Republic of Belarus in 2016 was characterized by the recovery of the economic activity in the second half of the year after its considerable decline in The credit risk was still the most significant one as to the amount of potential losses for banks. The share of bad assets in the assets exposed to credit risk totaled 12.8% as at January 1, 2017, having grown over the year by six percentage points. At that, the banks credit risks and the government finances sector s risks are complementing and intensifying each other due to the fact that around 18% of the banks credit portfolio are guaranteed by the Government and local authorities and state-owned enterprises account for the considerable part of borrowers. Fiscal risk potential under the liabilities owed to the Belarusian banks is evaluated in the amount of 8-10% of the GDP. The share of bad assets grew, to a great extend, due to the worsening of the financial indicators of activities of the real sector s enterprises, primarily, the state-owned ones, against the background of low economic activity. Another factor of growth of the credit risk potential is a significant share of liabilities owed to banks in foreign exchange in the enterprises debt under credit in the absence of the corresponding receipts in foreign exchange. Financial condition of the nonfinancial institutions sector in 2016 saw no significant changes compared with The actual settlements discipline worsened, with high debt load being still in place. At the same time, a number of positive changes was noticed: the share of unprofitable and lowprofit enterprises went down, net losses of loss-making enterprises were reduced, and the share of loss-making economic entities in the total number of organizations declined. A number of decisions aimed at improving financial stability of the largest borrowers was taken in However, despite of them, the problem aspects in the activities of certain enterprises are getting stable character, 5

6 which is an indication of one of the major problems of the Belarusian economy low investment return of financial recourses and inefficiency of their distribution among the real sector s branches. High dollarization of banks assets was still in place at the end of the year the share of the operating banks assets in foreign exchange totaled 61.7%. As at January 1, 2017, the share of foreign exchange deposits in the overall structure of households bank deposits totaled 76.3%. At the same time, in 2016 the trend towards reduction of the level of banks assets and liabilities dollarization was observed. A significant volume of gross external debt, which developed in the sectors of the economy, bears a risk for the financial stability of the country, including, due to the high price of servicing it. The total payments designed to repay the principal amount of gross external debt and servicing it (excluding repayment of trade credits and banks short-term liabilities) amounted in 2016 to USD 6.3 billion (interest and other payments accounted for 22.2% of this amount), which is equivalent to 13.2% of the GDP, or 21.2% of goods and services export. In 2016, the situation in the domestic foreign exchange market improved compared with the previous year and was characterized by the establishment of the considerable net supply of foreign exchange on the part of households and reduction of net demand in the segment of enterprises. The level of systemic bank risk in 2016 reduced due to the shrinking of the credit gap practically to zero by the end of the period under review, surplus of liquidity, as well as certain improvements in the banking sector s position versus the other countries in 2016 Q4. At that, 2016 witnessed a certain reduction of the banking sector s systemic risk concentration. At the same time, the attained balance is unstable and the potential of financial risks remains at a high level. High credit risk in the banking sector caused by the low efficiency of the state-owned enterprises activities, dollarization of banks balances, as well as significant level of fiscal risks and external debt were the key threats to financial stability in Under the conditions of the above-mentioned challenges and problems the system of measures designed to ensure financial stability is implemented in the country. An inter-agency consulting and coordinating body Financial Stability Council was established in 2016 and is operating with a view to 6

7 strengthening the system of financial security and coordinating the measures designed to raise financial stability. In 2016 H1, the Republic of Belarus cooperated with the IMF and the World Bank within the Financial Sector Assessment Program (FSAP). The FSAP mission assessed the progress achieved in ensuring compliance with the international standards in the field of the banking sector supervision, insurance area and financial market infrastructures. The experts noted significant success in implementing the process of integrated banking supervision in Belarus and ensuring stable functioning of the payment system. The FSAP mission also assessed the development of corporate management in the state-owned financial institutions, financial reporting standards and audit practices, the measures aimed at securing creditors rights and legal basis of insolvency regulation, as well as designing the strategy of the digital banking development by the National Bank. As part of the FSAP, the stress-testing of the banking sector s stability was carried out independently by the experts of the National Bank, 11 largest banks and the IMF. The stress-tests were based on the same macroeconomic scenarios for , which reflect the main risks longstanding slowing-down of the growth rates in Russia and in the world as a whole due to the low or falling-down prices on energy, depreciation of the national currency exchange rate, and increase in interest rates. The results of stress-tests, which were obtained by the National Bank and banks, are, on the whole, in line with the IMF s assessments and evidence the adequate sustainability of the Belarusian financial institutions. At the same time, in the case of the negative development of the macroeconomic situation, separate banks will be in need of additional capitalization. Based on the results of assessments, the National Bank and the Government of the Republic of Belarus organized the work aimed at implementing the FSAP mission s recommendations, in particular, the plan of actions designed to implement recommendations made in follow-up of the Program of assessment of the financial sector of the Republic of Belarus, the implementation of the majority of which is scheduled for the next 3-5 years, was developed. In July 2016, a special audit of nine largest Belarusian banks was carried out as to the assets quality assessment by the most authoritative 7

8 international audit companies. This procedure was aimed at determining possible losses under banks credit portfolios, caused both by the worsening of the debtors financial condition and general economic situation, as well as assessment of the impact of these losses on the banks capital. The assets quality review (AQR) revealed the potential violation of the capital adequacy requirements in three banks. These banks developed and submitted to the National Bank the plans of measures, which are designed to ensure regulatory capital adequacy and envisage procedures aimed at reducing the credit risk accepted by banks, including by means of improving the quality of security under granted credits. Partial transfer of bad assets to the JSC Asset Management Agency, which was established in 2016, was geared towards resolution of the banks bad debt. With a view to ensuring the stable functioning of the banking sector and developing efficient measures designed to release the banks of the Republic of Belarus from the bad assets the work aimed at implementing the project on establishing the market of bad assets in the Republic of Belarus was organized at the National Bank. The main strategic objectives of this project are: - a complex analysis of factors hindering formation of the bad assets market in the Republic of Belarus; - a stimulation of activities designed to release the banks from the bad assets, improvement of the methods and forms of state participation; and - a facilitation of formation of the institutional, functional, and legal environment to establish efficient market of the banks bad assets. In 2016 a number of steps was taken in the area of imroving efficiency of managing state-owned enterprises: a stage-by-stage reduction of directed lending to state-owned enterprises continued; targeted gross indicators for state-owned enterprises were partially substituted by the efficiency and profitability indicators; and primary basis for increasing the efficiency of monitoring state-owned enterprises and analysing risks was laid. 8

9 CHAPTER 1. EXTERNAL AND INTERNAL MACROECONOMIC RISKS The main external factors which made an impact on the development of the Belarusian economy in 2016 were instability in the global raw materials market of oil and potash fertilizers in the first half of the year and reduction of oil deliveries from the Russian Federation in the second half of the year. In 2016, the raw materials and goods markets were characterized by high volatility. A significant factor was uncertainty as to the decision on limiting the crude oil production by the countries-suppliers of oil of the OPEC and the countries, which are not the OPEC members. The global oil prices have been recovering since 2016 Q2. The price for Brent oil grew up from USD36.5 per barrel in 2016 Q1 to USD51.6 per barrel in 2016 Q4. The agreements on the reduction of the crude oil production by the countries being the major crude oil producers, which were reached in November 2016, made the major impact on the oil quotations. But, the high level of oil stocks and a slow growth rate of the global economy may be the reasons for further formation of oversupply in the oil market and preclude from declaring the formed fundamental changes in the short-and-medium term in the explicit manner. Prices for Urals oil in 2016 Q4 totaled USD47.9 per barrel, a 9% growth compared with Q Oil prices, USD Price per ton of oil imported in the Republic of Belarus 250 (left-hand scale) Price per barrel of Urals oil (right-hand scale) 150 I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV Source: the NBRB

10 The global market of potash fertilizers was characterized in 2016 by low demand due to a large volume of stocks accumulated by the importers. In 2016, the situation in the potash fertilizers market was complicated: the prices were declining and the negotiations for new contracts were protracted due to the large volume of stocks accumulated by the importers. The analysts forecasted impossibility of stabilizing the potash market if the agreements of major importance for the branch won t be signed. In mid-2016 the Belarusian Potash Company signed agreements on the delivery of fertilizers with India and China, that led to the growth of physical volumes and value of potash fertilizers exports. Dynamics of wold prices for potash fertilizers, USD per ton I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV Source: the NBRB. The prices for potash fertilizers exported by the Republic of Belarus remained practically unchanged in 2016 Q4 compared with the previous quarter: a drop by 0.8%. In 2016, the growth of the global economy slightly slowed down compared with 2015 due to the decline in the volumes of production in the industrialized countries. At the same time, the economic situation in the Russian Federation the main trade partner of the Republic of Belarus was gradually improving. According to the assessments of the International Monetary Fund (hereinafter the IMF ), the global economy grew in 2016, on the whole, by 3.1% versus 3.2% a year earlier, with the growth rates in the industrialized countries going up by 1.6% (a 0.5 percentage point decrease on the previous year) and in the transition economies and developing countries by 4.1% (the same as in 2015). The following main factors contributed to the slowing 10

11 down of the global economic growth: slowing down of the economic growth in the industrialized countries and decline in global trade. In 2016, the consumer price index (hereinafter the CPI) totaled 100.7% (100.3% in 2015) in the industrialized countries and 104.5% in the developing countries (104.7%). The economy of the euro area grew in 2016 by 1.7% (a decline by 0.3 percentage point compared with 2015). At that, the growth rates of its economy have been higher than those of the American one for the first time since The economic situation in the Russian Federation was characterized in 2016 by the manifestation of the attributes of the revival of the economic activity. The real GDP in 2016 (according to the first assessment of the Rosstat) dropped by 0.2% versus 2015, compared with a decline by 3.7% in At that, the annual growth rate of the output in Russia was evaluated as positive in 2016 Q4 and inflation went down to a considerable degree: consumer prices went up by 5.4% over Macroeconomic situation in the Republic of Belarus in 2016 was characterized by the recovery of economic activity in the second half of the year following its considerable decline in Despite a decline in the volumes of production under certain types of activities related to oil processing and in construction, the growth of production of agricultural products, transport services, and recovery of industrial production in 2016 H2 were conducive to the overall improvement of situation in the Belarusian economy. In 2016 (according to the first assessment), the volume of the GDP dropped by 2.6% versus 2015 (in 2015 by 3.8%). Decline in consumer activity, especially in 2016 H2, made an impact on the volume of retail turnover and services provided to households. Retail turnover declined in comparable prices in 2016 by 4.1% (by 1.3% in 2015). Paid services to households went down by 4.4% (by 2.3% a year earlier). An investment activity was still low. In 2016, investment in fixed capital dropped in comparable prices by 17.9% (in 2015, by 17.5%). In 2016, inflation was slowing down. Over the year, the CPI was lower than its level in 2015 by 1.4 percentage points, totaling 110.6%. 11

12 Foreign trade turnover dropped in 2016, but not to a such considerable degree as a year earlier, that was due to the recovery of economic activity in the countries main trade partners in 2016 H2. Reduction of external turnover of goods and services of the Republic of Belarus totaled 9%. Imports of goods and services went down by 8.7% to USD29.8 billion under the influence of the change in domestic demand; exports by 9.2% to USD29.8 billion that was, mainly, due to a decline in global prices for energy resources. Balance of foreign trade in goods and services in 2016 was negative in the amount of USD27.3 billion (in 2015, the balance was positive totaling USD121.2 million). 30 Structure of foreign trade in goods USD bn Export Import Intermediate goods Investment goods Consumer goods -40 Source: the NBRB A decline in investments in fixed capital by 17.9% in 2016 compared with 2015 resulted in the decreased investment import (by USD0.6 billion, or by 17.6%) and intermediate import (by USD1.6 billion, or by 8.5%). Import of consumer goods dropped by USD0.6 billion, or by 7.9%. A positive balance of receipts under export and payments under import dropped from USD2.7 billion in 2015 to USD2 billion in Reduction of global prices for oil and oil products led to shrinkage of the share of the US dollar and the euro in receipts in favor of the Russian ruble. 12

13 Shares of currencies in receipts and payments in foreign trade, % USD Euro Russian Russian USD Euro ruble ruble Receipts from export of goods and services, incomes and transfers Payments under import of goods and services, incomes and transfers Flexible exchange rate policy made it possible to maintain the price competiveness of the Belarusian export in Over 2016, the dynamics of the real effective exchange rate made a positive impact on the competiveness of the Belarusian goods in foreign markets. The real effective exchange rate of the Belarusian ruble, as measured by the producer price index, depreciated due to the weakening of the nominal effective exchange rate of the Belarusian ruble since early 2016 by 12.7%. % Change in indexes of the Belarusian ruble real exchange rate to the currencies of the countries which are major trade partners, as measured by the price index of industrial producers (to December 2009) Source: the NBRB. Improvement in the current account and increase in the capital inflow under the financial account contributed to the formation of the 13

14 surplus of the balance of payments. At the same time, investment attractiveness of the Republic of Belarus in 2016 was still at a low level. Where in 2015 the net inflow of capital under the financial account totaled only USD0.7 billion (1.2% of GDP), in 2016 it amounted to USD1.3 billion (2.7% of GDP). In 2016, current account deficit totaled USD1.7 billion (3.6% of GDP), having dropped by 7.6% compared with Main items of the capital inflow under the financial account Attraction of funds by enterprises Attraction of funds by banks USD bn Source: the NBRB Attraction of FDI on net basis Attraction of funds by the Government and the National Bank (with account of attraction of credits to finance the balance of payments) Reinvested income Foreign Direct Investment (FDI) in 2016 stood at USD1.2 billion (2.5% of GDP), compared with USD1.5 billion (2.7% of GDP in 2015), with the reinvested incomes worth USD0.7 billion accounting for its major part. In 2016, net inflow of direct investments to the non-financial sector of the economy, excluding the amount of reinvested incomes, totaled USD0.5 billion, being higher than the amount obtained in 2015 by USD0.2 billion. The budgetary policy in 2016 was aimed at ensuring wellbalancing. In 2016, the consolidated budget of the Republic of Belarus ran a surplus of 1.3% of GDP (in 2015, 1.8%). According to the preliminary data, its revenues amounted to BYN28.5 billion (30.2% of GDP). The expenses of the consolidated budget totaled 29.0% of GDP. The republican budget for 2016 also ran a surplus of 1.0% of GDP (1.7% of GDP in 2015). 14

15 A significant volume of gross external debt in the sectors of the economy bears risk for the country s financial stability, including, due to the high price of servicing it. Total payments to repay the principal amount of gross external debt and service it (excluding repayment of trade credits and banks short-term liabilities) amounted in 2016 to USD6.3 billion (interest and other payments accounted for 22.2% of this amount), which is equal to 13.2% of GDP, or 21.2% of goods and services export. The Government external debt of the Republic of Belarus amounted as at January 1, 2017 to USD13.6 billion, having grown over 2016 by USD1,198.9 million, or by 9.6%, adjusted for the currency translation differences. In 2016, the Government attracted external loans in the amount of USD1,934.9 million; repaid USD892.4 million. 15

16 CHAPTER 2. NON-FINANCIAL SECTOR In 2016, financial condition of the non-financial organizations sector saw no significant changes compared with At the same time, some positive changes manifested themselves: the share of unprofitable and low-profit organization went down, net losses of loss-making enterprises declined, and the share of loss-making economic entities in the total number of economic entities decreased. In 2016, non-financial organizations sold products, goods, works, and services by 1.2% more, in real terms 1, than in 2015 (a year earlier the proceeds dropped by 4.7%). The profit from the sale of products, goods, works, and services declined in real terms by 1.6%, with the pre-tax profit growing by 28.9%, and net profit by 43.6%. The share of unprofitable and low-profit enterprises (with profitability ranging from 0% to 5%) calculated with respect to the total number of reported organizations, went down in 2016 by 1.9 percentage points and totaled 58.3%. In 2016, 19% of organizations were in the red compared with 21.7% in The amount of net losses dropped 1.6 times. The amount of net losses per loss-making organization averaged BYN1.8 million in Grouping of organizations by return on sales in 2015 Grouping of organizations by return on sales in % 19.2% 3.6% 48.6% > % 4.5% 3.5% 45.7% > % 24.7% 1 Adjusted for the GDP deflator. 16

17 In 2016, the actual settlements discipline deteriorated, with high debt load of the non-financial sector of the Belarusian economy being still in place. A decline in monetary receipts to the enterprises accounts led to an increase in 2016 in the shares of overdue accounts payable and receivable in their total amounts (from 16.4% as at January 1, 2016 to 17.3% as at January 1, 2017 and from 22.4% to 22.9% respectively). % Share of overdue accounts receivable and payable in total amount thereof Source: the Belstat. Accounts receivable Accounts payable As at January 1, 2017, 75.2% of organizations had overdue accounts receivable (74.4% a year earlier) and 64.4% of organizations had overdue accounts payable (64.6% a year earlier). The continuation of the trend towards an increase in these shares may adversely affect the non-financial organizations creditworthiness in the future. The total debt load coefficient 2 of organizations dropped in 2016 by 6.3 percentage points, amounting to 691% as at January 1, % 90 Ratio of finished stock and average monthly volume of production Source: the Belstat. 2 Ratio of total accounts payable to average monthly revenues from the sale of products. 17

18 In 2016, a number of decisions aimed at improving financial soundness of the largest borrowers was taken. However, the problem aspects in the activities of certain enterprises turn stable, that indicates one of the major problems of the Belarusian economy low investment return on financial resources and inefficiency of their distribution among the real sector s branches. The amount of withdrawn circulating funds in the stocks of finished goods was still high. As at January 1, 2017, the stocks of finished goods in the industrial enterprises warehouses totaled BYN3,659.7 million, having grown over the year by 9.3%. An inter-agency working group established by the mutual decision of the Council of Ministers and the National Bank was operating in 2016, the activities of which were aimed at tackling the tasks of supporting the real sector of the economy, ensuring provision of credit resources to enterprises under the conditions of deterioration of their financial condition and lowering of the ability to use their own credit obligations due to negative macroeconomic trends. The decisions, which were taken at the meetings of the inter-agency working group, were aimed at improving financial soundness of the largest borrowers. For this purpose, the banks redistributed the debt burden on the borrowers as pertains to the change in maturity, lowering of interest rates and provision of a grace period (installment plan) for the payment of interest. As at January 1, 2017, debt of the top 100 borrowers totaled BYN13.6 billion, the volume of their debt refinanced by banks BYN5.5 billion. But, despite the debt refinancing and implementation of certain support measures, financial condition of many enterprises being considered is still complicated, and the problem aspects in activities of some of them turn stable. A high level of debt burden is observed against the background of the low level of paying capacity. A number of enterprises take inadequate measures designed to reduce expenses and improve their financial condition, including by means of alienating non-core assets. Individual enterprises have low level of use of production capacities and considerable stocks of finished products. It should be noted that state-owned enterprises make the major impact on the growth of the bad assets share in the assets exposed to credit risk. As at January 1, 2017, the volume of the state-owned enterprises bad assets 18

19 totaled BYN3.1 billion, having grown 2.7 times over the year; the share in the banking sector s bad assets 59.5%. In this regard, the risks generated by the state-owned enterprises of the real sector of the economy bear potential threat to the financial stability in the country. Unsatisfactory condition of a number of state-owned enterprises manifests one of the major problems of the Belarusian economy low investment return on financial recourses and inefficiency of their distribution among the real sector s branches. Agriculture is a case in point. The share of this branch in the GDP s structure by the types of economic activities fluctuated during the last decade within the range of 7-8%, moreover, in recent years it even felt down to some extent. At the same time, the share of agricultural enterprises in the outstanding debt of the corporate sector of the economy under the credits of banks and JSC Development Bank of the Republic of Belarus amounted in different years to % (with the upward trend), being practically 2 times higher than participation of the agricultural enterprises in production of the GDP. The share of agriculture in the structure of GDP, % The share of agriculture in debt under credits, % Interest rate on all banks credits in rubles, % including credits to agriculture, % The share of banks bad assets in the corporate segment, % including in the agricultural branch, % On the other hand, during the share of banks bad assets in the assets exposed to credit risk and placed in the agricultural branch was 1.5 times higher, on average, than in the corporate sector as a whole (in 2016, the excess was nearly twofold), while the interest rates on banks credits in the 19

20 national currency for agricultural enterprises were always considerably lower than for enterprises of other branches (in separate periods up to 2 times). Having regard to the form of ownership dominating in the agriculture, the above-mentioned factors underline once again the need for improving efficiency of the state-owned enterprises as the key factor of maintaining financial stability in the country. The population s debt under credit went down in real terms, with the households debt burden remaining practically unchanged compared with the previous year. In 2016, the credit amounts in real terms (adjusted for the consumer prices growth) owed by natural persons to banks were down by 5.9% (by 2.5% in 2015). At the same time, households debt burden 3 in 2016 remained practically unchanged and amounted to 12.3% as at early 2017 (as at early %) due to a decline in the population s real monetary incomes. In 2016, as well as in the previous years, households were a net creditor of the banking system of the Republic of Belarus. The natural persons debt to the banking sector amounted as at year-end 2016 to 37.5% of the volume of their deposits, as at year-end %. At the same time, households debt in Belarusian rubles as at late 2016 exceeded the level of households ruble deposits by 57% (as at year-end 2015 by 70%). Households debt in foreign exchange to the banking sector continued to decline due to the persisting ban on lending to households in foreign exchange, with the natural persons foreign exchange deposits going down as well. In order to assess the degree of availability for households of purchasing housing it is necessary to consider the conditions, under which such purchasing is carried out. Since a significant part of population purchases housing on credit (on the market or soft terms), an efficient instrument of analyzing the availability of purchasing housing is the debt service-to-income ratio (DSTI), which represents itself the ratio of the flow of payments under the existing debt (including both the repayment of the principal amount under credit, as well as the payment of interest) to the amount of current expenses. In other words, the DSTI shows what share of income the borrower should regularly direct to repay credit (the level of debt burden). 3 The ratio of the debt under credits granted by banks to households to the annual volume of their income. 20

21 The figure below represents the DSTI calculated for the family of two persons, each of which receives the average income for Belarus, under the condition that a credit for construction (purchasing) of a one-room flat of the area 40 square meters, which is located in the center of Minsk, was obtained. 180 Debt service-to-income ratio under different terms of lending, % Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q preferential DSTI market DSTI DSTI for families (3 and more children) The DSTI is given for different terms of lending. 4 The heaviest burden is on the borrowers using market lending (only in 2010 the corresponding DSTI dropped up to 55%, i.e. net income of one family member was sufficient for servicing debt). Through much of the last five years, the market DSTI amounted to over 100%, indicating the low level of availability of market lending for the majority of population of Belarus. Only at the end of 2016 the market DSTI dropped to 89%, with declining of the interest rates in the credit market being the key factor of this process. 4 Market lending the loan amounts to 80% of the housing price, the interest rate is set on the conditions of a bank, and the term of lending is 25 years; preferential lending the loan amounts to 90% of the housing price, the interest rate amounts to fifth part of the refinance rate, but no less than 5%, and the term of lending is 20 years; and preferential lending to the families with many (three and more) children the loan amounts to 100% of the housing price, the interest rate amounts to 1%, and the term of lending is 40 years. 21

22 CHAPTER 3. FINANCIAL SECTOR In 2016, the banking sector continued to play the dominant role in carrying out financial intermediation functions. At the same time, nonbank segments of the financial sector were developing at the outstripping rates. In 2016, the financial sector s aggregate assets 5 amounted to BYN101.4 billion (having grown over the year by 3.6%), or 107.5% of the GDP, of which the share of the National Bank accounted for 21.1%, banks and nonbank financial institutions 65.5%, insurance sector 2.8%, leasing companies 3.2%, JSC Development Bank of the Republic of Belarus 5.9%, and State Institution Agency for Guaranteed Repayment of Natural Persons Bank Deposits 1.4%. The share of assets of microfinance institutions and assets of the JSC Belarusian Currency and Stock Exchange does not exceed 0.05% of the financial sector s assets on aggregate. Structure of the financial sector's assets as at January 1, 2016, % Structure of the financial sector's assets as at January 1, 2017, % National Bank 65.5 Microfinance institutions Development Bank 21.1 Banks and non-bank financial institutions Belarusian Currency and Stock Exchange Source: the NBRB. Insurance sector Leasing companies Source: the NBRB. Agency for Guaranteed Repayment of Natural Persons Bank Deposits At the same time, over 2016 the share of banks and non-bank financial institutions in the financial sector s assets dropped by 1.0 percentage point (with the nominal growth of the banks and non-bank financial institutions assets by 2.1%), while the shares of JSC Development Bank of the Republic of Belarus, the insurance sector and the segment of leasing companies grew 5 Assets of the National Bank of the Republic of Belarus, banks and non-bank financial institutions, insurance sector, segment of leasing companies, microfinance organizations, JSC Development Bank of the Republic of Belarus, JSC Belarusian Currency and Stock Exchange, and State Institution Agency for Guaranteed Repayment of Natural Persons Bank Deposits. 22

23 by 0.4, 0.2, and 0.2 percentage point respectively, indicating the outstripping development of the non-bank segment of the financial market. In 2016, the broad money supply-to-gdp ratio, which is an important indicator characterizing the overall level of development of the financial sector and the economy as a whole, stood at 35.7%, increasing by 1.8 percentage points compared with BANKING SECTOR As at January 1, 2017, the banking sector of the Republic of Belarus comprised 24 operating banks, including 19 banks with the participation of foreign capital. Over 2016, the state s share in the banking sector s aggregate authorized capital dropped from 82.0% to 80.3% and, at the same time, the share of foreign capital went up from 15% to 16.7%. The share of other investments remained at the level of 3.0%. As at January 1, 2017, 5 stateowned 6, 5 private, and 14 banks controlled by foreign capital were operating. As at January 1, 2017, 5 banks underwent bankruptcy and liquidation procedures. A high level of concentration of the banking sector s assets and capital was still in place. As at January 1, 2017, five largest banks accounted for 79.1% of assets and 73.2% of capital of the banking sector (79.5% and 75.3% respectively in early 2016). The Herfindahl-Hirschman index 7 calculated on the basis of assets grew to a small extent from and The same index calculated on the basis of capital declined from to The distribution of the banking sector s assets and capital became more even to a slight extent. The Gini index 8 calculated on the basis of assets and capital was and (0.767 and as at January 1, 2016). 6 Here and hereinafter: - state-owned banks (SOBs) a group of banks with the majority interest in the authorized capital belonging to the Government agencies and legal persons of state ownership; - foreign banks (FBs) a group of banks with the majority stake in the authorized capital belonging to the foreign capital; and - private banks (PBs) a group of banks that are not included into SOBs and FBs groups. 7 The Herfindahl-Hirschman index reflects the extent of concentration of the indicator and takes on values from 0 to1. Value 0 corresponds to minimum concentration, less than 0.10 to low concentration, from 0.10 to 0.18 to average concentration, and above 0.18 to high concentration. 8 The Gini index allows for evaluating the extent of disparity indicating how evenly one or another variable is allocated among the participants. Value 1 corresponds to the total concentration and value 0 to the parity of all participants. 23

24 In 2016, the banking sector s performance indicators were still at a high level. In 2016, the banking sector earned profit of BYN1.0 trillion (before tax), a BYN0.29 billion, or 39.7%, increase on the previous year. One of the operating banks made nominal loss as at the year-end As at January 2017, the banking sector s earned profit (after tax) totaled BYN884.9 million. Growing profit of the banking sector made an impact on the improvement of the banking sector s efficiency indicators, that manifested itself in the growth of the return on assets indicators (from 1.32% to 1.63%) and capital indicators (from 10.41% to 12.60%) of the banking sector. % Source: the NBRB. Profitability of the banking sector (before tax) Return on equity Return on assets*100 (right-hand axis) % Discrimination between constituent elements in the structure 9 of the return on equity of the banking sector shows that an increase in the profit margin and the level of risk were the main factors behind an upward pressure on the return on equity in At the same time, a decline in the return on the risk weighted assets and financial leverage curbed the growth of the return on equity. Dynamics of change in the profitability indicators had a multidirectional character over the year. Over 2016, the banking sector s capital adequacy indicators were higher than requirements set for an individual bank. The regulatory capital quality worsened to a slight degree. 9 Four components may be singled out in the structure of the return on equity: the profit margin; the return on riskweighted assets; the level of risk; and the financial leverage. The profit margin is calculated as the ratio between profit (before tax) and net revenues from banking; the return on risk-weighted assets as the ratio between net revenues from banking and risk-weighted assets; the level of risk as the ratio between risk-weighted assets and all assets; and the financial leverage as the ratio between assets and equity. 24

25 Since January 1, 2016, the regulatory capital has been calculated in line with the approaches specified by the international standards Basel III (the first official data on calculation in line with new approaches were obtained as at February 1, 2016). Over 2016, the amount of the banking sector s risk-weighted assets 10 was up by BYN5.0 billion, or by 12.0% (in 2015, the growth accounted for BYN6.1 billion, or 17.2%). The regulatory capital adequacy changed to an insignificant degree from 18.7% to 18.6%, with the prescribed requirement for an individual bank being 10%. The dynamics of the regulatory capital adequacy ratio varied in different groups of banks. For example, the capital adequacy ratio of stateowned banks decreased from 19.7% in early 2016 to 17.7% as at January 1, 2017, despite a 19.1% growth of risk-weighted assets over the year. The capital adequacy ratio of foreign banks went up from 16.6% to 19.8%, with the risk-weighted assets of this group decreasing over 2016 by 0.3 percentage point. As for the group of private banks, the growth of risk-weighted assets by 22.4% had a negative impact on the capital adequacy ratio, which decreased from 25.4% to 24.1% over In 2016, along with the growth of the aggregate amount of the banking sector s Tier 1 capital (by BYN0.5 billion, or by 8.2%) banks were also raising their regulatory capital at the expense of the sources that generate Tier II capital. An increase in the registered authorized capital of banks and the revaluation of fixed assets became the main sources of growth of the banking sector s regulatory capital in Assets evaluated in terms of the level of credit, market, and operational risks for the purpose of calculating the regulatory capital adequacy. 25

26 20 Banking sector's capital adequacy indicators % Regulatory capital adequacy Core capital adequacy (Basel II) / from February 1, 2016 Tier I capital adequacy (Basel III) Capital-to-assets ratio Source: the NBRB. In 2016, banks Tier II capital grew by BYN0.4 billion, or by 23.0%. As a result, the quality of the regulatory capital worsened the Tier II / Tier I ratio grew by 3.8 percentage points to 31.3% compared with January 1, In 2016, credit risk was the most significant one to sustainable operation of the banking sector. This was associated with the potential of credit risk accumulated due to worsening of financial indicators of the enterprises of the real sector of the economy, primarily, of the stateowned ones, on the background of continuing decline in economic activity and heavy debt load on enterprises. Another factor of growth of the credit risk potential is a significant share of liabilities owed to banks in foreign exchange in the enterprises debt under credit in the absence of the corresponding receipts in foreign exchange. In 2016, the banking sector s assets exposed to credit risk dropped by 0.8% (or by 3.8% excluding exchange rate fluctuations) and totaled BYN40.2 billion in equivalent. In 2016, assets in the national currency grew by 1.2%, while assets denominated in foreign exchange, vise versa, declined by BYN0.9 billion in equivalent (by 7.1%). In 2016, the value of the indicator characterizing the overall level of the banking sector s exposure to credit risk 11 increased against the background of deceleration in credit processes and amounted to 59.8% by the end of the year (55.0% as at year-end 2015). 11 The ratio of assets weighted for credit risk for the purpose of calculating the regulatory capital adequacy to total assets. 26

27 40 Growth of assets exposed to credit risk % Total assets Extended to economic entities Extended to households Source: the NBRB. In 2016, the credit risk profile (the structure of assets exposed to credit risk classified under risk groups) worsened against the background of declining volume of credit investments. The share of assets classified under Group I dropped by 7.3 percentage points to 71.5%. Accordingly, the share of assets forming Group II increased by 1.8 percentage points and stood at 14.6%. The shares of assets classified under Groups III, IV, and V accounted for 8.7% (a 3.8 percentage points increase in 2016), 2.2% (a 0.8 percentage points increase), and 1.9% (a 1.3 percentage points increase) respectively. By the turn of 2017, the banking sector s bad assets 12 totaled BYN5.1 billion, growing over 2016 nearly 2 times (by 85.7%), or by BYN2.4 billion. Assets classified under Group V were responsible for the largest increase of 3.3 times, while assets forming Group IV increased 1.6 times, and assets forming Group III grew 1.8 times. Structure of bad assets as at January 1, 2016, % Structure of bad assets as at January 1, 2017, % Source: the NBRB. Group III Group IV Group V 68.4 Source: the NBRB. Group III Group IV Group V 12 Assets classified under Groups III, IV, and V for the purpose of establishing special provision. 27

28 The share of bad assets in the banking sector s total assets exposed to credit risk went up from 6.83% as at January 1, 2016 to 12.79% at the turn of The share of bad assets denominated in the national currency grew over the year from 6.26% to 12.41%; in foreign currency from 7.22% to 13.05%. Debt under credit owed by a number of largest state-owned borrowers is classified under risk Group I and Group II due to the availability of government guarantees. At the same time, their financial stability indicators suggest that the debt owed by them may be classified under risk Group III, Group IV, and Group V. In the absence of government guarantees the share of the banking sector s bad assets in the assets exposed to credit risk could be larger. The volume of prolonged debt grew over 2016 by 88.1%, uncollectable debt written off the balance sheet by 60%, with the banking sector s loan portfolio 13 declining by 4.9%. Dynamics of a credit gap, i.e. deviation of the current level of credits issued to the economy from the long-term equilibrium trend (the level of credit debt which is considered to be normal for the given country having regard to its historical experience and the current macroeconomic and monetary conditions of functioning), may be an assessment of the credit risk potential in future. The carried out assessments of credit risk evidence that by the end of 2016 the credit gap approached the equilibrium. In other words, at the end of the period under review the debt under credit did not make any significant pressure on the formation of imbalances in the economy. 13 Legal persons accounted for the bulk of debt written off the balance sheet 89.7%. 28

29 12,000 10,000 8,000 6,000 4,000 2,000 0 Dynamics of the credit gap in the Republic of Belarus Credits to the economy in prices as of January 2000, BYN bn. Equilibrium level of lending (by the model), BYN bn. Credit gap (right-hand axis), % The legal persons loan portfolio was the main source of credit risk. The level of systemic risks in the sphere of lending to households remained very low. The dominating part of credit risk of the banking sector is concentrated in the legal persons loan portfolio. As at January 1, 2017, the corporate sector accounted for 68.9% of assets exposed to credit risk. The structure of assets by types of economic activity remained practically unchanged during the year. According to the data of banking reporting: the processing and mining industry accounted for 52.6% of the banks total debt under credit; wholesale and retail trade, repair of cars and motor cycles 16.5%; and agriculture, hunting and forestry 10.0%. Lending to entities of the agricultural, forestry and fishing industries, economic entities of the construction industry and transactions involving real estate poses the highest risks: as at January 1, 2017, the share of bad assets in banks assets exposed to credit risk stood at 34.7%, 24.7 and 25.2% respectively (the share of bad assets in the industrial sector is equal to 17.1%). Banks claims on natural persons grew over 2016 by BYN0.27 billion, amounting to BYN7.3 billion (a 3.8% growth) as at January 1, The share of bad assets in the assets loaned to natural persons totaled 0.79% as at late At the end of 2016, a minor increase in the volumes of consumer lending was observed, while the share of non-performing consumer loans accounted for 2.93%, having declined by 1.02 percentage points since the beginning of 29

30 the year. Bad debt on the loans for purchase of real estate was insignificant and accounted for only 0.16% as at January 1, Banks with foreign capital and private banks that specialize in retail lending assume the highest risks in terms of lending to households. For example, if at January 1, 2017 state-owned banks accounted for 79.9% of retail lending and 16.0% of related bad assets, Belarusian banks with foreign and private capital accounted for only 21.1% of retail lending and 84.0% of bad assets. The share of assets exposed to credit risk was extended by the banking sector to economic entities within financing the implementation of government programs and activities. The share of legal persons debt secured by guarantees of the Government of the Republic of Belarus and local executive and administrative bodies in bank assets exposed to credit risk stood at 14.6% as at January 1, 2017 and did not exceed 16.5% during 2016 as a whole. The share of bad assets of this category grew almost twice over 2016 (12.06% as at the year-end). The coverage level of established special provisions on the assets exposed to credit risk was 5.77%, having grown since early 2016 by 1.04 percentage points. The level of coverage of bad assets by actually established provisions thereon amounted to 33.9% as at the end of the year. In 2016, the practice of rendering financial support to the economic entities by means of providing a grace period (payment by installments) in repaying credits issued to finance government programs and measures continued due to the increased level of failures in repaying credits and growing level of bad debts. In particular, as at January 1, 2017, banks and the JSC Development Bank of the Republic of Belarus provided a grace period (payment by installments) in repaying debts under credits to the organizations of the agricultural complex worth BYN1,519.1 million within the measures established by Edict of the President of the Republic of Belarus No. 348 On Measures Designed to Raise the Efficiency of Work of the Organizations of the Agricultural Complex dated July 17,

31 In 2016, the banking sector s sensitivity to the potential deterioration in the quality of the loan portfolio remained at a high level. The materialization of the scenario in which the quality of the banking sector s loan portfolio is deteriorating would result in the failure of one bank (with its share of assets in total assets of the banking sector accounting for 1.4%) to comply with the regulatory capital requirements. Furthermore, an additional capital of BYN12.8 million (BYN66.9 million as at January 1, 2016) would be needed in order that this bank comply with the prescribed requirement. The banking sector would continue to incur significant losses if the above shock materializes they would be 3 times as much as the profit earned by banks over 12 months (4 times as at January 1, 2016), amounting to the third part of the capital. Stress testing results Indicators over quarter Change over 12 months Capital adequacy ratio, % Actual value Calculated value Change Losses in respect of profit over 12 months, times Ratio Losses versus capital, % Ratio The amount of additional investments in capital, BYR billion Sum The banking sector as a whole would be able to withstand potential deterioration in the quality of the loan portfolio: capital adequacy ratio would amount to 14.1%, with the prescribed requirement for an individual bank being 10%. In 2016, with a view to tackling the current problems of institutions of, primarily, the private form of ownership, Edicts of the President of the Republic of Belarus on measures on financial recovery of legal persons were enforced. The analogous decisions of the Head of the state were drafted with respect to the organizations of the agricultural complex for their implementation in In 2016, the banking sector maintained liquidity indicators values that were in excess of secure functioning requirements prescribed for an individual bank. 31

32 As at January 1, 2017, the banking sector s liquid-to-total assets ratio stood at 30.8%, with the requirement for an individual bank being 20%, and the short-term liquidity ratio was 2.09, with the minimum requirement for an individual bank being equal to 1. % Liquid-to-total assets ratio Current liquidity (right-hand axis) Source: the NBRB. Banking sector liquidity indicators Short-term liquidity*100 (right-hand axis) The liquidity coverage ratio 14 calculated by banks in compliance with International Standards Basel III reflects the situation with liquidity in 2016 and the banking sector s vulnerability to the relevant risk fairly well. Meanwhile, this indicator is not deemed to be a prudential requirement and is used by the National Bank for monitoring liquidity. In 2016, the average weighted liquidity coverage ratio for the banking sector grew from 117.6% to 170.6%. 14 The liquidity coverage ratio (LCR) characterizes the ratio between the sum of highly liquid assets and net outflow of monetary funds during next 30 days. The LCR shows how existing unencumbered highly liquid assets enable the bank to continue its operation for at least one month in the context of hypothetical stressful situation which is included in the calculation of the indicator. More specifically, considered stress scenario suggests that such events as the outflow of the portion of deposits held by households, partial loss of major funding sources, and the growth of market volatility would take place and is taken into account in the LCR multiplying balances of various banks liabilities by corresponding coefficients subject to the probability of the above funds outflow. The LCR recommended value is 100%. 32

33 Liquidity coverage ratio by groups of banks % Source: the NBRB. Banking sector Large banks Medium-sized banks Small banks In 2016, predominantly long-term lending in the context of insufficient resources with corresponding maturities was conducive to the increase in the banking sector s exposure to liquidity risk. Thus, in 2016 the gap between the banking sector s long-term assets and liabilities grew almost threefold. Households and economic entities funds constituted the main sources of replenishing the resource base of the banking sector in In 2016, funds attracted by natural persons grew by 1.9%, or BYN0.39 billion. The volume of funds attracted from economic entities increased by 3.9% (by BYR0.47 billion) Structure of liabilities as at January 1, 2016, % 19.0 Government Enterprises Banks Source: the NBRB NBRB Households Non-resident Structure of liabilities as at January 1, 2017, % 17.7 Government Enterprises Banks Source: the NBRB NBRB Households Non-resident In 2016, the amount of resources provided by the National Bank to the banking sector went down by 75.3%, from BYN1.6 billion to BYN0.4 billion. The share of the National Bank s resources in the structure of the banking sector s liabilities went down to a considerable extend and stood at 33

34 0.6% as at January 1, The share of the Government s resources increased by 1.6 percentage points to 9.8% (a decrease by BYN1.1 billion to BYN6.3 billion in absolute terms). In 2016, the degree of the banking sector s resistance as a whole became higher in respect of potential withdrawal by natural and legal persons of 20% of their funds. Given a 20% outflow of deposits held by households and enterprises, 11 banks whose assets account for 88.1% of the total amount of the banking sector s assets would lack liquidity (in early 2016, there were 10 such banks, with their assets accounting for 72.5% of the total amount of assets). If the scenario in question is materialized: - 3 banks (60.2% of the total amount of assets) would fail to comply with the liquidto-total assets ratio; - 2 banks (1.9% of the total amount of assets) would fail to comply with the shortterm liquidity ratio; - 9 banks (86.2% of the total amount of assets) would fail to comply with the instant liquidity ratio; and - 7 banks (73.3% of the total amount of assets) would fail to comply with the current liquidity ratio. Stress testing results Indicators January 1, 2016 October 1, 2016 January 1, 2017 Change over the over 12 quarter months Instant liquidity ratio, % Actual value Calculated value Change Current liquidity ratio, % Actual value Calculated value Change Short-term liquidity ratio, times Actual value Calculated value Change Liquid-to-total assets ratio, % Actual value Calculated value Change In the event of the shock materialization in the banking sector as a whole, the values of the current liquidity ratio and of the liquid-to-total assets ratio would be higher than the prescribed minimum requirements. The size of gross external debt of the banking sector of the Republic of Belarus in relation to aggregate banks liabilities and the National Bank s gold and foreign exchange reserves is still high. 34

35 In 2016, the amount of the banking sector s external debt fell by 8.1%, or USD0.5 billion, and amounted to USD5.98 billion as at January 1, Long-term funds (the maturity of which exceeded one year) dominated the structure of external borrowings. As at January 1, 2017, their share in the total amount of foreign debt stood at 65.3%. As at January 1, 2017, Russia and Germany were the largest creditors of the banking sector of the Republic of Belarus. The Belarusian banks owe to the residents of these countries USD3.5 billion and USD0.7 billion in equivalent, respectively. As at January 1, 2017, the Belarusian banks controlled by foreign capital attracted 55.1% of non-residents total funds in the banking sector, including banks controlled by Russian capital 46.7%. The share of funds attracted from non-residents in the Belarusian banks liabilities went down from 19.0% to 17.7%. The size of gross external debt of the banking sector of the Republic of Belarus in relation to aggregate banks liabilities and the National Bank s gold and foreign exchange reserves is an identification of heightened risks to stable functioning of banks. As at January 1, 2017, the ratio of the banking sector s external debt to the international reserve assets totaled 121.4%. Liabilities to non-residents by country, % As at January 1, 2016 Russia As at January 1, 2017 Russia Germany Germany Austria Poland Italy Great Britain Switzerland Austria Poland Italy Cyprus Switzerland Source: the NBRB. Other countries Source: the NBRB. Other countries 35

36 In 2016, the degree of the banking sector s resistance to the outflow of nonresidents funds remained at a low level. Given a 50% outflow of non-residents funds, there would be 14 banks lacking foreign exchange liquidity, with the share of such banks assets standing at 81.3% of all assets of the banking sector (nearly 10 percentage points below the level as at the beginning of the year). In the banking sector as a whole, only one liquidity requirement set for corresponding liquidity ratio in all currencies the current liquidity requirement (a decline up to 61.2%) would be violated. Stress testing results Indicators January 1, 2016 October 10, 2016 January 1, 2017 over the quarter Change over 12 months Instant liquidity ratio in foreign currency, % Actual value Calculated value Change Current liquidity ratio in foreign currency, % Actual value Calculated value Change Short-term liquidity ratio in foreign currency, times Actual value Calculated value Change Liquid-to-total assets ratio in foreign currency, % Actual value Calculated value Change In the event of the above shock materialization the following ratios would be below the prescribed requirements: the current liquidity ratio at 10 banks (with the assets share of 74.8%), the short-term liquidity ratio at 5 banks (with the assets share of 9.7%), the instant liquidity ratio at 8 banks (with the assets share of 33.9%), and the liquid-to-total assets ratio at 5 banks (with the assets share of 8.5%). In 2016, an increase in indicators of the banking sector s open foreign exchange position was responsible for a slight growth in its sensitivity to potential fluctuations in exchange rates of foreign currencies. Meanwhile the shares of the foreign currency constituent in the banking sector s assets and liabilities went down over the year saw an increase in indicators of the foreign exchange position characterizing the banking sector s direct sensitivity to the risk of potential fluctuations in exchange rates of foreign currencies, an indication of the increase in the overall level of the banking sector s exposure to foreign 36

37 exchange risk. Over the year, the ratio of the total open foreign exchange position to the banking sector s regulatory capital was within the requirement prescribed for individual banks (no more than 10%), amounting to 6.98% as at January 1, 2017 (4.47% as at January 1, 2016). In 2016, the overall majority of banks maintained long foreign exchange position. As at January 1, 2017, the indicator of the banking sector s net open foreign exchange position accounted for 6.39% of the regulatory capital. % 18 Banking sector's open foreign exchange position (OFEP) Total OFEP-to-capital ratio Net OFEP-to-capital ratio Source: the NBRB. By the turn of 2017, the share of foreign currency claims in the total amount of clients debt on lending and other asset-related operations dropped to 56.2% (57.8% by the turn of 2016), while clients debt under credit in foreign exchange (in dollar terms) dropped by 13.2% over the year and in the national currency by 2.2%. The share of attracted foreign currency resources in the total amount of the banking sector s liabilities decreased from 67.3% to 64.7%. 37

38 Foreign currency constituents-to-total amount ratio Clients funds Clients debt under credit Households funds (right-hand axis) Enterprises funds (right-hand axis) Source: the NBRB. % In 2016, households preferred to place savings in deposits in Belarusian rubles. Natural persons deposits in the national currency grew by 12.4%, in foreign exchange (in the US dollar terms) went down by 9.5%. The share of the foreign currency constituent in the total amount of natural persons deposits attracted by banks declined over the year from 79.1% to 76.3%. The share of funds in foreign exchange in the total amount of deposits held by economic entities in 2016 went down up to 63.7%, with the balance of deposits in foreign exchange (in US dollar terms) declining by 11.9% and the balance of enterprises funds in Belarusian rubles growing by 24.5%. The banking sector s vulnerability to the devaluation of the national currency against foreign currencies grew in 2016 to an insignificant degree and was still at the low level. As at January 1, 2017, 2 banks had short foreign exchange position with their insignificant share in total assets of the banking sector (10%). A 30% depreciation of the Belarusian ruble against foreign currencies would lead to a decline in the banking sector s regulatory capital adequacy ratio by 2 percentage points, on the whole, and would stand at 16.6%, which is an indication of the banks high capacity to withstand foreign exchange risk. Stress testing results Indicators January 1, 2016 October 1, 2016 January 1, 2017 over the quarter Change over 12 months Capital adequacy ratio, % Actual value Calculated value Change Losses versus profit over 12 months, times Ratio Losses versus capital, % Ratio

39 In 2016, the overall level of the banking sector s exposure to interest rate risk went up. At that, the risk that banks may incur losses in case of changes in interest rates on assets and liabilities denominated in foreign currency was higher than the same risk under transactions in Belarusian rubles. Key indicators characterizing the banking sector s exposure to interest rate risk (the relative change in net interest income and economic cost of capital) attest to the increase in banks sensitivity to the changes in interest rates on claims and liabilities denominated both in the national currency and foreign exchange. In 2016, the volumetric and temporal structure of assets and liabilities denominated in the national currency and sensitive to the changes in interest rates improved: positive cumulative interest rate gap between assets and liabilities in the national currency totaled BYN0.8 billion. Data for early 2017 showed that, given a 1% per annum change in the yield on claims and liabilities denominated in the national currency, the banking sector s net interest income will change by 0.46% (by 0.07% in early 2016). The potential relative change in the economic cost of the banking sector s capital will amount to 0.89% (0.76% in early 2016). 40 Relative gap between Belarusian rubles-denominated assets and liabilities sensitive to the change in interest rates % up to 30 days from 31 to 90 days from 91 to 180 days from 181 days to 1 year over 1 year January 1, 2016 January 1, 2017 January 1, accumulation curve January 1, accumulation curve Source: the NBRB. 39

40 The banking sector s exposure to the interest rate risk associated with financial instruments denominated in foreign exchange increased in The volumetric and temporal structure of assets and liabilities denominated in foreign exchange and sensitive to changes in interest rates worsened in The cumulative interest rate gap between claims and liabilities denominated in foreign exchange and with maturities of up to one year widened by BYN4.1 billion in 2016 and amounted to BYN5.8 billion as at January 1, The relative change in the banking sector s net interest income increased from 1.09% as at January 1, 2016 to 3.56% as at January 1, 2017, given a 1% per annum change in interest rates on assets and liabilities denominated in foreign exchange. At the same time, an increase in the net interest margin on financial instruments denominated in foreign exchange from 4.12% to 4.30% was observed in An increase, compared with the beginning of the year, in the potential relative change of the economic cost of the banking sector s capital by 0.81 percentage points from 0.77% to 1.58% is also an indication of the increase in the banking sector s exposure to the risk of change in the yield on assets and liabilities denominated in foreign exchange. 15 Relative gap between foreign exchange-denominated assets and liabilities sensative to change in interest rates % up to 30 days from 31 to 90 days from 91 to 180 days from 181 days to 1 year January 1, 2016 January 1, 2017 January 1, accumulation curve Source: the NBRB. January 1, accumulation curve over 1 year 40

41 As at January 1, 2017, the banking sector s sensitivity to the upward movement of yield curves in the national currency saw no significant changes and in foreign exchange went up compared with January 1, The ability of the banking sector as a whole to generally withstand such shocks will remain at high level. The parallel 1,500 basis points upward movement of the yield curve in Belarusian rubles will incur the banking sector extra costs which would amount to the level of the annual profit made by banks. At that, the capital adequacy requirement of all banks would be higher than regulatory minimum. The banking sector s regulatory capital adequacy ratio would stand at 16.8%. Stress testing results Indicators January 1, 2016 October 1, 2016 January 1, 2017 over the quarter Change over 12 months Capital adequacy ratio, % Actual value Calculated value Change Losses versus profit over 12 months, times Ratio Losses versus capital, % Ratio As at January 1, 2017, given a 1,000 basis points upward movement of the yield curve in foreign exchange, the capital adequacy ratio would decline in 16 banks with their share of assets in the total amount of the banking sector s assets accounting for 82.4% (in 13 banks accounting for 74.9% of assets as at January 1, 2016). However, the ability of the banking sector as a whole to withstand such shock would remain at high level. Stress testing results Indicators January 1, 2016 October 1, 2016 January 1, 2017 over the quarter Change over 12 months Capital adequacy ratio, % Actual value Calculated value Change Losses versus profit over 12 months, times Ratio 0, ,4 0,6 Losses versus capital, % Ratio 0,2 1,9 6,5 4,6 6,3 In 2016, the overall relative level of the banking sector s exposure to financial risks remained at the previous level. 41

42 The diagram of risks is an integrated (aggregated) evaluation of the relative level of the banking sector s soundness which is based on a combination of the analysis of the dynamics of financial soundness indicators and the results of the banking sector s stress testing within the foreseeable historic time period. The scheme for plotting composite indicator which evaluates the level of risks in the banking sector is based on the use of multiple indicators characterizing various factors affecting its soundness and employs the system of weighting coefficients which show the significance of each factor when identifying the overall level of risks. The majority of weights in the suggested algorithm were assigned in an expert manner based on the experience and knowledge of the National Bank s specialists. However, an expert survey into banks was conducted with a view to refining the evaluations of the significance of the main risk factors made by experts of the National Bank as well as enhancing the objectiveness of the integrated evaluation of the banking sector s exposure to risks which made it possible to take into account their viewpoint when identifying the significance of the main characteristics of the banks soundness. Diagram of risks weighted for their significance, as at January 1, 2017 Capital adequacy Credit risk Liquidity risk January 1, 2016 January 1, 2017 Return rate Foreign exchange risk Source: the NBRB. Interest rate risk In 2016, the accumulated potential of credit risk made an upward pressure on the growth of the banking sector s exposure to risks. But, the measures taken by the National Bank, which were aimed at restructuring the banks credit portfolio made in possible to reduce the impact of credit risk and improve the banking sector s liquidity. 42

43 Dynamics of the banking sector s level of risks Overall level of risks Liquidity risk Capital adequacy Credit risk Foreign exchange risk Interest rate risk Return rate In 2016, the majority of banks noted the change in business activity in the economy, deterioration in the financial standing of the borrowers and foreign economic factors as the main sources of risk. A significant impact on the increase in risks was also made by the policy designed to reduce interest rates, which was implemented over the year (a factor of change of interest rates in the domestic financial market). Sources of risk Number of banks that noted corresponding source 2016 Q Q Q Q4 Change in prices for goods and services Change in the business activity in the economy Deterioration in the financial standing of debtors Change in interest rates in the domestic financial market Insufficient liquidity Change in the situation in the domestic foreign exchange market Change in the situation in the domestic stock market Change in the situation in the domestic real estate market Change in approaches to the regulation of the economic activity Change in approaches to the regulation of banking External economic factors Increased competition in the banking sector Operating incidents The Republic of Belarus s country risk from a bank shareholder s viewpoint

44 3.2. INSURANCE SECTOR As at January 1, 2017, 19 insurance companies, including eight stateowned companies and companies in which more than 50% of stakes were owned by the state (hereinafter state-owned insurance organizations ) carried out insurance activities in the insurance market of the Republic of Belarus; 29 insurance brokers conducted intermediary insurance activities 15. Three insurance companies conducted exclusively voluntary life insurance and supplementary pension insurance according to the legislation, one company was involved in reinsurance activity. Eight insurance companies were foreign-owned. In 2016, the share of foreign capital in the aggregate authorized capital of the insurance companies of the Republic of Belarus increased by 1 percentage point and totaled 4.1% (the quote of foreign investors participation in the authorized capital of the insurance companies of the Republic of Belarus is 30%). Two insurance organizations (Belgosstrach and Beleximgarant) and an insurance organization which is involved, exclusively, in reinsurance (state enterprise Belarusian National Reinsurance Organization ) have financial soundness rating assigned by international rating agencies. As at January 1, 2017, the rating of the above-mentioned organizations assigned by Fitch Ratings was B-, stable outlook 16. In 2016, the bulk of insurance business was still concentrated in 10 insurance companies (mainly state-owned 17 ), which held leading positions in terms of assets values. In 2016, these 10 companies accounted for 93% of the insurance sector s total assets. In 2016, the insurers equity capital slightly increased, totaling BYN1.4 billion as at January 1, The share of the authorized capital in the insurance sector s equity capital grew over the reported period to a small degree (by 0.4 percentage point) and amounted to 79.5%. The insurance organizations assets went up to a greater extent than their equity capital (by 11.9% and 4.7% respectively), that led to further decrease in the ratio 15 At that, three insurance companies and two insurance brokers are undergoing liquidation procedure; the decisions on termination of special permits (licenses) for insurance activities were taken with respect to one insurance organization. 16 RAEX rating agency ( Expert RA, the Russian Federation) assigned A rating (high level of credibility) to the Public Joint Stock Insurance Company Ingosstrakh Insurance Company. 17 Share of the state-owned insurance companies assets, included in the said 10 companies, in the total amount of the insurance sector s assets grew to a small degree from 89.3% to 89.5%. 44

45 between the equity capital and the assets of the insurance sector from 54.0% to 50.5%. In 2016, the trend towards the growth of insurance premiums volume of both voluntary and compulsory insurance continued, with the state-owned insurance organizations still dominating. In the year under review, insurance premiums collected by insurance companies of the Republic of Belarus amounted to BYN1 billion, a 20% increase, with the state s share totaling 86.4%. The volume of state-owned companies insurance premiums amounted to BYN0.9 billion in the period under review (a 19.5% increase compared with 2015), including premiums on voluntary insurance BYN0.4 billion (a 27.3% increase compared with 2015). In 2016, insurance premiums of non-state-owned insurance organizations amounted to BYN0.1 billion, a 24.2% increase compared with The volume of insurance premiums under the voluntary and compulsory insurance amounted to BYN0.54 billion and BYN0.45 billion respectively. As a result of the outstripping growth of the voluntary insurance premiums their share in the overall insurance portfolio stood at 54.9%, a 2.8 percentage points increase compared with In the segment of voluntary insurance premiums the highest growth was observed in voluntary life insurance (increment by 97.1%), medical expenses insurance (45.0%), insurance of business risk (41.2%), insurance of construction and installation risks (4.9 times), insurance of liability for nonperformance (improper performance) of bonds issuer s obligations (40.3%), and insurance of civil liability of air vehicles owners (41.4%). Compulsory insurance of the civil liability of vehicles owners (23.4%), compulsory industrial-accident and occupational diseases insurance (15.2%), voluntary business property insurance (11.7%), voluntary natural persons property insurance (11.2%), and voluntary medical expenses insurance (5.6%) accounted for the dominating shares in the overall amount of the insurance premiums. Overall market insurance premiums under the kinds of insurance associated with life insurance (life insurance and supplementary pension insurance) accounted for BYN86.7 million in the insurance market as a whole, the annual growth rate 149.0%. The share of the mentioned kinds of cumulative insurance in the overall amount of the insurance premiums grew 45

46 by 1.7 percentage point compared with 2015 and amounted to 8.8% (the share of the Republican Affiliate Unitary Joint Enterprise Stravita, the affiliate company of Belgosstrakh, accounted for 75.1% of the insurance premiums under cumulative kinds of insurance). The most important macroeconomic indicators characterizing the state and development of the insurance market insurance premiums/gdp ratio and amount of insurance premiums per capita amounted to 1.05% and BYN103.9 in 2016 against 0.92% and BYN86.6 in Insurers assets/gdp ratio totaled 3%. Despite a positive dynamics of the absolute indicators of the insurance market development in the Republic of Belarus, the main macroeconomic indicators of the given segment of the financial market lag behind the respective indicators of the European states 18. Along with that, among the Eurasian Economic Union (EEU) member - states, the Republic of Belarus is second only to Russia in terms of insurance premiums/gdp ratio values: Russia 1.3%, Kazakhstan 0.7%, Armenia 0.6%, and Kyrgyzstan 0.24%. The outpacing growth of insurance premiums against the amount of insurance payments brought about a decrease in the share of insurance payments in the amount of insurance premiums. According to the results of the activities in 2016, the insurance organizations ensured the outpacing growth of insurance premiums (20.1%) over the growth of the insurance payments. Over the year under review, the volume of the insurance payments totaled BYN0.54 billion, having grown by 14.4% compared with As a result, the share of insurance payments in the amount of insurance premiums totaled 54.7%, a 2.7 percentage points decrease against the 2015 level. In 2016, insurance organizations continued to follow the earlier adopted approaches in implementing the underwriting policy, which made it possible to adequately assess the amounts of risks accepted for insurance during the entire insurance period. These approaches include, inter alia, improvement of conditions for insurance and the tariff policy. As a result, in the year under 18 Thus, in 2015, insurance premiums/gdp ratio averaged (in percent): in Europe 7.0, the USA 8.1, Great Britain 10.8, France 9.3, Germany 6.2, Czech Republic 3.7, and Poland

47 review, the combined loss ratio 19 of the non-life insurance companies stood at 83% (93% in 2015). With that, in 2016, the indicators of the insurance sector s effectiveness significantly deteriorated. According to the results of the financial and economic activities in 2016, profit earned by insurers totaled BYN130.1 million before taxation, a 38.7% decrease on the 2015 level. Net profit generated by the insurance sector as a whole dropped by 36.5% and amounted to BYN93.3 million. In 2016, the return on equity 20 and assets 21 of the insurance sector amounted to 9.4% and 4.8% respectively due to the outpacing growth of the insurance companies equity over that of their profit. Decrease of the insurance sector s profit against 2015 due to accounting in the structure of profit for 2015 of the significant volume of income gained as a result of a significant depreciation in 2015 of the Belarusian ruble, led to both a drop in profit and a shrinkage of the sector s profitability against 2015: return on equity dropped by 7.1 percentage points, of assets by 4.2 percentage points. It is worth mentioning that in 2014, which is comparable to 2016 in terms of functioning, return on equity amounted to 8.9%, of assets 5.4%. The dynamics of indicators characterizing the level of the underwriting risk 22 shows a low degree of the Belarusian insurance sector s exposure to this risk. One of the factors determining the degree of the underwriting risk is the adequacy of the amount of insurance reserves established by the insurer to the risks accepted for insurance, i.e. the adequacy of the insurance reserves. As at January 1, 2017, the amount of insurance reserves established by the insurers of the Republic of Belarus totaled BYNR1.1 billion (a 23.1% growth compared with the state as at January 1, 2016), of which the mathematical reserves accounted for BYN0.35 billion and the technical reserves BYN0.72 billion, with the annual growth rates being 36% and 19 The combined loss ratio is calculated as the ratio of the sum of insurance payments and change in provisions for losses and expenses associated with conduct of the case to the amount of collected insurance premiums. 20 The ratio between the volume of profit (before tax) earned by insurance companies over the year and the average annual amount of the insurance sector equity. 21 The ratio between the volume of profit (before tax) earned by insurance companies over the year and the average annual amount of the insurance sector assets. 22 Underwriting risk is a probability of making loss (actual results being below the target), as well as of a failure to perform obligations to the policyholders in full and in a timely manner due to an incorrect assessment of risks accepted for insurance. 47

48 18% respectively. A significant growth of mathematical reserves was caused by laying the insurer under obligation to transfer, when maintaining all kinds of insurance associated with life insurance, no less than 50% of profit earned from the investment of mathematical reserves funds and allocation thereof in addition to the guaranteed return provided in the insurance policy to increase the savings of the persons insured under such policy (paragraph 6 of Provision on the Insurance Activities in the Republic of Belarus approved by Edict of the President of the Republic of Belarus No. 530 dated August 25, 2006). As at January 1, 2017, the ratio of the reserves established by the insurance companies to the average amount of insurance payments over the past three years stood at 239.0%, having grown over the year by 2 percentage points. Its value confirms that the Belarusian insurers reserved sufficient funds to pay the claims upon the occurrence of the insured events. In 2016, the total amount of large claims paid by the country s insurance companies totaled BYN40.3 million, or 3.95% of the average annual amount of the established insurance reserves (BYN23.6 million and 2.9% respectively in 2015). Thus, despite a certain growth of this indicator, the risk of a decrease in the amount of insurance reserves owing to large payments may be assessed as low. In the year under review, the insurance sector s equity capital adequacy ratio 23 stood at 133%. A rather high value of the above-mentioned indicator gives evidence of the availability of additional sources of fulfilling by the insurance companies of their liabilities to policyholders in case of inadequacy of insurance reserves. In 2016, the degree of exposure of the country s insurance sector to market (stock market, foreign exchange, and interest rate) risks stood at a low level. In 2016, the insurance sector s exposure to stock market risk increased, while being at the low level. In 2016, the total sum of insurance companies investments in business entities and banks securities increased by 18.8%, amounting to BYN244 million, or 8.7% of the insurance sector s assets as at January 1, 2017 (BYN205 million, or 8.1%, as at early 2016). The insurance sector invested significant monetary funds in the securities of state-owned banks 44.6% of the total amount of assets. 23 Adequacy of the insurers equity is defined as equity/established insurance reserves value ratio. 48

49 The insurance sector s exposure to potential fluctuations in exchange rates of foreign currencies may be assessed as low. In the course of 2016, the insurers assets in foreign currency exceeded relevant liabilities, resulting in a predominantly long foreign exchange position. As at January 1, 2017, the insurance sector s net open foreign exchange position accounted for plus 33.9% of the aggregate amount of the equity capital (as at January 1, %). Excess of open foreign exchange position over the volume of equity capital is conducive to protection of the insurers assets from devaluation and makes it possible to minimize the risk of losses caused by the growth in liabilities denominated in foreign exchange. An exposure to interest rate risk is only inherent in insurance organizations providing long-term insurance which involves accumulation of monetary funds. The peculiar feature of this kind of insurance is incorporation in the insurance programs of payouts with a guaranteed return rate (guaranteed income rate) accrued on funds accumulated under insurance policies, which makes them sensitive to the change in interest rates. A small share of life insurance premiums (long-term insurance) in the overall structure of insurance premiums (as at January 1, %) is conducive to a low degree of the insurance sector s, as a whole, exposure to interest rate risk. In 2016, the degree of the insurance sector s sensitivity to credit risk remained low as well. For the insurance sector, credit risk means the risk of the counterparties failure to perform their obligations under the agreements on reinsurance and investment (placement) of monetary funds, as well as other economic agreements. As at January 1, 2017, total receivables of the insurance sector (excluding accounts receivable under payments of regular installment premiums) amounted to BYN135 million, including the receivables in arrears over 30 days BYN10.2 million (as at January 1, 2016, BYN124.3 million and BYN10.5 million respectively), or 13.7% of the total amount of insurance premiums (15.1% in 2015). In 2016, liquidity risk continued to be of minor importance for the country s insurance sector stability. The Belarusian insurance sector s assets are traditionally characterized by a high degree of liquidity. As at January 1, 2017, the country s insurance 49

50 companies placed 66.1% of assets on accounts with banks (current (settlement) accounts and accounts for managing funds received under term deposit agreements) or used them to purchase government securities. Thus, insurance companies were still able to regulate, without material losses, their liquidity through the purchase and sale of government securities that are freely traded in the market or through early withdrawal of funds from accounts for managing funds received under term deposit agreements. As at January 1, 2017, the current liquidity ratio 24 in the country s insurance sector as a whole remained practically unchanged and stood at 116% (111% as at January 1, 2016). The level of current liquidity gives evidence that the insurance sector assets are sufficient for financial and economic activities and timely repayment of the term obligations OTHER FINANCIAL INTERMEDIARIES SECTOR In 2016, the JSC Development Bank of the Republic of Belarus continued to strengthen its positions in the financial intermediation market. Credit risk, the level of which slightly decreased compared with 2015, continued to be the most significant one for sustainable functioning of the institution. The foreign exchange and liquidity risks were insignificant. The JSC Development Bank of the Republic of Belarus (hereinafter the Development Bank ) the main purpose of which is to improve funding for government programs and socially important investment projects has been a big player in the financial intermediation sphere since In 2016, the Development Bank continued its activities in financing government programs and events, supporting export and small and medium entrepreneurship. In the year under review, the Development Bank continued to perform a new function of assets manager in the interests of the state. The given function is stipulated in Edict of the President of the Republic of Belarus No. 257 On Certain Issues of Purchasing Banks Assets Established in the Course of Lending to Enterprises of Woodworking Industry, and Specifying 24 The current liquidity ratio is defined as a ratio between monetary funds, short-term accounts receivable, financial investments and short-term liabilities and insurance reserves. 50

51 the Limit of Domestic Government Debt, dated June 24, 2015 (hereinafter Edict No. 257). For the purpose of implementation of Edict No. 257, the Ministry of Finance purchased assets and relevant rights under loans provided by the Belarusian banks (JSC JSSB Belarusbank, JSC Belagroprombank, Belinvestbank JSC, and JSC BPS-Sberbank) for modernization of woodworking enterprises. The total amount of assets purchased by the Ministry of Finance and transferred to the Development Bank for management totaled over BYN1.4 billion. Within 2016, the assets of the Development Bank went up by 12%, totaling BYN6.1 billion as at January 1, In the year under review, the Development Bank s revenues totaled BYN181 million, a 2% increase compared with The positive factor that influenced the revenues dynamics was the increase by 4.5% of net interest income against the 8% increase of net deductions to special reserves to cover potential losses under assets and operations which are not reported on the balance-sheet. The cost of risk (the ratio between net deductions to reserves and assets exposed to credit risk) amounted to 2.7% at the end of 2016, having dropped by 0.4 percentage point compared with the beginning of the period. The excess of assets growth rate over the net interest income growth rate was conducive to the shrinkage in the net interest rate margin (after the establishment of reserves) from 4.4% to 3.6%. In 2016, the Development Bank s return on assets amounted to 3.2%, having fallen by 0.7 percentage point over 12 months as a result of the outpacing growth rate of assets over that of profit. In 2016, the regulatory capital of the Development Bank went up by 11% and amounted to BYN1.3 billion. At the same time, risk-weighted assets grew by 31.0%. This was responsible for the drop of the regulatory capital adequacy ratio from 35.0% to 30.5% over the year. Taking into account the specific nature of its activity, the Development Bank is most of all exposed to the credit risk. In 2016, the total volume of credits provided to the customers grew by 14%, amounting to BYN3.7 billion at the year-end. The balance of bad and prolonged debt accounts decreased by 48% (with the balance of prolonged debt increasing by 24.6%), while the share of bad debt in the total value of the credit portfolio dropped from 5.8% to 2.6%. 51

52 As at early 2017, special provisions for potential losses on assets exposed to credit risk were established in full. The coverage level of established provisions for bad assets was 81%. As at January 1, 2017, the share of assets classified under Risk Group V totaled almost 65% in the structure of the Development Bank s bad assets. In connection with the fact that the Development Bank s obligations, the share of which amounted to around 60% in the structure of liabilities, were represented mainly by long-term and medium-term financial instruments, it had no problems concerning imbalance of money flows over the year, and its exposure to liquidity risk was rather low. In 2016, the share of foreign exchange component in the obligations of the Development Bank grew from 34% to 40%. Besides, the attracted resources were the source of assets established in foreign exchange and thus the maximum value of total open foreign exchange position on all the foreign currencies were no more than 9% of the regulatory capital. In 2016, the leasing organizations activities were characterized by positive financial results. The share of the overdue debt in the volume of the leasing payments, accrued within the reported period, decreased; the volume of the new business increased. A significant part of the leasing portfolio was still generated by leasing organizations established with participation of bank capital. As at January 1, 2017, the register included 95 leasing organizations, 27 of which were established with foreign capital participation. 10 leasing organizations were established with participation of bank capital. As at January 1, 2017, aggregate authorized capital of the leasing organizations totaled BYN385.8 million, a BYN69.1 million, or 21.8%, increase over the year. Entities of the leasing market were present in all the regions of the Republic of Belarus. As at January 1, 2017, the major share of the 95 leasing organization included in the register was registered in Minsk 60 leasing organizations; 11 in Minsk Region, 8 in Brest Region, 4 in Vitebsk Region, 5 in Grodno Region, 5 in Gomel Region, and 2 in Mogilev Region. Leasing organizations opened 13 branches in the regions of the Republic of Belarus, With the purpose of creating favourable conditions for promotion of Belarusian products in the foreign markets and decreasing risks in concluding 52

53 international leasing deals, eight affiliate companies were registered abroad, seven of which were established by OSC Promagroleasing. In 2016, the leasing market activities had positive financial results. Aggregate profit of the leasing organizations amounted to BYN171.4 million, of which BYN86.3 million, or 50.3%, is the profit gained by the leasing organizations established with participation of bank capital. With that, eight organizations finished 2016 with losses, with the aggregate amount of their losses totaling BYN0.5 million. The share of the lessors fees (income) in the volume of leasing payments accrued over 2016 totaled 17.5% (in %). As at January 1, 2017, the share of the overdue debt in the volume of the leasing payments accrued in 2016 amounted to 3.2% (as at January 1, %). With a view to maintaining financial stability, mitigating insolvency risk and ensuring timely fulfillment of obligations to counteragents, the leasing organizations are making provisions for doubtful debts. As at January 1, 2017, the volume of leasing portfolio (the lessees debt excluding the overdue debt) amounted to BYN2,302.5 million, having dropped by 6.1% over BYN million Dynamics of the leasing portfolio Source: the NBRB. January 1 April 1 July 1 October 1 January 1 A decrease in the leasing portfolio was due to the slowdown of the growth in the volume of the concluded new financial lease (leasing) agreements in the middle of 2016 caused by the decline in business activity of the economic entities and investment in fixed capital. 53

54 Financial leasing operations with the condition of repurchase of the leasing item accounted for the major share (97.4%) of the leasing organizations leasing portfolio. Liabilities under agreements entered into in the national currency amounted to 66.1% of the leasing portfolio. Five leasing organizations established with participation of banks capital (OJSC АSB Leasing, OJSC Promagroleasing, VTB Leasing JLLC, Raiffeisen - Leasing JLLC, and OJSC Agroleasing ) accounted for about 70% (BYN1,610.0 million) of the aggregate leasing portfolio. As at January 1, 2017, the export leasing operations 25 accounted for 3.1% of the total leasing portfolio. As at January 1, 2017, the volume of new business (the value of the financial lease (leasing) agreements entered into over 2016) stood at BYN1,111.5 million, having grown by BYN57.8 million, or 5.5%, compared with Obligations under agreements concluded in the national currency account for 84% in the total volume of the new business. As at January 1, 2017, the share of the new business volume totaled 1.18% of GDP, which is a bit lower than the level as at the late 2015 (1.21% of GDP). The volume of the new business of the leasing organizations amounted to 11.7% of the volume of the long-term credits issued by banks to the economic entities. Over 2016, excess of the volume of the new business over its value as at the end of 2015 was due to the growth in the volume of new agreements concluded with natural persons. Thus, aggregate price of the new agreements of the financial lease (leasing) concluded with natural persons over 2016 totaled BYN242.7 million. As at the end of 2015, this indicator stood at BYN62.7 million. With that, the volume of the new business under agreements concluded with legal persons declined compared with the data for Over 2016, 6,166 agreements of financial lease (leasing) worth BYN868,8 million were entered into with this category of lessees, a drop by 411 agreements, or BYN122.2 million, compared with Over 2016, thousand items of leasing, the total value of which amounted to BYN756.3 million, were passed to lessees, a 110,1 thousand items, or BYN107 million, increase compared with With that, International leasing, where a lessor and a seller (deliverer) of an item of leasing are entities of the Republic of Belarus, while a lessee is an entity of other state. 54

55 thousand items of leasing worth BYN167.9 million were passed to natural persons. Items of leasing were purchased by leasing organizations at the expense of both own and attracted funds. In 2016, a slightly more than 50% of the items of leasing worth BYN378.9 million were purchased at the expense of own funds (in % worth BYN248.2 million). 49.9% of the items of leasing worth BYN377,4 million were purchased at the expense of bank targeted credits (in % worth BYN401.1 million). Leasing agreements 200, , , , , , , ,000 80,000 65, ,000 40,000 30, , ,000 20, , , , Source: the NBRB. number of agreements with natural persons total number of agreements number of agreements with legal persons With that, the lessees advance payments accounted for 36.4% of the own funds (in %). As at January 1, 2017, the debt of leasing organizations under credits attracted for their leasing activities from banks amounted to BYN1,314.6 million, of which: - owed to resident banks BYN1,028.2 million (including in foreign exchange BYN330 million in the equivalent); and - owed to non-resident banks BYN286.4 million (including in foreign exchange BYN136.7 million in the equivalent). As at January 1, 2017, overdue debt of leasing organizations under credits attracted for leasing activities from banks totaled BYN22.8 million, or 1.7% in the total amount of debt of leasing organizations under banks credits. 55

56 With a view to implementing provisions of the Law of the Republic of Belarus On Protection of Consumer Rights, dated January 9, 2002, as well as mitigating risks of both parties while concluding the leasing transactions with natural persons, Resolution of the Board of the National Bank of the Republic of Belarus No. 432 dated August 9, 2016 introduced changes to the Rules of Carrying out Leasing Activities approved by Resolution of the Board of the National Bank of the Republic of Belarus No. 526 dated August 18, The above-mentioned changes involve the provision to the lessee being a natural person of the written information on possible terms and conditions of leasing before concluding the financial lease (leasing) agreement, as well as compiling, at the request of a lessor or a lessee being a natural person of a fixed or rough cost sheet or calculation of the leasing payments (schedule of leasing payments). Besides, the reasons for and the order of changing an amount or an order of definition of the amount of leasing payments under the financial lease (leasing) agreement under the agreement of parties or by a lessor on an unilateral basis are clearly defined. Resolution of the Board of the National Bank of the Republic of Belarus No. 345 dated June 22, 2016 introduced changes to the Instruction On the Volume and Order of Disclosure of Information on the Leasing Activities and Financial State of the Leasing Organizations Included into the Register of Leasing Organizations approved by Resolution of the Board of the National Bank of the Republic of Belarus No. 495 dated August 1, 2014 in terms of specifying information about the transactions carried out within the framework of leasing activities which is placed on the official website of the leasing organization. Decision on introduction of such changes was taken on the basis of monitoring of the leasing organizations websites. It was aimed at ensuring receipt by the engaged users of a more detailed and specific information on the activities of leasing organizations and on their transactions, that will help them to take weighted decisions in the area of economy. The work on drafting and finalizing the Edict of the President of the Republic of Belarus On Modifying Edicts of the President of the Republic of Belarus on the Issues of Leasing Activities prepared for the purpose of building up the relevant legislative framework for granting in possession and use of residential houses and apartments to the natural persons under the agreements of financial lease (leasing). 56

57 In 2016, within the framework of consumer rights protection one leasing organization was excluded from the Register in line with paragraph 4 of part 5 of subclause 1.5 of clause 1 of Edict of the President of the Republic of Belarus No. 99 On the Issues of Leasing Activities Regulation dated February 25, 2014 for systemic (2 times over the calendar year) nonfulfillment by a leasing organization of the National Bank s written instructions on remedying violations. In 2016, the segment of microfinance organizations consisting, for the most part, of lombards, did not bear any threats to the financial stability due to the insignificant volume of the operations carried out thereby. As at January 1, 2017, 115 microfinance organizations (four consumer cooperatives, four funds, and 107 lombards) were on the Register of Microfinance Organizations. In 2016 Q4, 107 microfinance organizations carried out activity on providing microloans (four consumer cooperatives, three funds, and 100 lombards). As at January 1, 2017, assets of microfinance organizations amounted to BYN23.5 million, equity capital BYN15.0 million, liabilities BYN 8.5million, and net profit over 2016 BYN3.7 million. In 2016, the overall amount of the monetary funds attracted by microfinance organizations totaled BYN7.3 million, including: - by consumer cooperatives BYN0.3 million (from natural persons being founders BYN0.25 million, or 83.3%, from other persons BYN0.05 million, or 16.7%); - by funds BYN0.2 million (BYN0.1 million, or 50%, from both the natural persons being founders and from other persons); and - by lombards BYN6.8 million (from property owners, founders (participants) BYN4.4 million, or 64.7%, from other persons BYN2.4 million or 35.3%. In 2016, the amount of the microloans granted by microfinance organizations totaled BYN100.9 million, including: - consumer cooperatives granted BYN0.9 million. Microloans granted to natural persons for the purposes of carrying out craft activities accounted for the major share BYN0.6 million, or 66.7%; 57

58 - funds granted BYN4.0 million. Microloans granted to natural persons for the purposes of the business and entrepreneur initiative comprised the major share BYN3.6 million, or 90.0%; and - lombards granted BYN96.0 million. Microloans granted against the pledged goods made of precious metals and stones accounts for the major share 85.5% (BYN82.1 million), against the pledge of other movable property 9.6% (BYN9.2 million), and against the pledged vehicles 4.9% (BYN4.7 million). For the purpose of ensuring financial soundness of consumer cooperatives and prompt analysis of the results of their activity, the National Bank set financial ratios and their limits, as well as requirements to establishing reserves and the minimum amount of a mutual investment fund and a mutual financial assistance fund. As at January 1, 2017, the minimum amount of the mutual investment fund (BYN1,050) and mutual financial assistance fund (hereinafter MFAF ) (100% of the mutual investment fund) was met by all the consumer cooperatives. Total amount of mutual investment fund of the consumer cooperatives stood at BYN5.3 thousand, MFAF BYN365.8 thousand. As at January 1, 2017, reserve for potential losses under microloans 26 was established in the total amount of BYN170.0 thousand. As at January 1, 2017, consumer cooperatives did not establish a reserve for writing off bad debt 27 for the reason of absence of the overdue debt (for more than 730 days) under granted microloans. As at January 1, 2017, the ratios of short-term, middle-term and longterm liquidity 28 with the prescribed minimum value of 70%, 80%, and 90% respectively are considered as fulfilled by all the consumer cooperatives, as 26 The given reserve is generated at the level of at least 35% of the total amount of the overdue debt under the principal debt, interests for using a microloan, forfeit (fines, penalties), as well as sums receivable as a result of applying other sanctions, including indemnification of losses, for violation of provisions of an agreement, for delay under the principal debt for the term of days, 50% for delay under the principal debt for days, 100% when awarded by a court. 27 The given reserve is established at the level of at least 100% of the total amount of the overdue debt under the principal debt, interest for using a microloan, forfeits (fines, penalties), as well as sums receivable as a result of applying other sanctions, including indemnification of losses, for violation of provisions of an agreement, for delay under the principal debt for the term exceeding 730 days. 28 The given ratios are calculated as a ratio of the amount of the consumer cooperative borrowers obligations with the remaining maturity of up to and including 30, 90 and 180 days, including those until redeemed, and the amount of the consumer cooperative obligations to their members with the remaining maturity of up to and including 30, 90 and 180 days, including those until redeemed and with the overdue term of repayment. 58

59 far as they do not have obligations to their members with the remaining period to maturity of up to 30, 90, and 180 days, including the until redeemed liabilities and those with overdue term of repayment. In 2016, the work on developing the market of over-the-counter financial instruments in the country continued. As at January 1, 2017, the Register of Forex Companies incorporated six legal persons, for ensuring sustainable functioning of which financial ratios and their limits were established. With a view to building up a system of state regulation of activities of forex companies and executing control thereof, Edict of the President of the Republic of Belarus No. 231 On Carrying out Activities in the Over-thecounter Forex Market dated June 4, 2015 (hereinafter Edict No. 231) was adopted, which came into force on March 7, The National Bank was appointed as the government agency responsible for the regulation of operations in the OTC forex market. According to paragraph 1 of Edict of the President of the Republic of Belarus No. 231, the following entities are authorized to carry out the activities on conducting operations involving non-deliverable OTC financial instruments initiated by natural and legal persons (activities in the OTC forex market) in the Republic of Belarus: - legal persons registered in the Republic of Belarus, the authorized capital of which is formed in compliance with the requirements of Edict No. 231 in the amount of at least BYN200 thousand, and included by the National Bank in the Register of Forex Companies (hereinafter forex companies); - National Forex Center; - banks; and - non-bank financial institutions. Five forex companies and the Joint Stock Company MinskTransitBank (within the framework of the joint project with DukascopyBankSA, Switzeland) started to carry out activities directly in the OTC forex market (i.e. operations with non-deliverable OTC financial instruments initiated by natural and legal persons). As at January 1, 2017, the assets of forex companies amounted to BYN2.7 million, equity BYN1.2 million, liabilities BYN1.5 million. 59

60 Aggregate authorized capital of the forex companies totaled BYN1.6 million, including those of non-residents BYN1.2 million (or 75.0%). In 2016, the total number of the mentioned companies and bank s clients amounted to 974, the number of the operations initiated thereby 176,986. The total volume of the clients positions opened under the mentioned operations totaled USD3.9 billion (taking into account the leverage). Clients of the forex companies and the bank placed margin security worth USD3,001 thousand, with the share of clients of the forex companies totaling USD853 thousand, or 28.4%. As at January 1, 2017, the total amount of contributions to the guarantee fund of the National forex centre amounted to USD461 thousand. The given fund is build up with the aim of fulfilling obligations of forex companies, banks, and non-bank financial institutions on returning marginal security to clients (in case of incapability of forex companies to fulfill such obligations at the expense of their own funds and security capital, and of banks and non-bank financial institutions at the expense of their own funds). The requirement on building up security capital, which is replenished by them at the expense of funds in foreign exchange contributed by clients as a margin security, and is placed at the current (settlement) bank accounts with a special regime of functioning for a forex company opened in at least two banks or non-bank financial institutions of the Republic of Belarus, is applied to the forex companies. As at January 1, 2017, all forex companies complied with the requirement on meeting the minimum amount of security capital (50% of the margin security). Security capital amounted to USD316 thousand, or 55.2% of the margin security. The National Bank established financial requirements and their limits for the purpose of ensuring financial sustainability of forex companies and analyzing the results of their activities in a prompt manner. As at January 1, 2017, the marginal ratio of the sum of monetary funds attracted from clients to the forex companies own funds (up to 20) was met by all forex companies. 60

61 As at January 1, 2017, the ratios of instant, current and short-term liquidity 29 were met by all forex companies, with the prescribed minimum values being 0,2, 0,7 and 1 respectively. The ratio of maximum amount of open positions (no more than 0.2) which is calculated as a ratio of difference between the amount of margin security under open positions of the forex companies clients on all the basic assets and the amount of the margin security under open positions carried over to the external counteragent or the National forex centre to the own capital of a forex company, amounts to zero at all forex companies. This evidences the fact that forex companies carry over positions opened by clients to the external counteragents 30. In 2016, the indicators characterizing financial stability of the State Institution Agency for Guaranteed Repayment of Natural Persons Bank Deposits (hereinafter the Agency ) had positive dynamics. The Agency was established in December 2008 with a view to ensuring the guaranteed repayment of monetary funds in Belarusian rubles and foreign exchange placed by the natural persons on the accounts and/or in deposits with banks and non-bank financial institutions to protect the rights and lawful interests of such persons. The Agency fulfills its functions according to Law of the Republic of Belarus No. 369-З On Guaranteed Repayment of Natural Persons Bank Deposits dated July 8, 2008 (hereinafter the Law). As at January 1, 2017, 24 banks with a special permit (license) to engage in banking operations, issued by the National Bank, which empowers them to carry out banking transactions involving opening and/or maintaining natural persons bank accounts and/or attracting natural persons monetary funds into bank deposits, were registered with the Agency. As at January 1, 2017, the Agency s property totaled BYN1,418.5 million. 29 The given ratios are calculated as the ratio of an amount of the forex company s assets to the amount of the forex company s liabilities. Lists of assets and liabilities of a forex company included in the calculation of each liquidity indicator are established by Resolution of the Board of the National Bank of the Republic of Belarus No. 67 as of February 10, 2016 having regard to assets liquidity and terms of liabilities repayment. 30 When calculating the amount of margin security under the open positions of the forex companies clients under a separate basic asset, margin security under the open position, at which a positive financial result of a client under the operation is ensured in case of a positive change (increase) in the basic asset s price, is included in the calculation with a positive sign; margin security under the open position, at which a positive financial result of a client under the operation is ensured in case of a negative change (decrease) in the basic asset s price, is included into the calculation with a negative sign. 61

62 Over 2016, the Agency s property was formed due to: - banks obligatory contributions; - income from allocations and (or) investments of temporary free monetary funds of the Agency into deposits and securities; and - proceeds from the Joint Stock Company Delta Bank obtained as repayment of the Agency s claims passed thereto as a result of repayment of a compensation under deposits. Agency s reserve is a part of the Agency s property and is intended for repayment of bank deposits to natural persons. As at the end of 2016, the amount of the reserve totaled BYN1,330.6 million 31, having increased by BYN240.3 million, or 22%, over the year. 1, Agency s reserve 1, Source: the Agency. Over 2016, special-purpose contributions worth BYN115.3 million, difference resulted from the change in the national currency exchange rate in the amount of BYN47,6 million, and receipts from banks aimed at repaying the Agency s claims passed thereto as a result of repayment of a compensation of deposits worth BYN57.7 million, income from investments and (or) allocation of reserve funds in the amount of BYN20.2 million, and a fee for late payment of regular contributions worth BYN6 thousand were responsible for the growth in the amount of the Agency s reserve. Over the year, deposits of natural persons were compensated in the amount of BYN108 thousand. 31 Minus established reserve repaid as compensation of the occurring liabilities in the amount of BYN390 thousand. 62

63 Structure of the Agency s reserve as at January 1, % 3.3% income from investment of the monetary funds of reserve in securities income from placement of monetary funds on deposit accounts banks obligatory contributions currency translation differences debt collected from banks, which resulted due to repayment of compensation to natural persons Source: the Agency. 13.1% 30.5% 51.9% As a result of the reserve growth, the Agency s reserve amount/natural persons deposits volume ratio grew from 5.59% as at the beginning of the year to 7.02% as at the year-end. As at January 1, 2017, the Agency s monetary funds were placed and (or) invested in full into: deposits of the National Bank of the Republic of Belarus BYN85.5 million, USD505.3 million, and EUR68.0 million; and long-term government bonds BYN84.4 million. Monetary funds of other property were placed and (or) invested into: deposits of the National Bank of the Republic of Belarus BYN17.1 million; and long-term government bonds BYN58.8 million. Structure of the Agency s investment portfolio as at January 1, 2017 Government securities Deposits 1, Source: the Agency 63