BANKA QENDRORE E REPUBLIKES SË KOSOVËS CENTRALNA BANKA REPUBLIKE KOSOVA CENTRAL BANK OF THE REPUBLIC OF KOSOVO. Financial Stability Report

Transcription

1 BANKA QENDRORE E REPUBLIKES SË KOSOVËS CENTRALNA BANKA REPUBLIKE KOSOVA CENTRAL BANK OF THE REPUBLIC OF KOSOVO Financial Stability Report Number 08 December 2015

2 CBK Working Paper no. 4 Efficiency of Banks in South-East Europe: With Special Reference to Kosovo 2

3 Financial Stability Report BANKA QENDRORE E REPUBLIKËS SË KOSOVËS CENTRALNA BANKA REPUBLIKE KOSOVA CENTRAL BANK OF THE REPUBLIC OF KOSOVO Financial Stability Report 1

4 Financial Stability Report 2

5 Financial Stability Report PUBLISHER Central Bank of the Republic of Kosovo Economic Analysis and Financial Stabilty Report 33 Garibaldi, Prishtinë Tel: Fax: Web-site EDITOR-IN-CHIEF Arben MUSTAFA EDITOR Albulena XHELILI AUTHORS Taulant SYLA Arta NUSHI Hana GAFURRI Krenare MALOKU Zana GJOCAJ Bejtush KIÇMARI TRANSLATOR and Butrint BOJAJ TECHNICAL EDITOR 3

6 CBK Working Paper no. 4 Efficiency of Banks in South-East Europe: With Special Reference to Kosovo 2

7 Financial Stability Report ABBREVIATIONS: ATM CAR CBK CEE CIS EBRD ECB FDI GDP HHI IMF KAS KPST MF MFI MTA NFA NIM NPISH NPL ODC OECD POS pp PTK RLI ROAA ROAE ROE RWA SDR SEE TPL VAT Automated Teller Machines Capital Adequacy Ratio Central Bank of the Republic of Kosovo Central and Eastern Europe Commonwealth of Independent States European Bank for Reconstruction and Development European Central Bank Foreign Direct Investments Gross Domestic Product Herfindahl-Hirschman Index International Monetary Fund Kosovo Agency of Statistics Kosovo Pension Savings Trust Ministry of Finances Micro-Finance Institutions Money Transfer Agencies Net Foreign Assets Net Interest Margin Non-Profitable Institutions Serving Households Non-Performing Loans Other Depository Corporations Organization for Economic Cooperation and Development Point of Sales Percentage Points Post and Telecommunication of Kosovo Rule of Law Index Return on Average Assets Return on Average Equity Return on Equity Risk Weighted Assets Special Drawing Rights South-Eastern Europe Third Party Liabilities Value-Added Tax Note: Users of the data are required to cite the source. Suggested citation: Central Bank of the Republic of Kosovo (2015), Financial Stability Report No. 8, Prishtina: CBK. Any required correction will be made in the electronic version. 5

8 CBK Working Paper no. 4 Efficiency of Banks in South-East Europe: With Special Reference to Kosovo 2

9 Financial Stability Report CONTENTS: 1. Governor s Foreword Summary External economic and financial environment Kosovo s Economy Kosovo s Financial System General Characteristics The exposure of external sector Kosovo s Banking Sector Structure of the Banking Sector Activity of Banking Sector Banking sector performance Banking sector risks Stress-test Analysis Financial infrastructure in Kosovo Pension Sector Structure of pension sector Performance of the Pension Sector Insurance Sector Structure of Insurance Sector Activity of the Insurance Sector Performance of the Insurance Sector Microfinance Sector and Financial Auxiliaries Microfinance Sector Performance of the Microfinance Sector Financial Auxiliaries Shtojca statistikore Referencat

10 Financial Stability Report LISTA E FIGURAVE Figure 1. EURIBOR interbank lending and ECB refinancing rate Figure 2. Brent crude oil price Figure 3. Structure of ProCredit Holding assets Figure 4. Efficiency indicators of PCH Figure 5. Structure of Raiffeisen Bank International Figure 6. Growth trend of loans and deposits of RBI Figure 7. Efficiency indicators of RBI Figure 8. Structure of NLB Group assets Figure 9. Growth trend of loans and deposits of NLB Group Figure 10. Efficiency indicators of NLB Group Figure 11. Real GDP growth rate, in percent Figure 12. Inflation and its main contributors, annual growth in percent Figure 13. Imports, exports and trade balance Figure 14. Financial system assets and its constituent sectors Figure 15. Structure of assets of the financial system Figure 16. Financial intermediation rate by sectors in Kosovo Figure 17. Financial intermediation rate of the banking sector in the region Figure 18. Structure of foreign claims Figure 19. Structure of foreign liabilities Figure 20. Foreign exposure by financial sectors Figure 21. Structure of commercial banks, by ownership Figure 22. Concentration level in the banking sector Figure 23. Structure of the banking sector assets Figure 24. Assets of the banking sector Figure 25. Structure of securities Figure 26. Contribution to loans growth by sectors Figure 27. Total loans and new loans Figure 28. New loans Figure 29. New loans by sectors Figure 30. New loans by sectors and purpose of use Figure 31 Total loans, new loans, paid loans and outstanding loans Figure 32. Structure of loans by economic activity Figure 33. Loans to industrial sector Figure 34. Loans by economic activity Figure 35. Structure of loans by maturity Figure 36. Growth trend of loans by maturity Figure 37. Deposits of the banking sector Figure 38. Enterprise deposits Figure 39. Non-resident deposits

11 Financial Stability Report Figure 40. Structure of deposits by maturity Figure 41. Time deposits Figure 42. Average interest rates Figure 43. Average interest rates on loans to enterprises and to households Figure 44. Average interest rates on loans to enterprises Figure 45. Average interest rates on loans to enterprises, by economic activity Figure 46. Average interest rates on loans to households, by purpose of use Figure 47. Average interest rates on enterprise and household deposits Figure 48. Financial performance of the banking sector Figure 49. Banking sector income Figure 50. Banking sector interest income Figure 51. Banking sector income, annual change Figure 52. Banking sector expenditures Figure 53. Banking sector expenditures, annual change Figure 54. Interest and non-interest expenditures by categories Figure 55. NPL and loan loss provisions Figure 56. Profitability indicators of the banking sector Figure 57. Expenditures to income ratio of the banking sector Figure 58. The map of the banking sector risks Figure 59. Loans and deposits of the banking sector Figure 60. Broad liquid assets ratio to short term liabilities Figure 61. Banking sector reserves Figure 62. Liquidity gap Figure 63. NPL to total loans ratio Figure 64. Annual growth of total loans and NPL Figure 65. NPL by economic sectors Figure 66. Structure of loans by classification Figure 67. Loans movements by credit classification Figure 68. NPL and provisions Figure 69. Concentration of credit risk Figure 70. Banking sector capitalization Figure 71. Regulatory capital and RWA Figure 72. Structure of regulatory capital Figure 73. Structure of Tier 1 capital Figure 74. Structure of Tier 2 capital Figure 75. Structure of RWA by risk weight Figure 76. RWA to total sector assets ratio Figure 77. Opened positions in foreign currencies against Tier 1 capital Figure 78. Loans and deposits in foreign currency Figure 79. Loans and deposits sensitivity to interest rates

12 Financial Stability Report Figure 80. The gap of assets and liabilities sensitivity to interest rate Figure 81. Structure of pension sector investments Figure 82. Assets of KPSF Figure 83. Assets of SKPF Figure 84. Structure of insurance companies assets, by ownership Figure 85. Structure of insurance sector assets Figure 86. Liabilities and equity of insurance companies Figure 87. Premiums received and claims paid Figure 88. Assets of microfinance institutions Figure 89. Structure of MFI sector loans Figure 90. Structure of MFI sector loans, by economic activity Figure 91. Structure of MFI sector loans, by maturity Figure 92. Average interest rate on loans Figure 93. Average interest rate on loans Figure 94. Structure of leasing

13 Financial Stability Report LIST OF TABLES Table 1. Number of financial institutions Table 2. Structure of assets in the banking sector Table 3. Structure of the banking sector liabilities Table 4. Key efficiency indicators of the banking sector Table 5. Indicators of the banking sector capacity Table 6. The Indicators used to identify systemic importance of the banks in Kosovo Table 7. Results of systemic importance of the Kosovo banks Table 8. Summary of stress-test results: credit risk Table 9. Summary of stress-test results: liquidity risk Table 10. The share of payment instruments to total EICS transactions Table 11. Banking Sector Network Table 12. The share of the value of card transactions by terminals in the total value of card transactions Table 13. Pension Funds Structure by Ownership Table 14. Received gross premiums Table 15. Claims paid Table 16. Additional efficiency indicators of the sector LIST OF BOXES Box 1. Performance of the main banking groups operating in Kosovo Box 2. New loans Box 3. Bank lending survey Box 4. Identification of banks with systemic importance in Kosovo

14 CBK Working Paper no. 4 Efficiency of Banks in South-East Europe: With Special Reference to Kosovo 2

15 Financial Stability Report 1. Governor s Foreword Kosovo s economy in 2015 was characterized by accelerated growth pace, generated mainly by increased domestic demand. Price developments in the global markets continue to have a significant impact on the price level in Kosovo, making the country's economy face with deflationary developments. The fiscal sector continues to remain sustainable, with low budget deficit and public debt. Trade exchanges with the external sector, including import and export, continued to grow. Considerable growth was also recorded in remittances and foreign direct investments received in Kosovo, which represent important sources of financing for the overall economic activity in the country. The banking sector has expanded its activity and has marked a further improvement of the financial soundness indicators, thus continuing to be a very important contributor to the development and stability of the economy. The easing of credit standards by banks and, on the other hand, the increased demand for loans from households and enterprises have resulted in the acceleration of bank lending growth, which has encouraged the growth of domestic demand. The decrease of loans interest rates has given a significant contribution to the increased demand for loans, which are already close to the level of interest rates applied in the region countries. The accelerated credit growth, along with the reduction of interest rates and the improvement of other lending conditions represent very important developments in easing the access to finance in Kosovo. This ease is also reflected in the growth of lending to less credited sectors of the economy, such as agriculture, manufacturing and energy, which during the first half of 2015 were the sectors with the highest growth rates of loans received. In addition to accelerated growth in lending, the first half of 2015 was characterized by further improvement of the loans portfolio quality as a result of lowering the value of non-performing loans in the banking sector. The banking sector also continues to have a high level of capitalization and satisfactory liquidity position. The high level of the banking sector sustainability is also shown by the results of the stress-test where all the banks appear to be able to withstand shocks considered as hypothetical scenarios. As regards the other sectors of the financial system, the pension sector continued to mark a good financial performance, increasing the share price in invested assets and a positive return on investments. The insurance sector recorded assets growth, but continues to face with difficulties in terms of profitability. MFI sector continued with lending expansion, thus increasing access to finance especially for individuals and small enterprises. However, the funding of microfinance institutions continues to be characterized by high costs, which sets out the need to further increase the efficiency of this sector. Based on the current state of the financial system and taking into account the forecasts for the overall macroeconomic developments in the country, it is estimated that the country's financial system will continue to expand its activity and to maintain sustainability during the following period. The Central Bank of the Republic of Kosovo will continue to monitor and evaluate closely the developments related to the financial stability in the country and at the same time informing the public regularly on developments in the financial sector and the economy in general remains an important priority. Bedri HAMZA Governor 11

16 Financial Stability Report 12

17 Financial Stability Report 2. Summary External economic environment, during the first half of 2015, was characterized by accelerated growth pace of economic activity. The improved economic activity is translated into improvement of the credit cycle in the euro area, where until June 2015 lending activity recovered from the previous year s decline. The continuous price decline in the international markets was also reflected in the euro area which, in June 2015, was characterized by low inflation rate of 0.2 percent. In the euro area it is expected a further strengthening of the economic activity, relied mainly on a further decline in oil prices, rising consumer confidence and positive developments in labor markets. Also, the continuous increase of the euro area exports as a result of depreciation of the euro and the program of quantitative easing from the European Central Bank (ECB) is expected to have a positive impact on the economic activity. The performance of the economic activity in the Western Balkans, in the first half of 2015, is estimated to have marked improvement. Similar to the euro area, deflationary pressures were present also in the region in Western Balkans during 2015 also increased financial intermediation, where all the countries were characterized by an acceleration of credit growth. Banking sectors of the region improved the level of capitalization and the quality of the loan portfolio during The IMF and World Bank forecast an acceleration of economic growth in the Western Balkans region in Kosovo s economy was characterized by overall macroeconomic stability, manifested by positive economic growth rate, as well as of the fiscal and price sustainability during the first half of According to KAS estimates, the first quarter was characterized by an annual growth of 0.2 percent, while in the second quarter the country s economy marked an accelerated growth rate by recording an annual growth of 3.4 percent. The economic growth in the first six months of 2015 is estimated to be generated mainly by increased domestic demand, namely by the increase in consumption and investments, while net exports continued to contribute negatively to the economic growth. In the first six months of 2015, Kosovo s economy was characterized by a price decline, where the inflation rate was -0.4 percent. Kosovo continues to have a stable fiscal position. CBK estimates suggest an acceleration of economic growth for the entire year of 2015 compared with the previous year. The growth rate of the real GDP for 2015 is estimated to be 3.5 percent, compared with the growth of 1.2 percent in The acceleration of the growth rate is relied on expectations for the growth of consumption and investments, where an important contribution was given by the accelerated growth of the bank lending. Kosovo s financial system, during the first half of 2015, was characterized by an activity expansion and a high level of sustainability in all its constituent sectors. The banking sector recorded an acceleration of lending thus reinforcing its role in financing the economic activity. The value of total loans until June 2015 amounted to euro 2.01 billion, representing an annual increase of 6.1 percent. Lending growth occurred as a result of the easing of credit supply, while also the demand for loans increased. The structure of lending to companies remains similar to previous years, where loans intended for the trade sector represent the largest category with a share of 54.0 percent of total loans to enterprises. Agriculture, energy and manufacturing, despite of being the sectors with the lowest access to bank financing, marked the highest annual growth of loans. Increased lending in the country has been funded mainly by the increase in deposits collected within the country. Deposits in the banking sector recorded a growth of 6.3 percent, reaching a value of euro 2.57 billion in June The structure of deposits by maturity has undergone significant changes in the past two years. While time deposits dominated the structure of deposits in the past, in June 2015, the main category of deposits was represented by transferable deposits. This development in the structure of deposits was mainly due to the sharp 13

18 Financial Stability Report decline in the interest rates on deposits in the past two years, which may have discouraged scheduling of deposits by depositors. The banking sector during the first half of 2015 was characterized by a significant reduction in the interest rate on loans, and a slight increase in the interest rate on deposits. The average interest rate on loans decreased to 7.6 percent, in June 2015, from 10.5 percent as it was in June Meanwhile, the average interest rate on deposits in June 2015 increased to 0.8 percent from 0.6 percent in June Consequently, the interest rate spread on loans and deposits in June 2015 decreased to 6.8 percentage points from 9.9 percentage points in June Financial soundness indicators of the banking sector continue to reflect a high degree of sustainability. The banking sector recorded a significant improvement of the financial performance marking a net profit with an amount of euro 44.9 million in June 2015, mainly as a result of the reduction of expenses, particularly for provisions and interest expenses on deposits. The liquidity position of the banking system remains at a satisfactory level, where in June 2015, the broad liquid assets to short-term liabilities ratio stood at 41.9 percent, which is significantly above the minimum of 25 percent as required by the Central Bank. The capital level of the banking sector strengthened mainly due to the significant improvement of the financial performance, resulting in an increase of capital quality as well as the sector s capitalization indicators. In June 2015, the Capital Adequacy Ratio (CAR) reached 19.0 percent compared to 17.4 percent as it was in the previous year. The banking sector s exposure to credit risk has shown a downward trend, where the share of non-performing loans to total loans in June 2015 declined to 7.2 percent from 8.2 percent in June The banking sector has also increased the coverage degree of non-performing loans with loan loss provisions to percent from percent in June The banking sector s exposure to market risk remains at a low level given the significant decline of the net aggregated open position in the foreign currency to Tier 1 capital, low share of loans in non-euro currency to total loans portfolio, as well as the low sensitivity of assets and liabilities to interest rate movements considering that the majority of loans and deposits have fixed interest rates. Moreover, the stress test analysis continue to suggest high capacity of the banking sector to cope with considered shocks in the context of hypothetical scenarios. Banking infrastructure, during 2015, continued to expand. The increase of the number of ATMs and POS devices resulted in an increased number and value of withdrawals through ATMs, and sales through POSs. During this period, it has increased the number and the value of transactions through the Electronic Interbank Clearing System in Kosovo (EICS). Also, it was marked an increase in the total number of bank accounts, e-banking, and the number of debit and credit cards. All these developments led to increased efficiency of the banking services. With increased activity were characterized also other constituent sectors of the financial system: the pension sector, the insurance sector and the sector of microfinance institutions. Pension sector continues to be the sector with the highest growth rate of asset within the Kosovo s financial system, where the assets value of the sector until June 2015 amounted to euro 1.18 billion, marking an annual growth of 18.1 percent. Also pension sector continued to record good financial performance, thus increasing the share price of assets invested and, consequently, a positive return on investments. The insurance sector has increased its activity where in June 2015 the value of assets of the sector amounted to euro million, which corresponds to an annual growth of 11.5 percent. However, the sector s financial performance continues to be not favorable, hence deepening the loss compared to the previous year. The microfinance sector in 2015 was characterized by expansion of its activity reaching a total assets value of euro million, corresponding to an annual growth of 2.8 percent. The microfinance sector until June 14

19 Financial Stability Report 2015 marked a significant increase of the profit that was reflected in the improvement of the profitability indicators. 15

20 Financial Stability Report 3. External economic and financial environment Macroeconomic environment in the euro area External economic environment during the second quarter of 2015 was characterized by accelerated growth pace of the economic activity. The euro area economy, compared to the same period of the previous year, marked an increase of 1.2 percent (0.8 percent in Q2 2014), whereas compared to the previous quarter recorded a real economic growth rate of 0.3 percent (0.1 percent in Q2 2014). The increased economic activity, mainly supported by manufacturing and services sector, remained concentrated in Germany, Spain, Italy and Greece, while France was characterized by slower economic growth rate. Despite expectations for an economic decline of 0.5 percent, as a result of failing to pay the debt in due time, Greece recorded an annual growth rate of 1.4 percent in the second quarter, while compared to the previous quarter, the real economic growth rate was 0.8 percent. Economic activity in Greece is estimated to have been supported by consumer spending growth during the second quarter of 2015, driven by expectations for increased control of the capital, as well as the increased revenues from tourism. According to the ECB, the euro area was characterized by an inflation rate of 0.2 percent in June 2015, exceeding the year-end deflationary period of The inflation rate in the euro area is expected to remain very low in the upcoming months, while until the end of 2015 it is expected a gradual increase in inflation. For 2015 as a whole, the IMF has forecasted an inflation rate of 0.1 percent. The gradual increase in the inflation rate is expected to be mainly driven by the impact of monetary easing policies in the overall demand in the Figure 1. EURIBOR interbank lending and ECB refinancing rate 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% June Mar Dec Sep June Mar Dec Sep June Mar Dec Sep June Mar Dec Sep June Mar Dec Sep June Mar Dec Sep June Mar m 12m Norma e rifinancimit e ECB-së, (boshti i djathtë) Source: Euribor (2015) and ECB (2015) euro area, the impact of the lower euro exchange rate, as well as expectations for a gradual increase in oil prices. After launching the quantitative easing program by the ECB, senior officials of ECB stated that the easing monetary policies will be supplemented by macro-prudential policy in order to ensure the maintenance of the financial stability. The ECB continued to keep the refinancing rate unchanged also in June However, the launch of the broad incentive program as of March of this year has resulted in the decline of the interest rates for 1 month and 12-month Euribor interbank lending. In June 2015, 1 month Euribor rates marked a decline of an average of percent from percent as they were in March On the other hand, 12-month average rates marked an average decrease of 0.16 percent in June 2015, from the average of 0.21 percent in March 2014 (figure 1). 16

21 Financial Stability Report International oil price The price of Brent Crude 1 oil in the second quarter of 2015 marked a decline of around 43.4 percent compared to the same period of the previous year. The sharpest oil price decline was marked in January 2015, while expectations for 2015 show for an average of oil price decline from 17 percent compared to 2014 (figure 2). With a price declines in the second quarter were also characterized the gold metals (figure 2). The gold price was on an average of 7.4 percent lower compared with the second quarter of The largest decline in the gold price was recorded in March 2015, where 1 gold unit (the equivalent measurement unit is 31.1 grams of gold and is named "troy oz ") had a lower cost for about 11.8 percent than in March Figure 2. Brent crude oil price, in USD M M M M M M M M M M M M M M M M M M M M M M M M M M01 The declining trend of food prices Source: World Bank (2015) continued in the second quarter of Compared to the same period of the previous year, the food prices index marked an average decline of 20.4 percent, while the cereal price index marked an average decline of 19.8 percent (figure 12). Exchange rate of the euro against the major currencies during the second quarter of 2015 was depreciated against the same period of The largest depreciation of euro was marked against the US dollar with 19.9 percent, followed by Swiss franc with 14.9 percent and British pound with 12.0 percent. While against Macedonian denar euro has remained almost unchanged in the second quarter compared to the same period of 2014, while against the Serbian dinar and the Albanian lek has marked an appreciation of 4.1 and 0.3 percent, respectively. Euro marked a depreciation also against the Croatian kuna with 0.2 percent, in the second quarter of Euro area banking sector The banking sector in major euro area countries, except Greece, was characterized by an improvement of the key financial soundness indicators. Capitalization level of the banking sector, expressed through the regulatory capital to risk weighted assets ratio, improved to 18.1 percent in Germany (17.1 percent in June 2014) and to 14.4 percent in Spain (13.5 percent in June 2014). However, countries such as Greece and Italy were characterized by deterioration of the capitalization level of the sector where in June 2015 the level of capitalization in Greece was 10.3 percent (16.2 percent in June 2014) while in Italy it was 14.5 percent (15.0 percent in June 2014). The main countries of the euro area also were characterized by improvement of the liquidity level in the banking sector, where in June 2015 Germany recorded a liquidity level of 45.4 percent (45.2 percent in June 2014), while in Italy this indicator was 16.8 percent (16.4 percent in June 2014). On the other hand, Greece was characterized by a decline of liquidity to 28.9 percent from 29.5 percent in June Regarding the quality of the loan portfolio, countries like Italy and Greece increased the level of non-performing loans (NPL). In June 2015, the level of NPL reached 18.0 percent in Italy (17.3 percent in June 2014), and 34.7 percent in Greece (34.2 percent in June 2014). On the other hand, Spain was characterized by a decline of NPL which dropped to 1 Brent Crude represents commercial classification for the oil produced in the North Sea as the representative of oil price in global level. 17

22 Financial Stability Report 7.0 percent from 9.0 percent in June The other performance indicators, such as Return on Assets (ROA) and ROE (Return on Equity), also marked improvement in most euro area countries, with the exception of Greece where it was observed a deterioration of ROA to -3.3 percent (-0.4 percent in June 2014) and of ROE at percent (-4.7 percent in June 2014). The euro area was characterized by an increased lending activity during the last year, where according to the ECB, in June 2015, total loans recorded a growth of 1.2 percent, which represents a significant improvement from the decline of 3.6 percent in June Within the euro area, Slovenia recorded the sharpest annual decline in lending with 12.1 percent, while the Netherlands was characterized by the highest growth of 12.1 percent. With positive developments were also characterized deposits, which in June 2015 recorded an annual growth of 1.5 percent, which represents a significant improvement compared with the decline of 2.0 percent in June Within the euro area, the Netherlands recorded the highest annual growth of deposits with 12.1 percent, while Slovenia recorded the sharpest annual decline of 6.3 percent. Consequently, the average of loan to deposit ratio was percent in the euro area in June The highest level of this indicator of percent was registered in Cyprus, while the lowest level of 60.2 percent was recorded in Malta. Regarding the interest rates, the euro area was characterized by a declining average interest rate on loans to 2.8 percent in June 2015 from 3.3 percent in June The lowest average interest of 1.7 percent was registered in Finland in June 2015 and the highest of 5.5 percent was registered in Cyprus. The main euro area countries marked an average decline of interest rate on deposits of 0.4 percentage points and, consequently, the average deposit rate declined to 1.1 percent in June Belgium was the country with the highest average rate of interest on deposits with 1.9 percent, in June While Lithuania was characterized by the lowest average interest rate on deposits with 0.4 percent, in June Meanwhile, Greece was the country which recorded a more significant decline of 0.9 percentage points on the average interest rate on deposits. The interest rate spread on loans and deposits, in the euro area, declined to 1.7 percentage points in June 2015 from 1.8 percentage points in June The highest interest rate spread on loans and deposits with 3.2 percentage points was registered in Cyprus, while the lowest of 0.6 percentage points was recorded in Belgium. Macroeconomic environment in the Western Balkans The performance of the economic activity in the Western Balkans, in the first half of 2015, is estimated to have marked improvement. The increased economic activity in 2015 is expected to be supported mainly by strengthening the external demand, which is expected to be reflected in increased exports of the Western Balkan countries. According to the IMF forecasts, the Western Balkan countries are expected to mark an average increase in GDP of 2.8 percent in Montenegro is expected to be characterized by the highest economic growth rate of 4.7 percent, while Serbia is expected to be the only country to record an economic decline of 0.5 percent. Western Balkan countries in the first months of 2015 were characterized by low inflationary pressures, driven mainly by food and energy prices on the global level. However, the IMF forecasts an average inflation rate of 0.9 percent in the countries of the region, in Albania is expected to be characterized by the highest inflation rate of 2.2 percent, followed by Montenegro with 1.7 percent, while Macedonia and Kosovo are expected to be the countries with the lowest inflation rate of 0.1 percent and -0.5 percent, respectively. 18

23 Financial Stability Report Banking sector in the Western Balkans The banking sector in the Western Balkan countries was characterized by positive performance, which was reflected in the improvement of the key financial soundness indicators. Western Balkan countries continue to be characterized by a satisfactory level of capitalization of the banking sector. Over the last year, most of the countries in the region, strengthened capitalization level, where the average regulatory capital to risk weighted assets until June 2015 was 18.4 percent (17.9 percent in June 2014). Albania was the country which was characterized by the most significant decline of the capitalization level, which in June dropped to 15.9 percent from 17.5 percent in June 2014, mainly as a result of higher growth rate of the risk weighted assets against the movements of the regulatory capital. The level of the banking sector liquidity in most Wester Balkan countries marked a slight decrease compared with the previous year, thus reducing the regional average to 47.2 percent in June 2015 (48.9 percent in June 2014). Western Balkans marked improvement in the quality of the loan portfolio, where the level of nonperforming loans amounted to 14.9 percent in June 2015 compared with the level of 16.0 percent in June In June 2015, Kosovo recorded the lowest NPL level with 7.2 percent, while the highest level of NPL with 22.8 percent was marked in Serbia. Also the profitability indicators marked improvements compared to the previous period, where ROA of the region improved to 1.2 percent, in June 2015 (0.7 percent in June 2014), while ROE improved to 10.4 percent in June 2015 (7.1 percent in June 2014). Credit activity in all the Western Balkan countries has increased compared with the first half of the previous year. The average growth rate of total loans in the region was 4.3 percent. The largest growth of lending activity of 8.5 percent was recorded in Macedonia, while the smallest increase of 0.2 percent was marked in Montenegro. Also, deposits marked an increase in all Western Balkan countries compared to the previous year. The average growth rate of total deposits in the region was 7.3 percent. The largest increase of 12.0 percent was recorded in Montenegro, while the lowest of 4.4 percent was recorded in Albania. Consequently, the average loan to deposit ratio in the region was 97.2 percent, where the highest ratio of percent was registered in Serbia, whereas the lowest level of 55.4 percent was marked in Albania. Regarding the interest rates on loans in the Western Balkans in general it was marked a decrease compared to the previous year. Until June 2015, the average interest rate on loans in the region recorded a decline of 0.52 percentage points reaching 8.64 percent (9.15 percent in June 2014). Bosnia and Herzegovina, except that remains characterized by the lowest interest rates on loans with 5.6 percent, also recorded the most significant decline in annual average interest rate on loans with 0.94 percentage points. Serbia remains the country with the highest average interest rates on loans, which until June reached 13.5 percent. Moreover, Serbia was the only country in the region which was characterized by an increased average interest rate of 1.33 percentage points compared to the same period of the previous year. Western Balkans decreased the average interest rate on deposits as well, by an average of 0.61 percentage points on average and, as a result, the average interest rate on deposits amounted to 2.24 percent in June Kosovo was the country that recorded the lowest interest rate on deposits from 0.81 percent in June On the other hand Serbia, despite the fact that it was the country which was characterized by the most significant annual decline of 1.74 percentage points, continued to be the country with the highest interest rate on deposits with 5.0 percent in June Despite the decline in interest rates on deposits, the most significant decline in interest rates on loans caused the interest rate spread on loans and deposits, in the Western Balkans to stand at 6.4 percentage points in June 2015 (6.3 points percent in June 2014). The highest interest rate spread on loans and deposits of 8.5 percentage points was registered in Serbia, while the lowest of 3.5 percentage points was marked in Bosnia and Herzegovina. 19

24 Financial Stability Report Box 1. Performance of the banking groups operating in Kosovo ProCredit Holding PCH (Germany) The value of total assets of the banking group ProCredit Holding (PCH) reached euro 6.1 billion in June 2015, marking an annual increase of 5.6 percent. According to the regional expansion, the structure of assets of the group is focused on Southeastern Europe, which comprises 48.7 percent of total assets of the group. The second important segment is Germany with 21.2 percent of total assets of the group, followed by South America and Eastern Europe with a share of 17.2 percent and 12.9 percent, respectively. PCH in 2014 sold their segments in the region of Africa and is planning to sell the segments in South America (figure 3). During the first half of 2015, the countries of Southeastern Europe and Germany were characterized by economic growth with a positive impact on the performance of the group, despite the recession of countries in Eastern Europe and the economic slowdown in South America due to the depreciation of the currency peso against US dollar and the price decline of goods in Colombia. The PCH group s business model continues to be traditional, where lending is funded mainly by resident deposits. Over the last year, the group's lending activity was recovered, where in June 2015 the group's total loans amounted to euro 4.5 billion, representing an annual increase of 6.3 percent compared with the decline of 0.4 percent in June of the previous year. The recovery coincides with the progress of deposits which during this period was characterized by an accelerated growth, where until June 2015 amounted to euro 4.1 billion, representing an annual increase of 9.8 percent (1.3 percent in June 2014). Consequently, loans to deposits ratio in June 2015 decreased to percent from percent as it was in June PCH group during the first half of 2015 marked an improvement of the overall efficiency indicator, expressed through the expenditures to income ratio, which in June 2015 was 70.2 percent, representing a decrease of 3.6 percentage points compared with the previous year (figure 4). The improvement is mainly Figure 4. Effeciency indicators of PCH, in percent attributed to the faster decline of 7.6 percent of the operational expenditures and the slight increase of 0.4 percent of operational income. Faster decline of operational expenditures was a result of reduced personnel expenditures, which marked a decline of 13.0 percent, and reducing the administrative expenditures which marked a decline of 2.3 percent. Within revenues, interest income marked a decline of 7.5 percent despite the fact that the group's lending activity increased during this period. Whereas, income from fees and commissions recorded a growth of 3.6 percent until June Despite the decline in revenues, better management Figure 3. Structure of ProCredit Holding assets, in percent of expenditures ensured that the group's profit until June 2015 to be significantly higher compared to the same period of the previous year. Until June 2015, the realized profit amounted to euro 33.1 million (euro 22.9 million until June 2014). Increased profit significantly contributed to improving the rate of return on equity (ROE) (annualized), which reached 11.6 percent compared with 9.4 percent as it was in The capital adequacy ratio (CAR) marked a value of 11.7 percent in June 2015 (12.4 percent in June 2014), while continuing to meet the regulatory requirements of the capital adequacy (figure 4). The performance of the group is expected to continue to improve also during the second half of 2015, influenced among others also by macroeconomic developments in the countries where it operates. This is 12.9% 17.2% 48.7% 21.2% Southeastern Europe Eastern Europe Southern America Germany 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Expenditures to income ratio *ROE CAR *ROE is annualized Source: ProCredit Holding (2015) 16% 14% 12% 10% 8% 6% 4% 2% 0% 20

25 Financial Stability Report because initially Germany, the country of origin of PCH, it is expected that until the end of 2015 to have an economic accelerated growth supported by the price decline of oil, the strong labor market and the growth of the public expenditures on accommodation of the refugees flow with which all the Europe is facing this year. Similarly, Southeastern European economies in 2015 are expected to have higher economic growth compared to the previous year. The performance of the group significantly depends on the performance in Serbia, Kosovo and Bulgaria where operate three largest group subsidiaries. Although Bulgaria is forecasted to mark a slowdown growth during 2015, its negative effect may be neutralized by Serbia, which is expected to mark an economic recovery from the decline of the previous year that came as a result of floods which harmed the agricultural sector. Given that ProCredit share of assets in Kosovo to total assets of the group, in June 2015 was 12.8 percent, the performance of the group can be positively influenced by the Kosovo s economy, which is expected to mark an accelerated growth as a result of the increased domestic demand for consumption, and the increased private and public investments. Raiffeisen Bank International RBI (Austria) The value of total assets of the banking group Raiffeisen Bank International (RBI) amounted to Figure 5. Structure of Raiffeisen Bank Ineternational, in percent euro billion in June 2015, marking an annual decline of 5.9 percent. According to the regional expansion, Austria holds the leading 29.9% position in the structure of assets representing 16.7% 29.9 percent of total assets of the group, followed 14.6% by the Central Europe as another important 20.9% segment representing about 20.9 percent of total assets of the group. Southeastern Europe with 17.8% 17.8 percent represents the third place, followed by Eastern Europe with a representation of 14.6 percent of total assets of the group. The remainder includes the units assets in Asia and Central Europe RBI Group (Austria) Southeastern Europe Other Eastern Europe America which are planned to be reduced or sold Source: Raiffeisen Bank International (2015) by the end of 2017 (figure 5). Countries in which the group operates during the first half of 2015 was characterized by an economic recovery (countries in the Central Europe) and a moderated economic growth (Southeastern Europe), while Eastern European countries in which the group operates, faced with recession, thus negatively affecting the performance of the group. The reduction of RBI assets was mainly driven by the economic slowdown growth in Austria, from imposing of the economic sanctions against Russia, which deepened the recession in this country, from the depreciation of the currencies of Ukraine and Russia against the US dollar and euro, and the changes in the banking legislation in Hungary (Settlement Act). Figure 6. Growth trend of loans and deposits of RBI, in percent 60% 50% 40% 30% 20% 10% 0% -10% -20% June 2011 Loans (annual change) Deposits (annual change) The business model of the RBI banking group Source: Raiffeisen Bank International (2015) continues to be traditional with the lending activity mainly funded by deposits (figure 6). Over the last year, the group s lending activity was characterized by an annual decline of 5.6 percent, where the total loans of RBI, until June 2015, amounted to euro 76.3 billion. This decline was mainly driven by the decrease of loans in Russia and in Ukraine, and the decrease of loans in foreign currency in Hungary as a result of changes in banking legislation. The value of deposits until June 2015 amounted to euro 67.0 billion, marking an annual growth of 4.1 percent, which is mainly caused by the increase in deposits in the Czech Republic as a result of the economic recovery in this country. As a result of the decrease of loans against the increased level of deposits, loans to 21

26 Financial Stability Report deposits ratio resulted in percent in June 2015, representing a decrease of 11.7 percentage points compared with the same period of the previous year. With regard to the overall efficiency indicator, expressed through the expenditures to income ratio, the RBI group worsened where the indicator reached 56.8 percent in June 2015, from 55.3 percent in June 2014 (figure 7). This increase of 1.5 percentage points is attributed to the faster decline of 11.0 percent of operational income, compared to the decline of operational expenditures from 8.6 percent in June The faster decline of the total operational income was mainly driven by interest income which marked a decline of 12.0 percent, mainly driven by large currency fluctuations (depreciation of the Russian and Ukrainian currency), the increase of non-performing loans in Asia, as well as the lower interest rates in Poland. Within operating expenditures, personnel expenditures were characterized by an annual decline of 15.5 percent, while other administrative expenditures marked a decline of 0.7 percent until June During the first half of 2015, RBI has allocated euro 24 million as additional assets for loan loss provisions against for the segment of the central office and for the branch in Russia as a result of the unfavorable economic situation in this country. In the branch of RBI in Ukraine, loan loss provisions were lower mainly as an effect of the currency depreciation. Until June 2015, RBI group recorded a net profit of euro 288 million, marking an annual decline of 16.4 percent, which can be adversely affected by economic performance in Russia and Ukraine. Despite the decrease of the profit, the ratio of return on equity (ROE) recorded significant improvement, which in June 2015 stood at 11.0 percent (annualized), which represents a significant increase compared with the rate of 0.2 percent as it was in The capital adequacy ratio (CAR) in June 2015 stood at 16.6 percent, compared with a rate of 16.8 percent in June 2014, which remains well above the 8 percent of the minimum as set by Basel III regulatory requirements (figure 7). Meanwhile, the nonperforming loans to total loans ratio in June 2015 increased to 11.9 percent compared with 10.7 percent in June In June 2015, the coverage of non-performing loans by loan loss provisions stood at 66.6 percent (65.3 percent in June 2014). RBI continues to be the only of the three main banking groups operating in Kosovo that trades its shares on the stock exchange. The share price of RBI on the Vienna Stock Exchange, in June 2015, decreased to euro 13.05, compared to euro 23.32, in June This decrease of the share price, among others, came as a result of the economic instability in Ukraine and Russia. Economic developments in the countries where the RBI group operates are expected to positively influence the performance of the RBI group. Austria, despite the slower economic growth in this period, it is expected that by the end of 2015 and in 2016 to have a faster pace of economic growth as a result of the increased public expenditures that are designated for immigration. Similarly, Southeastern European economies in 2015 are expected to have higher economic growth. Positive growth trend is expected to continue in the countries of Central Europe as a result of the economic growth in Germany which is the largest trading partner of these countries. Meanwhile, Russia s economic decline is expected to continue during 2016 as a result of the continuation of sanctions and the declining oil prices. The low share of 0.68 percent of assets of Raiffeisen Bank in Kosovo to total assets of the group suggests that the impact of the performance of Raiffeisen Bank in Kosovo and the Kosovo s macroeconomic environment impact on the group's performance remains limited. Nova Ljublanska Banka- NLB (Slovenia) Figura 7. Effeciency indicators of RBI, in percent 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Expenditures to income ratio *ROE CAR *ROE is annualized Source: Raiffeisen Bank International (2015) NLB banking group during the first half of 2015 was characterized by declining activity, compared to the same period of the previous year, while financial performance and sustainability indicators marked an improvement. In June 2015, the value of total assets of the group amounted to euro 11.6 billion, representing an annual decline of 5.3 percent. Regarding the regional expansion of the group s assets, Slovenia represents the main market with 69.7 percent of total assets. Southeastern Europe also is a very 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 22

27 Financial Stability Report important market for the NLB group, given that 29.4 percent of the group's total assets are invested in this region. The remainder assets of group is invested in West and Central Europe with a share of 0.9 percent (figure 8). With a moderate economic growth were characterized some Southeastern Figure 8. Structure of NLB Group assets, in percent European countries in which the group operates, while the economy of Slovenia was 29.4% characterized by a higher economic growth as a result of increased exports and strengthening 0.9% of the domestic demand for consumption. However, despite the positive developments in the macroeconomic environment, the banking 69.7% sector activity in Slovenia marked a decline, including the NLB group, which being in the restructuring phase was characterized by a declining activity. The NLB group followed the traditional business model, as well, taking into account Source: Nova Ljubljanska Banka (2015) that the activity of the group consists of lending and is financed by deposits. Similarly as the RBI group, the NLB group during this period was characterized by a decline in lending activity, where in June 2015, the value of total loans reached euro 9.0 billion, representing an annual decline of 4.5 percent. The decline was mainly due to the process of restructuring of the banking sector in Slovenia as a result of over-indebtedness and due the high level of non-performing loans on the balance sheets of the banks. With a decline were characterized also deposits, the value of which amounted to euro 8.7 billion in June 2015, representing an annual decline of 0.5 percent (figure 9). The more significant decline of loans, along with the slight decline of deposits has affected the loans to deposits ratio to be reduced to percent in June 2015 from as it was in June NLB Group in the first half of 2015 improved the -10% efficiency and financial performance of the key -12% -14% indicators. The overall efficiency indicator, June 2011 expressed through the expenditures to income Loans (annual change) Deposits (annual change) ratio, marked an annual decline of 0.4 percentage Source: Nova Ljubljanska Banka (2015) points, decreasing to 59.5 percent in June 2015 (figure 9). This improvement is attributed to the significant reduction of loan loss provisions for 37.8 percent, while operating income marked a decline of 2.9 percent. Within revenues, interest income marked a decline of 9.7 percent, while the income from fees and commissions recorded a growth of 2.1 percent until June However, net interest income and net income from fees and commissions marked an increase as a result of the reduction of expenditures on interest and fees. Within operating expenditures, personnel expenditures marked a decline of 2.1 percent until June 2015, while general and administrative expenditures marked a decline of 2.9 percent. Slovenia Southeastern Europe Western and Central Europe Figure 9. Growth of loans and deposits of NLB Group, in percent 4% 2% 0% -2% -4% -6% -8% Figure 10. Effeciency indicators of NLB Group, in percent 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% The group managed to close the first half of with a profit of euro 53.4 million (34.0 Raporti i Shpenzimeve ndaj te Hyrave *ROE CAR million in the first half 2014), which was *ROE is anualized Source: Nova Ljubljanska Banka (2015) reflected in the return rate on equity (ROE) (annualized) which recovered to 7.8 percent from 4.8 percent in In addition, the group has 40% 20% 0% -20% -40% -60% -80% -100% -120% -140% -160% 23

28 Financial Stability Report strengthened the capitalization level expressed through the capital adequacy ratio (CAR), which reached 15.9 percent in June 2015 compared with 15.7 percent in June 2014 (figure 10). Positive development was recorded also in the credit portfolio quality, where the non-performing loans to total loans ratio declined to 24.6 percent in June 2015 compared with 25.8 percent in June While the coverage of non-performing loans by provisions in June 2015 was 69.4 percent compared to 70.7 percent in June

29 Financial Stability Report 4. Kosovo s Economy Kosovo s economy was characterized by increased economic activity during the first half of According to KAS, the first quarter was characterized by an annual growth of 0.2 percent, while in the second quarter it was marked an economic accelerated growth rate of 3.4 percent. The economic growth rate in the first six months of 2015 is estimated to have been generated mainly by increased domestic demand, namely the increase in consumption and investments, while net exports continued to contribute negatively to the economic growth. Figure 11. Real GDP growth rate, in percent Source: KAS (2014) and CBK estimates for 2015 CBK forecasts for 2015 suggest an accelerated economic growth compared with the previous year. The real GDP growth rate for 2015 is estimated to be 3.5 percent, compared with the growth of 1.2 percent that was recorded in 2014 (figure 11). The forecast for the growth in 2015 is largely based on the growth of private investments and private consumption. However, unlike the previous year, when investments and public consumption had decreased, these two categories are expected to be characterized by growth until the end of 2015 compared to the previous year. The higher real growth rate of imports of goods and services compared to exports is estimated to have affected the contribution of net exports to real GDP growth to be negative. In the first six months of 2015, Kosovo s economy was characterized by price decline. The inflation rate, expressed through the consumer price index (CPI) in the first half of 2015 was -0.4 percent (figure 12). The main contribution to the price decline was given by the category of transport prices which had a negative impact with 1.7 percentage points, then the category of furniture, clothing and footwear which had a negative impact with 1.2 percentage points each, and health and education which contributed negatively with 0.4 and 0.2 pp, respectively. 2 On the other hand, food and non-alcoholic baverages contributed positively by 3.4 percentage points, and energy by 1.8 percentage points. In the first six months of 2015, the CPI components such as electricity, gas and other fuels marked a price increase with an average of 4.9 percent, alcoholic beverages and tobacco with 3.4 percent and clothing and footwear with 1.9 percent. Same developments had also the prices of non-alcoholic beverages, which increased by 1.1 percent. Food and non-alcoholic beverages represent about 40.9 percent of the consumer basket in Kosovo. Conversely, a more significant price decline was recorded in transport services with an average of 7.9 percent, which also gave the main contribution to the overall decline of inflation. Transport services 3 represent around 13.1 percent of the consumer basket, while the decline recorded in the prices of these services is mainly attributed to the price decline of oil derivatives. 2 The calculation of the contribution of components of the CPI on the inflation level, except price movements, is based also on the weight that certain components have in the CPI. It may happen that a certain category have increased prices but at the same time have marked a reduction weight in total CPI. In this case, if weight reduction is higher than the price increase then the contribution is negative to the total contribution of CPI. 3 Transport services include the subcategories: purchase of cars; The usage of equipment for personal transport; and transport services. 25

30 Financial Stability Report Due to the high dependence of the Kosovo s economy on imports, as well as the relatively high share of tradable goods and services in the consumer basket, price movements in international markets continue to be the main determinant of price movements in the country. The import price index recorded an average annual decline of 0.4 percent in the first half of 2015, while manufacturing prices marked an increase of 3.9 percent. Until June 2015, the fiscal sector was characterized by a growth of revenues and expenditures compared to the previous year. Primary budget revenues until June 2015 reached a value of gross euro million. If VAT returns of euro 15.0 million and other taxes from the Tax Administration and Customs of Kosovo are deducted, the primary budget revenues would reach net euro million, representing an annual increase of 7.2 percent. On the other hand, the total budget expenditures amounted to about euro million representing an annual increase of 5.8 percent. In the first six months of 2015, government current expenditures reached a value of euro million, representing an increase compared to the same period of the previous year of 11.6 percent. Within current expenditures, with a higher growth were characterized the category of wages and salaries (11.1 percent) and the category of subsidies and transfers (19.5 percent). On the other hand, capital expenditures amounted to euro million in the first half of 2015, corresponding to an annual decline of 15.4 percent. Kosovo s budget recorded a deficit of euro 21.1 million until June 2015 (euro 28.2 million in the same period of 2014). Until June of 2015, public debt reached euro million or 11.2 percent of GDP, compared with euro million as it was in the same period of the previous year or 10.2 percent of GDP. In the first half of 2015, the external sector in Kosovo was characterized by a growth of the current account deficit and a recovery of the capital and financial account. The deficit in the current and capital account recorded a value of euro million in the first six months of 2015, compared with a value of euro million as it was in the same period of the previous year. The deficit increase of the current and capital account mainly is attributed to the increase of the deficit in the goods account, as well as the decreases marked in the positive balance of the services account and the accounts of primary and secondary income. Kosovo s economy was characterized by an increase in commercial activity in the first half of 2015, namely an increase of the value of total exports and imports of goods and services. However, despite the increase of goods export up to 14.5 percent in the reporting period, the increased value of imported goods by 5.1 Figure 12. Inflation and its main contributors, annual growth in percent -15 percent has increased the trade deficit of goods for 3.7 percent (figure 13). This resulted due to the higher weight of imports compared in exports of Kosovo s foreign trade. Similar to export of Qer 2009 Qer 2010 Qer 2011 Qer 2012 Qer 2013 Qer 2014 Qer 2015 Food and non-alcoholic beverages Alcoholic beverages and tobacco Energy Education Health Source: KAS and CBK calculations (2015) Figure 13. Imports, exports and trade balance, non-cummulative in millions of euro Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q Source: KAS (2015) Trade balance Exports Imports

31 Financial Stability Report goods, also the export of services was characterized by an increase of 10.8 percent in the first half of 2015, but the faster growth of the value of imported services by 24.2 percent led to a decrease of the positive balance of services by 3.9 percent. The category of the secondary income continues to affect the reduction of the current account deficit and capital balance of payments of Kosovo. Remittances, as one of the main components of the current account, increased by 15.8 percent in the first six months of 2015 and reached a value of euro million. Within the balance of payments, financial account recorded a balance of euro million in the first six months of 2015 compared with the balance of euro million in the same period of Within liabilities, the main category remains the category of FDI, whereas the main category within assets continues to be other investments (mainly deposits and commercial loans) outside Kosovo's economy. FDI balance was characterized by improvement in 2015, mainly as a result of the FDI growth in the country at million by June 2015, from 39.1 million euros as they were in the same period of The financial system was characterized by the expansion of its activity and a high level of sustainability in all its constituent sectors. The role of the banking sector in the financing of the economic activity strengthened in The increase of lending activity during this period, driven by supply as well as demand side, has further supported the growth of consumption and private investments. In the first six months of 2015 a total of 5,069 new companies were registered or 241 companies fewer than in the same period of the previous year, whereas 936 companies were closed or 55 companies more than in the same period of the previous year. The structure of newly registered enterprises is similar to the previous year s structure, dominated by enterprises in sectors such as trade, hotels, manufacturing, construction and agriculture. In the first six months of 2015, with the reduction in the number of registered businesses was characterized the trade sector (56 enterprises fewer), manufacturing (29), construction (61), hotels (59) and professional activities (43 companies fewer). Meanwhile, sectors that are characterized by an increased number of registered enterprises were agriculture (76 more companies), health (14), financial activities (7), power supply (6) and transport (5 enterprises more). CBK Forecasts for 2016 suggest that the Kosovo s economy will have a higher growth compared with This increase as in 2015 is expected to be generated by domestic demand, while net exports are expected to continue to have a negative contribution GDP growth. Consumption, as the main component of domestic demand, it is expected that during 2016 will have the major contribution to the economic growth. Investments, unlike 2015, are expected to be characterized by a significant increase in public investments. Also, the reduction of interest rates and eased lending standards for approving loans by banks are expected to have significant impact in encouraging the private sector investments. Also FDIs, which were characterized by significant growth in 2015, are expected to contribute to the growth of total investments. Net exports are expected to continue to have a negative impact on GDP growth. 27

32 Financial Stability Report 5. Kosovo s Financial System 5.1. General Characteristics Kosovo s financial system during the first half of 2015 was characterized by further expansion of its activity, albeit at a slower pace. The value of total assets of the system in June 2015 amounted to euro 4.73 billion, corresponding to an annual growth of 9.5 percent (figure 14). This increase is attributed to a considerable expansion of commercial banks and pension funds activity. Smaller contribution was given by the insurance sector, while the effect of the microfinance sector and financial auxiliaries, was quite low, regardless their business growth. The structure of the financial system continues to be dominated by the banking and pension sector, which in June 2015 accounted for 69.1 percent and 25.0 percent of total assets of the system (figure 15). Consequently, the slowdown in growth of the total financial system assets mainly reflects the slower growth of these two sectors. During this period, the pension sector recorded the highest annual growth rate of assets with 18.1 percent, followed by the banking sector which was characterized by an annual increase of 6.9 percent. The third component by size of assets is the insurance sector, which in June 2015 increased its share to total financial system assets to 3.2 percent. The insurance sector in June 2015 recorded an annual growth of 11.5 percent, becoming one of two constituent sectors of the financial sector which during this period was characterized by an accelerated increase of its activity. Figure 14. Financial system assets and its constituent sectors, annual change 27% 22% 17% 12% 7% 2% -3% -8% -13% Financial system Banking sector Pension sector Insurance sector Microfinance sector Figure 15. Structure of assets of the financial system 2.6% 0.2% 3.1% 23.2% Qershor % 0.2% 2.5% 3.2% 25.0% Qershor % The microfinance sector, which follows the insurance sector with a share of 2.5 percent to total financial system assets Banks Insurances Microfinance Banks Insurances Microfinance during this period marked an accelerated increased activity. Assets of microfinance sector, in June 2015, recorded an annual growth of 2.8 percent. The weight of financial auxiliaries to the whole financial system continues to be low with a share of only 0.2 percent of total financial system assets, despite its annual growth of 12.6 percent recorded in June

33 Financial Stability Report Financial intermediation in the country, calculated as the financial system assets to GDP ratio has expanded during this period, although with a slower pace. In June 2015, the rate of financial intermediation in the country has increased to 82.7 percent compared with 78.8 percent in the same period of the previous year. The expansion reflects the positive developments of the constituent majority of the sectors, except the microfinance sector, which was characterized by a slight decrease of the share to the financial intermediation. Pension sector and the banking sector marked a higher growth rate of their weight in financial intermediation in the country, while the insurance sector marked a slighter increase of the share (figure 16). Despite the increase, the level of financial intermediation of the banking sector in Kosovo continues to be relatively low compared with the countries in the region (figure 17). Based on this, it can be implied that, in relation to the size of the economy, the financial sector of Kosovo has still room for growth of the financial intermediation in order to converge with the average of other regional countries. 70% 60% 50% 40% 30% 20% 10% Figure 16. Financial intermediation rate by sectors in Kosovo 0% 140% 120% 100% 80% 60% 40% 20% Banking sector Pension sector Insurance sector Microfinance sector Figure 17. Finanical intermediation rate of the banking sector in the region The structure of the financial system has Source: Central Banks of the region (2015) expanded also in terms of the number of financial institutions operating in the country. Until June 2015, two new insurance companies entered in the domestic market with domestic capital. Also, the number of financial auxiliaries reached to 43 from 41 as they were in June Meanwhile, the number of commercial banks, pension funds and microfinance institutions remained unchanged. From a total of 88 financial institutions licensed to operate in the country, the majority of them consist of microfinance institutions and financial auxiliaries, the total number of which reached 61, in June 2015 (table 1). Table 1. Number of fiancial institutions 4 Description Commercial banks Insurance company Pension funds Financial auxiliaries Microfinance institutions The number of financial institutions represents the number of institutions that are licensed to operate in Kosovo market. 29

34 Financial Stability Report 5.2 The exposure of external sector 5 In June 2015, the value of investments in the external sector amounted to euro 1.63 billion, recording an annual increase of 22.0 percent. 6 The accelerated growth was mainly due to the increase of pension fund investments in Figure 18. Structure of foreign claims, in percent the external sector. The structure of external assets consists mainly of assets and other equities with a share of 64.8 percent, followed by deposits with a share of 16.0 percent and securities with a share of 14.1 percent. The remainder is represented by loans with 5.0 percent and other assets with 0.2 percent (figure 18). 100% 80% 60% 40% 20% 0% Within the total foreign assets, the highest annual growth of 40.3 percent was recorded by assets and equities, Other Annual change (right axis) followed by bank deposits held in the external sector, which marked a growth of 20.2 percent. The growth of assets and other equities invested in the external sector was due to the withdrawal of most of the assets that Kosovo Pension Savings Fund was holding at the CBK which were invested in the external sector. Meanwhile, the growth investments in deposits in the external sector was as a result of the funds placement by commercial banks to other alternatives such as deposits in the external sector in terms of the high liquidity level in the country. On the other hand, investments in other categories in the external sector were characterized by a decline, of which the highest declining rate of 31.8 percent was recorded by loans, followed by investments in securities, which marked a considerably lower decline of 5.2 percent. The decline in these categories among others may reflect an accelerated growth rate of bank lending in the country as well as the more favorable interest rates on Kosovo s government securities compared with the return on securities in foreign markets. The value of total liabilities to the Figure 19. Structure of foreign liabilities, in percent external sector in June 2015 amounted 100% to euro million, marking an 21.1% 25% annual increase of 3.3 percent. The 80% 15% structure of external liabilities 60% 3.3% 5% continues to be dominated by loans with -1.5% -5% a share of 62.9 percent, followed by 40% -15% deposits with 35.3 percent and other 20% -25% liabilities with a share of 1.8 percent -28.2% 0% (figure 19). Consequently, the growth -35% slowdown of total external liabilities was reflected by the slower growth of deposits and loans from the external Deposits Loans Other Annual change (right axis) sector. In June 2015, the loans received from the external sector recorded a growth of 4.2 percent, compared with the growth of 23.2 percent in June The significant slowdown may be a result of the presence of sufficient liquidity in the banking sector. The category of deposit in June 5.5% 12.4% 10.2% 22.0% 20% 0% Deposits Securities other than shares Loans Assets and other equities 30% 25% 15% 10% 5% 5 In this context, the financial system does not include the Central Bank of the Republic of Kosovo. 6 Within the requirements of Kosovo financial system to the external sector it is not included "cash" category. In monetary and financial statistics the "cash" category is considered as external asset (requirement to non-residents), due to the fact that euro is not national currency of Kosovo, but in this analysis these means are considered as such since they are kept in banks in Kosovo. 30

35 Financial Stability Report 2015 recorded an annual increase of 1.3 percent compared with the annual growth of 20.2 percent recorded in June The slowdown in the growth of non-resident deposits may have been impacted mainly by the low interest rates on deposits in Kosovo s banking sector during the past two years. Consequently, the value of net foreign assets (NFA) of the Kosovo s financial system in June 2015 reached euro 1.36 billion, marking an annual increase of 26.5 percent. Pension funds continue to represent the largest share of NFA (77.7 percent), hence had the main contribution to the growth of total NFA. Positive balance of total NFA is also contributed by the NFA of the banking sector with a share of 26.8 percent, while microfinance sector s NFA was the only segment which recorded a negative balance of -4.6 percent of total financial system NFA, which is a result of the high dependence of these institutions to external financing through credit lines (figure 19). Total exposure of the financial system to the external sector continues to be more pronounced within assets, in addition to lower exposure within liabilities. More specifically, foreign assets to total assets ratio of the financial system in June 2015 reached 34.5 percent (25.0 percent in June 2014), while the external liabilities to total liabilities ratio of the system stood at 5.6 percent (6.0 percent in June 2014 ) (figure 20). In terms of sectors, the banking sector Figure 20. Foreign exposure by financial sectors continues to have the lowest net exposure to the external sector. The 80% foreign assets to total assets ratio of the 70% banking sector is 17.4 percent, while the 60% external liabilities to total liabilities 50% 40% ratio of the sector was 6.2 percent. 30% Within the banking sector, the large 20% banks seem to be more exposed to the 10% external sector compared to smaller 0% banks, in terms of assets liabilities as well. This reflects the fact that larger Foreign assets/total assets banks, which are mostly foreign banks, *Financial system does not include the CBK have a higher degree of interaction with the external sector, and particularly with their parent banks. *Financial system Banking sector Pension sector Microfinance sector Foreign liabilities/total liabilities Pension funds sector continues to be exposed to the external sector assets. In June 2015, assets invested abroad accounted for 89.5 percent of total assets of the pension sector. Unlike other sectors, the microfinance sector is exposed only in terms of liabilities and until June the level of exposure reached 53.6 percent of total liabilities. The microfinance sector has high exposure within liabilities due to the usage of foreign credit lines in order to fund the lending activity, given that MFIs do not have the legal right to accept deposits. 31

36 Financial Stability Report 6. Kosovo s Banking Sector 6.1 Structure of the Banking Sector Banks with foreign ownership continue to dominate the banking sector, where out of ten banks licensed to operate in the country, eight of them belong to foreign ownership and manage 90.4 percent of total assets and own 93.0 percent of total banking sector capital. As regards to the country of origin, Austria, Germany, Slovenia, Albania and Serbia are Figura 21. Structure of commercial banks, by represented with a single bank each, ownership 100% 5.7% 6.9% 7.7% 8.3% while Turkey is represented by three 90% banks % 15.2% 15.9% 15.0% 80% (figure 21). In the banking sector operate also two domestically owned banks. 50% 70% 60% 25.3% 23.6% 24.9% 25.5% The banking sector continued to be characterized by decreasing the level of concentration in the market during the first half of The share of the three largest banks to total assets of the sector, in June 2015, declined to 65.3 percent compared with 67.2 percent in the previous year. The decline in concentration is observed also through the Herfindahl-Hirschman Index (HHI), which shows a steady decline of concentration in terms of assets, loans and deposits during the past four years (figure 22). The concentration decline was more pronounced in loans and assets as a result of the faster growth of the small banks activity compared with the slower growth of the three largest banks. 40% 30% 30.8% 28.9% 26.4% 24.8% 20% 10.8% 9.5% 9.6% 10.9% 10% 9.6% 12.7% 13.8% 14.9% 0% Turkey Kosovo Germany Austria Slovenia Serbia Albania Figure 22. Concentration level in the banking sector Assets (HHI) Loans (HHI) Deposits (HHI) The three largest banks in June 2015 recorded an annual growth of 0.8 percent of loans and a growth of assets of 3.9 percent, compared with the annual growth of 17.4 percent of loans and 13.0 percent in assets of other banks. The concentration decline is evident also in deposits, but with a slower pace. In June 2015, deposits of the three largest banks recorded a growth of 4.6 percent, compared with the growth of 9.9 percent in other banks. 7 With banks it is meant the subsidiaries and foreign branches that are licensed to operate in Kosovo. 32

37 In millions of euro Financial Stability Report 6.2. Activity of the Banking Sector Assets The value of assets of the banking sector in June 2015 amounted to euro 3.27 billion, marking an annual increase of 6.9 percent (9.8 percent in June 2014) (figure 23). The highest contribution to the growth of the sector s assets was given by the expansion of the loan portfolio which continues to be the Figure 23. Structure of the banking sector assets 3,500 3,000 2,500 2,000 1,500 1, dominant category of the banking 0 activity. However, assets growth of the Cash and b alance with the CBK banking sector slowed down in Securities Gross loans comparison to the previous year which Fixed assets Other assets Annual change of total assets (right axis) mainly may be due to the slowdown of the deposits growth, which at the same time represent the main source of financing of the banking activity. Balance wit h comm ercial banks Structure of the banking sector assets has not marked significant changes compared to the previous periods, taking into account that the majority of the banking sector assets (85.4 percent) remain invested in instruments which bring profit such as loans, securities and the balance with commercial banks. The share of the category of the balance with commercial banks to total assets remained similar to the same period of the previous year, while the categories of cash and securities were characterized by a slight increase in their share. On the other hand, the main category of assets, represented by loans, marked a slight decline in their share to total assets of the banking sector (table 2). Despite the slight movements, the increase in the share of securities against the decline in the share of loans to total assets of the sector suggests a more pronounced orientation of banks towards diversifying their portfolios. 12% 10% 8% 6% 4% 2% 0% Table 2. Structure of the banking sector Description In millions of euro Share (%) In millions of euro Share (%) In millions of euro Share (%) In millions of euro Share (%) Cash and balance w ith the CBK % % % % Commercial banks % % % % Securities % % % % Gross loans 1, % 1, % 1, % 2, % Fixed assets % % % % Other assets % % % % Total 2, % 2, % 3, % 3, % Within the structure of the banking sector assets, besides the category of loans which marked an increased accelerated growth of 6.1 percent (3.5 percent in June 2014) also the category of cash and balance with the CBK was characterized by an annual accelerated growth rate of 11.0 percent in June 2015 (0.8 percent in June 2014) (figure 24). The growth of the latter was mainly a result of the annual growth of 12.6 percent of commercial banks reserves at the CBK. The category of the balance with commercial banks, which includes deposits and credit lines with banks abroad, marked an increase of 7.3 percent low speed (22.0 percent in June 2014). This slowdown was due to the significant reduction of time deposits in non-euro currency that may be 33

38 Financial Stability Report the effect of the euro depreciation in relation to other currencies (the US dollar, Swiss franc, etc.) in late 2014 and early The category of investments in securities, in June 2015, amounted to euro million, corresponding to an annual growth of 9.5 percent, but slower compared to the previous year (64.5 percent recorded in June 2014). Within the investments structure of commercial banks in securities, Kosovo s government continues to increase investments in securities. In June 2015, Kosovo s Government investments in securities recorded an annual growth of 31.1 percent, increasing its share to total portfolio investments of securities at 49.2 percent (figure 25). The increasing investments in securities of the Kosovo s Government was primarily a result of higher interest rates offered by these investments compared with the interest rates on securities of foreign governments. It is worth mentioning that the simple average interest rate on securities of the Kosovo s Government increased to 1.8 percent in the first half of 2015, compared with the rate of 1.3 percent in the same period of Meanwhile, the simple average interest rate of the foreign government securities 8 until June 2015 was 0.05 percent compared with the rate of 1.1 percent as it was until June On the other hand, investments in securities in the external sector, which mainly consist of foreign government bonds, marked a decline of 5.7 percent, decreasing their share to 50.7 percent in the total portfolio of investments in securities. This decrease was driven by significant reduction of interest rates compared to the same period of the previous year. Investments in securities of other financial and non-financial corporations, which are considered as instruments with a higher degree of risk, have a lower share in the portfolio of securities investments (0.1 percent in June 2015), implying that banks avoid investments with higher risk. Loans Figure 24. Assets of the banking sector, annual change 65% 50% 35% 20% 5% -10% -25% Gross loans Securities Balance wit h comm ercial banks Cash and b alance with the CBK Figure 25. Structure of securities, in percent 100% 80% 60% 40% 20% 86.2% 40.3% 41.1% Loans remain the most important category of assets of the banking sector, with a share of 61.3 percent of total assets of the sector. Lending activity of the banking sector increased with an accelerated growth pace during the first half of In June 2015, the value of total loans amounted to euro 2.01 billion, representing an annual increase of 6.1 percent (3.5 percent in June 2014) (figure 26). The expansion of the lending activity among others was influenced by increased demand of enterprises for expansion of their operational capacity, and by the increased level of consumption by households (box 3). 59.7% 58.9% 50.7% 49.2% 0% Other financial and nonfinancial corporations Foreign governments Kosovo's Government 8 In calculation of the average interest rate for foreign governments were included the following countries: Germany, France, Belgium and Italy and Spain. 34

39 Financial Stability Report Structure of total loans continues to be dominated by loans intended for enterprises, which in June 2015 represented 66.7 percent of total loans. Loans to enterprises during the past three years were characterized by slower growth where in June 2015 recorded an annual growth of 5.2 percent (2.9 percent in June 2014). However, the main contribution to the accelerated growth of total loans was given by loans intended for households, which comprise 33.0 percent of total loans and recorded a growth of 11.4 percent, compared with the growth of 5.6 percent in June Other loans, which account for loans to non-governmental organizations and loans in non-euro currency represent 0.3 percent of total loans, representing a Figure 26. Contribution to loans growth by sectors, in percentage points 10% 8% 6% 4% 2% 0% -2% decline of 4.9 percent in June Loans to non-residents in June 2015 decreased their share to total loans at 0.02 percent (1.0 percent in June 2014) as a result of the sharp annual decline of 98.1 percent which was mainly due to the maturity of the majority of loans. Despite the accelerated growth of total loans, new loans issued by the banking sector in the first half of 2015 were characterized by an annual increase of 8.5 percent compared with the annual growth of 39.4 percent recorded in the first half of 2014 (box 2 ). The significant growth recorded in the previous year was a result of the increased demand due to the wage increases in the public sector on one hand and to the growth of supply by easing the standards and terms of lending by the banks on the other side, but it also had to do with the base effect, because the accelerated growth of new loans in 2014 has come after several years of decrease of new loans. Other Enterprises Households 10% 8% 6% 4% 2% 0% -2% Annual growth rate of loans (right axis) Box 2. New loans The total value of new loans issued by the banking sector until June 2015 amounted to euro million, marking an annual increase of 8.5 percent (figure 27). New loans are dominated by loans to enterprises, which until June 2015 represented 62.7 percent of total new loans and recorded a growth of 4.7 percent (figure 28). Figure 27. Total loans and new loans, annual change Figure 28. New loans, in millions of euro 50% % 30% 39.4% % 10% 0% -10% -20% 9.3% 3.5% 8.5% 2.8% 6.1% -2.0% -13.5% Total loans New loans New loans to enterprises New loans to households While new loans intended for households constituted 37.3 percent of total new loans and recorded a growth of 15.6 percent (figure 29). The structure of new loans to enterprises consists of investment loans, non-investment loans and loans with favorable conditions. Investment loans continue to dominate with a share of 64.0 percent to total new loans 35

40 Financial Stability Report to enterprises (figure 30). Non-investment loans and those with favorable conditions until June 2015 represented 30.0 percent and 6.0 percent, respectively, of total new loans issued to enterprises. Figure 29. New loans by sectors, annual change Figure 30. New loans by sectors and purpose of use 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% 53.9% 18.7% 15.6% 5.4% 4.7% -6.2% -6.5% -17.4% 90% 75% 60% 45% 30% 15% 0% 76.3% 72.4% 63.6% 64.0% 30.0% 27.8% 12.9% 15.8% 8.7% 6.0% 7.6% 8.3% Investing Non-investing Favourable Consumer Mortgage Favourable Loans to enterprises Loans to households New loans to enterprises New loans to households June 2014 June 2015 The structure of new loans issued to households consists mainly of consumer loans, mortgage loans and loans with favorable conditions. Consumer loans until June 2015 had a share of 72.4 percent of total new loans to households (76.3 percent as of June 2014). Mortgage loans and those with favorable conditions during this period increased their share to total new loans to households. Mortgage loans had a share of 15.8 percent of total new loans to households (12.9 percent in June 2014), while loans with favorable conditions had a share of 8.3 percent (7.6 percent in June 2014). In order to identify and compare the effects of new loans, returned loans, and write-off loans to the increase of the stock of total active loans, in figure 31 are presented trends of these three categories. All three categories have different impact on the value of total active loans, where new loans positively affect the growth of this amount, while the return of loans and write-offs have negative or decreasing effect on the value of total active loans. The value of new loans accumulated during the first half of 2015 recorded a slower annual growth compared with the significant increase over the same period of the previous year. On the other hand, returned loans and write-off loans during this period marked an annual decline of 1.6 percent and 2.8 percent, respectively. The annual decline of returned loans reflects the movements in the maturity of the total active loans. Loans with longer maturity increased their share while those with shorter maturities decreased their share to total active loans. In June 2015, the amount of returned loans and write-off loans to new loans ratio decreased to 79.3 percent compared to 87.5 percent until June The reduction of the share of returned loans and write-off loans to total new loans ratio, has a positive effect on the growth of total stock of active loans. 2,100 1,800 1,500 The write-off loans to total new loans ratio decreased to 1.4 percent from 1.5 percent as it 1,200 was in June 2014, which means that the impact 900 of write-off loans in 'removing' the effect of new 600 loans in the growth of total active loans marked 300 a decrease. Also, the ratio of loans to total loans 0 returned to New decreased to 77.9 percent from 85.9 percent as it was until June 2014, thus contributing positively to the growth of total stock of loans during this period. Figure 31. Total loans, new loans, paid loans and outstanding loans, in millions of euro Total loans New loans Paid loans Write offs Also, the returned loans to total new loans ratio decreased to 77.9 percent from 85.9 percent as it was until June 2014, thus contributing positively to the growth of total loans stock during this period. The amount of returned loans and write-off loans to new loans ratio until June 2015 marked a decrease in enterprise and household loans as well, but the reduction was significantly lower in household loans. 36

41 Financial Stability Report Box 3. Bank Lending Survey 9 The results of the latest bank lending survey reflect developments in bank lending activity during the period of March to September 2015, and the expectations of changes in lending activity in the period from October to March Lending activity in the country, in the period March-September 2015 was characterized by an accelerated pace of growth. Unlike other countries in the region of the Central and Southeastern Europe, in which the lending conditions continue to remain tight and the demand for loans is still low, the dynamics of lending in Kosovo during 2015 is estimated to have been at the highest level in the past three years. The accelerated trend of loans growth that characterized 2015 is attributed to eased lending of supply side of banks to enterprises and households, as well as the higher demand for loans from both sectors. The eased supply side of lending is generally attributed to eased lending standards by commercial banks in the country, especially for loans to small and medium enterprises (SMEs) and for consumer loans during this period. Banks declared eased lending standards in particular for long-term loans. Increased support for SMEs by easing lending standards, especially for sectors which were less credited previously, as agriculture and industry, as well as the increased long-term lending shows a gradual movement of banks from a more conservative approach towards alternatives that enable a larger expansion of their businesses. Standards for loans issued to households, during the period of March to September 2015, eased somewhat. If lending standards by usage are analyzed, it is noted that banks have eased lending standards for consumer loans. Eased lending standards were applied also for loans for house purchase. The main factors explaining the bank eased lending policies during March - August 2015 were satisfactory liquidity position of commercial banks, competition in the financial system and the improvement of loan portfolio quality. Continued growth of deposits and further improvement of loans quality in the subsequent periods are expected to be important generators in the lending dynamics in the country. The eased lending policy of banks for enterprises and households during the period from March to August 2015 is implemented mainly through the reduction of average interest rates on loans, providing loans with longer term of maturities and increasing the amount of loans issued. In line with expectations stated in the previous survey, banks reported an increase in demand for loans from companies and households during the period from March to August Regarding loans demand by enterprises, banks reported an increase in demand particularly from SMEs. As regards to the purpose of usage, banks reported a more significant increase in demand for consumer loans by households, while a slight increase was registered also for house purchase loans. Concerning loans to households, as well as loans to enterprises, the increased demand was higher for loans with longer term of maturities. Growth in demand for household loans was in line with domestic consumption growth during this period, while the increase in the demand for SME loans in the reporting period may have been influenced by the decline of interest rates on bank loans. Increased demand for loans by enterprises was reported to have occurred mainly in order to finance fixed enterprise investments, financing the working capital and debt restructuring. Meanwhile, increased demand from households mainly was attributed to increased consumer confidence, increased consumer expenditures and other developments in the real estate market. Regarding the quality of loan applications received in the period from March to September 2015, banks declared to some extent improved the quality of SME applications. Also, better quality was reported as regards to applications received for consumer loans as well as for long-term loans, which to some extent may explain the higher willingness of banks to increase loans for these categories. Regarding banks expectations for developments in lending activity in the next six months (September February 2016), the lending supply, expressed through lending applied standards, is expected to remain 9 Bank Lending Survey is carried out by the Central Bank of the Republic of Kosovo with banks operating in Kosovo. The survey is conducted twice a year, covering the period from March to September and the period from October to February. 37

42 Financial Stability Report generally unchanged. Regarding the approval loans applications, banks expect no significant changes in the next six months; although an easier access to bank financing are expected to continue to have SMEs. In the period of September February 2016, banks have stated that they expect an increased demand for loans. Demand for loans is expected to be higher by SMEs within enterprises, loans for house purchase within the household loans, and long-term loans as regards to the maturity. Loans structure by economic activity The structure of loans to enterprises by economic activity remains similar to previous years (figure 32). Loans intended for the trade sector represent the largest category with a share of 54.0 percent of total loans to enterprises, followed by loans intended for industry (mining, manufacturing, energy, and construction) with a share of 23.2 percent in June The sector of other services (hotels and restaurants, other financial services etc.) had a share of 19.0 percent, while the agricultural Figure 32. Structure of loans by economic activity, in percent 100% 80% 60% 40% 20% 0% 3.6% 3.9% 3.6% 3.8% 24.8% 23.8% 23.9% 23.2% 53.1% 53.2% 52.2% 54.0% 18.5% 19.1% 20.3% 19.0% Agriculture Industry Trade Other services sector continues to have the lowest access to bank loans with a share of 3.8 percent of total loans to enterprises. During the first half of 2015, economic sectors that increased the level of loans were trade sector, manufacturing, agriculture and energy. Besides the factors related to supply side of lending (box 3), increased lending to these sectors can be attributed also to the demand for loans from these economic sectors, taking into account that the total number of newly registered businesses, 30.3 percent of them belonged to the trade sector, 10.6 percent to manufacturing and 9.2 percent to agricultural sector. Despite of remaining the sector with the Figure 33. Loans to industrial sector, in percent lowest access to bank financing, agriculture represented the sector with 100% the highest annual growth of loans, which indicates the increased attention 80% 43.2% 43.0% 37.3% 33.3% of the banking sector to this sector. 60% 6.6% 6.0% 4.7% 5.5% Agriculture loans recorded an annual 40% growth of 12.2 percent in June 2015, unlike the annual decline of 5.6 percent 20% marked in June of the previous year. 46.2% 44.2% 50.0% 54.1% 0% 5.9% 7.3% 6.7% 6.0% Acceleration may reflect mainly the effect of demand taking into account that during this six-month period was marked Construction Energy Manufacturing Mining an increase of 19.4 percent of newly registered enterprises in the agricultural sector. Also, there were marked significant decreases of interest rates for this economic sector that may have encouraged investments in the sector during this period. It is worth mentioning that the supply effects are observed more in long-term lending to the agricultural sector, which is characterized with one-digit interest rates and the statements of banks, according to which, there were marked eased long-term lending standards for the sector. 38

43 Financial Stability Report Loans issued to the energy sector, representing 6.6 percent of loans to the industrial sector (figure 33) represent the economic sector which is constantly characterized by faster growth in lending in the recent years. In June 2015, lending to the energy sector recorded an annual growth of 12.2 percent (12.7 percent in June 2014). The increase can be mainly a result of increased demand given the high interest in investing in this sector. Loans intended for the manufacturing sector in June 2015 recorded an annual growth of 10.6 percent (16.9 percent in June 2014), which represents one of the sectors with the highest growth in lending during this period, taking into account the quite high weight to total loans by economic activity (figure 34). Double-digit growth rate of lending over the past two years reflects the positive performance of the manufacturing sector expressed through the industrial circulation index (processing industry) that has increased during the second quarter of 2015 compared with the first quarter. Also, the relatively high share of the sector to total new businesses registered (10.6 percent in the first half of 2015) may be an indicator of increased investments in this sector, which could be translated into increased demand for having access to the bank financing. Loans intended for trade sector, after three years of the slowdown growth, in June 2015 was marked an increase of 8.8 percent (an increase of 1.0 in June 2014). The acceleration, among other issues, reflects the increased commercial activity between Kosovo and other countries. Another influencing factor was the large number of new businesses registered in the trade sector. On the other hand, loans to the sectors of construction, mining and other services declined in June 2015 despite the interest rate decrease for these economic sectors and eased lending standards for enterprises from banks. Lending to the construction sector continues to decline for the third sequential year, where in June 2015, loans to the construction sector marked a decline of 9.0 percent compared with the decline of 10.3 percent in June The decline may be a result of the decreased activity in the construction sector over the past three years. However, during the second quarter of 2015 there is observed an increased activity in the construction sector which may have had an impact on the slower decrease of lending compared to the previous year. These developments in the construction sector activity may suggest a possible increase in lending in the following periods. Loans to the mining sector marked a decline of 8.5 percent in June 2015 (a decrease of 4.8 percent in June 2014). The decline in the activity of the mining sector reflects also the developments decrease of the sector presented by the industrial circulation index. Structure of loans by maturity Figure 34. Loans by economic activity, annual change 42% 32% 22% 12% 2% -8% -18% Agriculture Construction Energy Manufacturing Mining Trade Other services Structure of loans by maturity generally remains similar to previous years. In June 2015, loans with maturity 'over 2 years' represented the largest share of total loans with 70.0 percent (figure 35). Unlike the two previous years, when the share of long-term loans to total loans had marked a decrease, in June 2015 it was recorded an increase in the share of this category to total loans. The expansion is in line with statements of the banks which have eased the access to loans with longer maturities, as a measure in order to ease bank financing of businesses and households. At 39

44 Financial Stability Report the same time, long-term loans were characterized by a lower interest rates compared with shortterm lending. Medium-term loans with maturity of 1 to 2 years expanded their share to 8.6 percent in June 2015 as a result of the annual increase of 24.7 percent compared with the decline of 3.0 percent in June 2014 (figure 36). While shortterm loans with maturity of up to 1 year, continued to be the second-largest category with a share of 21.4 percent of total loans. These loans marked an annual decline of 9.4 percent in June 2015 which may be a result of demand decline for these loans compared to a more favorable supply side for long-term loans. Figure 35. Structure of loans by maturity, in percent 100% 80% 60% 69.5% 68.0% 67.6% 70.0% 40% 7.3% 7.8% 7.3% 20% 8.6% 23.2% 24.2% 25.1% 21.4% 0% Over 2 years Over 1 year up to 2 years Up tp 1 year Lending growth of long-term loans is expressed in lending to enterprises and households as well. Within lending to enterprises, the increase is more significant in the sectors of agriculture, manufacturing and trade. These developments may reflect the orientation of banks in providing loans with more favorable interest rates and conditions on long-term loans which may have driven an increase in demand for these loans. Moreover, the rapid developments of mortgage loans during this period may have contributed to the increased share of loans with long maturity, considering that 97.0 percent of new mortgage loans have maturities of over 2 years Liabilities Figure 36. Growth trend of loans by maturity, annual change 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% Up to 1 years Over 1 year up to 2 years Over 2 years The structure of liabilities of the banking sector continues to be dominated by deposits, which represent the main source of financing for commercial banks. In June 2015, deposits represented 78.7 percent of total liabilities of the banking sector (table 3). The high reliance on deposits as a stable source of funding prevents exposure to movements in foreign markets. The second category by share to total liabilities of the sector account for own resources which in June 2015 represented 10.7 percent of total liabilities. This category recorded an annual growth of 20.6 percent, which mainly represents the record profit growth realized by the banking sector. Within liabilities, the highest annual growth of 86.0 percent was recorded by the category of the balance from commercial banks. This increase is a result of the financing of some banks with assets of short maturity of "30 days", mainly borrowed from banks and other financial institutions abroad. On the other hand, the category of other borrowings (including certificates of deposit) marked an annual decline of 27.2 percent compared with the growth of 21.4 percent in June Also, the category of subordinated debt in June 2015 marked a decrease of 17.4 percent compared with the significant increase of 57.8 percent which was recorded in the same 40

45 Financial Stability Report period of the previous year. Reduction of funding activity of the banking sector through various forms of borrowings (certificates of deposit and subordinated debt) reflects the satisfactory level of capitalization of the banking sector. The reduction of borrowings from such funding sources which have higher interest rates contributes to the reduction of the banking sector expenditures. Table 3. Structure of liabilities of the banking sector Përshkrimi Deposits In millions of euro Share (%) In millions of euro Share (%) In millions of euro Share (%) Balance from other banks % % % In millions of euro 55.6 Share (%) Deposits 2, % 2, % 2, % 2, % Other borrow ings % % % % Other liabilities % % % % Subordinated debt % % % % Ow n resources % % % % Total liabilities 2, % 2, % 3, % 3, % 1.7% Total deposits of the banking sector reached a value of euro 2.57 billion, in Figure 37. Deposits of the bankign sector June 2015, marking an annual increase 100% of 6.3 percent. Compared with the same 90% period of the previous year, there is observed a slowdown of deposits growth 80% 70% 10.0% 60% (especially household deposits) which 50% 7.7% was reflected in the slowdown of the total activity of the banking sector. Low interest rates on deposits (especially on 40% 4.4% 30% 20% 10% 0% household deposits) which are Other deposits characterizing the banking sector as of Enterprise deposits Annual change right axis) the second quarter of 2014 have the Source:CBK (2015) highest contribution to the slowdown growth of deposit. Figure 38. Enterprise deposits, in percent Household deposits, which are 120% considered to be the most stable source of funding in relation to other financing channels, continue to dominate the 100% 80% structure of the banking sector deposits 61.7% 68.4% 64.4% 60% with a share of 74.0 percent of total deposits (figure 37). The value of 40% household deposits an annual increase of 6.0 percent, in June 2015 (an increase of 9.1 percent in June 2014). With an 14.5% 20% 23.7% 0% 14.4% 17.2% 13.8% 21.8% increase were characterized also Other nonfinancial corporations enterprise deposits which comprise up to 20.9 percent of total deposits and Source:CBK (2015) recorded an annual growth of 7.3 percent (an increase of 11.9 percent in June 2014). 23.0% 20.4% 20.8% 20.9% 6.3% 72.1% 74.8% 74.2% 74.0% Non resident deposits Household deposits 75.6% 8.8% 15.5% Other public corporations 15% 13% 11% 9% 7% 5% 3% 1% -1% 41

46 In millions of euro Financial Stability Report In the structure of enterprise deposits it is observed an increase in the share of non-financial corporation deposits (private enterprises) to 75.6 percent from 64.4 percent in June 2014 (figure 38). The expansion was mainly a result of the significant annual increase of 25.9 percent of this category, which also represent the highest increase in the past seven years. Meanwhile, the second category by weight, which is represented by deposits of other Figure 39. Non-resident deposits financial corporations, in June 2015, marked a sharp decline of 23.5 percent (an increase of 41.6 percent in June 2014). The decline was mainly due to the reduction of total time deposits of 50 insurance companies, microfinance 40 institutions and pension funds. Also the category of public enterprise deposits were characterized by a sharp decline of 31.2 percent, thus becoming the main contributor to the slower growth of enterprise deposits. The remainder of total deposits is comprised of non-resident deposits with a share of 3.6 percent and other deposits (government and other non-governmental organizations) with a share of 1.5 percent. Non-resident deposits whose value reached 92.8 million, in June 2015, recorded an annual growth of 1.6 percent (figure 39). Meanwhile, other deposits were characterized by an annual growth of 27.2 percent mainly due to the deposits growth of the central government and non-governmental organizations in commercial banks. Structure of deposits by maturity The structure of deposits by maturity Figure 40. Structure of deposits by maturity has undergone significant changes in the 120% past two years. While time deposits previously dominated the structure of 100% deposits, in June 2015 the main category 80% 16.2% 16.8% 18.9% 21.5% of deposits was represented by 28.4% 60% 51.2% 49.4% 41.6% transferable deposits with a share of 50.1 percent to total deposits. 40% Meanwhile, time deposits had a share of 50.1% 20% 32.6% 33.9% 39.6% 28.4 percent of total deposits, 0% corresponding with an annual decline of 13.2 percentage points. Saving deposits remain the third category with a share of 21.5 percent (18.9 percent in June Saving deposits Source:CBK (2015) Time deposits Transferable deposits 2014). These changes were a result of the sharp decline of interest rates on deposits which have characterized the banking sector since the second quarter of 2014 (figure 40). Transferable deposits marked the highest annual growth of 34.8 percent, in June In the context of transferable deposits, household deposits recorded a more pronounced annual growth of 39.7 percent, marking the main contribution to the growth of total transferable deposits. Enterprise transferable deposits were characterized by an annual growth of 26.8 percent and had a lower contribution to the growth of total transferable deposits. 42

47 Financial Stability Report Time deposits, as the main contributor to the slower growth of total deposits, in June 2015 marked a decline of 27.4 percent. This was mainly a result of the sharp decline of 28.7 percent of total time deposits of households (a decline of 12.0 in June 2014). Enterprises time deposits marked a decline of 19.6 percent compared with the growth of 14.4 percent as it was in June Similarly, other time deposits (government deposits and non-governmental organizations deposits) and non-resident deposits recorded an annual decline of 47.0 percent and 32.4 percent, respectively, in June Despite the reduction of the total value of time deposits, within the structure of this category of deposits, it is observed an increase in time deposits with longer maturity. In June 2015, compared with the same period of the previous year, there is an increase of deposits with medium and long-term maturities, whereas a reduction in short-term deposits (figure 41). In June 2015, deposits with maturity of up to 1 year had a share of 38.1 percent to total time deposits, representing a decrease of 21.2 percentage points compared with the previous year. This shift of deposits to longer maturity may have been affected by more favorable interest rates on long-term deposits against those with short-term deposits. Deposits with maturity from 1 to 2 years increased their share to 28.4 percent from 20.0 in June 2014, while Figure 41. Time deposits deposits with maturity over 2 years 100% increased their share to 33.4 percent 90% 17.7% 18.4% 20.7% 33.4% 80% from 20.7 percent as it was in June Saving deposits have continued with a positive growth trend, where in June 60% 50% 28.4% 40% 2015 recorded an annual growth rate of 66.5% 59.3% 30% 53.8% 21.0 percent (23.7 percent in June 2014). 38.1% 20% Household deposits, which represent % percent of total saving deposits recorded an annual increase of 21.4 percent (23.1 percent in June 2014). Non-resident deposits grew by 36.8 percent in June Over 2 years From 1 up to 2 years Up to 1 year In the context of non-resident deposits, unlike the growth trend of saving deposits, time deposits have decreased as a result of lower interest rates. These lower rates of deposits may have influenced non-residents to withdraw their deposits from local banks and deposit them at foreign banks which may have more favorable interest rates or to invest in other financial products that bring higher profits. Figure 42. Average interest rates 16% 14% Interest rates Interest rates on loans continued their declining trend during the first half of 2015, while deposits recorded a slight increase. The average interest rate on loans decreased to 7.6 percent in June 2015 from 10.5 percent in June Compared with the region countries, the 70% 12% 10% 8% 6% 4% 2% 0% interest rates on loans have marked a more significant decrease reaching an average rate which is close to the region interest rate. On the other hand the average interest rate on deposits increased to 0.8 percent from 0.6 percent in June Compared with the region countries, the interest rates on deposits are considerably lower in Kosovo. Despite the slight increase in interest 28.6% 15.1% 20.0% Interest rates on loans Interest rates on deposits Interest rate spread (percentage points) 43

48 Financial Stability Report rates on deposits, the significant decline in interest rates on loans made the interest rate spread on loans and deposits, in June 2015, to be reduced to 6.8 pp from 9.9 pp as it was in June 2014 (figure 42). Interest rate on loans The downward trend of interest rates on loans is observed in loans to enterprises and loans to households as well (figure 43). The average interest rate on loans to enterprises decreased to 7.4 percent, in June 2015, from 10.3 percent in the same period of the previous year. In the context of enterprise loans, investment loans were characterized by an average interest rate of 7.1 percent (10.1 percent in June 2014), while non-investment loans had an average interest rate of 8.0 percent (12.6 percent in June 2014) (figure 44). As regards to enterprise loans by maturity, lower interest rates were recorded in investment loans with maturity "over 5 to 10 years" (7.1 percent) in June 2015, while a higher interest rate was recorded in noninvestment loans with the same maturity over 5 to 10 years (11.5 percent). The reduction of interest rates was evident for loans intended for all economic activities. A more pronounced decline was recorded in the agricultural sector loans. In June 2015, the average interest rate on loans to agricultural sector declined to 7.7 percent from 13.1 percent as it was in June 2014 (figure 45). However, the agricultural sector continues to have the highest interest rate on loans, despite the downward trend followed in the recent years. Figure 43. Average interest rates on loans to enterprises and to households 16% 15% 13% 12% 10% 9% 7% Enterprises Households Figure 44. Average interest rates on loans to enterprises, by purpose of use 14% 13% 12% 11% 10% 9% 8% 7% 6% 5% Investing loans Non-investing loans Overdrafts Figure 45. Average interest rates on loans to enterprises, by economic activity 20% 16% 12% 8% 4% The average interest rate on loans to the industrial sector declined to 7.7 percent 0% in June 2015 from 11.3 percent, as it Agriculture Industry Services was in June 2014, while the service sector (including trade) was characterized with a decline of 7.2 percent from 9.8 percent as it was in the same period of the previous year. During this period, the highest interest rate of 9.2 percent was recorded in the industrial sector, specifically in loans with maturities of 'up to 1 year', while the lowest rate of 6.9 percent was recorded in the loans to services sector with a maturity of over 5 to 10 years. 44

49 In millions of euro Financial Stability Report The average interest rate on loans to households decreased to 8.2 percent, in June 2015, from 10.7 percent in June Within loans to households, the interest rate on consumer loans declined to 8.4 percent in June 2015 (10.9 percent in June 2014), while the average interest rate on mortgage loans declined to 7.2 percent (9.3 percent in June 2014) (figure 46). In mortgage loans, a more significant reduction was recorded in loans with maturity "over 5 to 10 years '', thus reaching 6.9 percent, in June 2015, from 9.2 percent in June Interest rates on deposits The average interest rate on deposits during the first half of 2015 did not mark significant changes compared to the same period of the previous year. In June 2015, the interest rate on household deposits reached 0.8 percent from 0.6 percent in June Higher Figure 47. Average interest rates on enterprise and household deposits Overdrafts Loans with favourable conditions Consumer loans Mortgage loans interest rates continue to have 6% household deposits with a maturity 5% over 2 years (1.7 percent), while lower 4% interest rates were observed in deposits with maturity of over 3 to 6 months (0.3 percent). Interest rate on enterprise deposits, in June 2015, was 1.0 percent, 3% 2% 1% similar to the same period of the previous year (figure 47). Within 0% enterprises, higher interest rates were in deposits with maturity of over 1 to 3 Enterprises Households months (1.4 percent) while lower interest rates were observed on deposits with maturity over 2 years (0.02 percent ). Moreover, interest rates on transferable deposits and on saving deposits for both categories (households and enterprises) declined compared with June 2014, but this decline was more pronounced in enterprise deposits Banking sector performance Figure 46. Average interest rates on loans to households, by purpose of use 21% 19% 17% 15% 13% 11% 9% 7% 5% 3% Figure 48. Financial performance of the banking sector The banking sector was characterized by good financial performance during the first half of 2015 where the net profit 60 realized until June 2015 amounted to euro 44.9 million (in June 2014 was euro million) (figure 48). During this 0 period, the sector's revenues declined slightly, primarily as a result of lower interest income on loans. Whereas, the expenditures of the sector continued Profit Revenues Expenditures with a downward trend also in the first half 2015 as a result of the reduced interest and noninterest expenses. Consequently, the increase in the profit of the banking sector was a result of the reduced expenses, especially those in deposit interest and expenses for provisions

50 Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Financial Stability Report The profit growth, only because of the reduction of expenditures, makes the profitability of the banking sector more sensitive to the potential growth of expenditures, in the future. More specifically, a possible increase in the interest rate on deposits or deterioration of the quality of the loan portfolio could directly result in deterioration of financial performance of the sector. Therefore, the banking sector should focus on increasing the sustainability of profits by improving the performance of the revenues and improving the operational efficiency by reducing the operational expenditures. Income The income of the banking sector until June 2015 reached a value of euro million, representing an annual decline of 1.5 percent. The income structure of the sector remains similar to the previous periods being comprised mainly of interest income (78.8 percent), followed by non- interest income (20.6 percent), and income from revaluation (0.6 percent) (figure 49). Interest income marked a decline of 2.9 percent, giving the main contribution to the decline of the total income of the banking sector. Figure 49. Banking sector income, in percent 100% 90% 18.6% 19.1% 19.9% 20.6% 80% 70% 60% 50% 40% 81.4% 80.2% 79.9% 78.8% 30% 20% 10% Revaluation income Non-interest income Interest income Figure 50. Banking sector interest income, in percent The decline of total interest income, including interest income on loans, interest on securities, interest on placements with other banks and other income was primarily a result of the decline of 2.1 percent in revenues from loans interest, which are the main determinants of the trend of interest income given that they comprise 97.2 percent of total interest income (figure 50). The decline in this category coincides with the decline of interest rates on loans recorded during this period (figure 51). 100% 99% 98% 97% 96% 95% 94% 93% 2.8% 1.2% The category of interest income from 60% securities was the only income category which was characterized by a significant 40% 20% 0% increase of 70.6 percent until June % The increase reflects the orientation of -40% commercial banks in the country -60% towards investments in securities of the -80% Kosovo s Government which during the year had higher interest rates compared to the previous year and compared with Loans Securities Fees and commissions the foreign government securities. Significant impact on the growth of interest income from securities had also the placement in the 0.3% 1.1% 95.9% 0.9% 0.7% 97.1% 1.6% 1.2% 0.8% 96.4% 0.3% 2.2% 0.4% 97.2% Loans Bank placement Securities Other Figure 51. Banking sector income, annual change 80% 46

51 Financial Stability Report domestic market of government bonds with maturities of three years, which have higher interest rates. The second category by weight in the structure of total revenues is the non-interest income which until June 2015 recorded a growth of 1.8 percent. The increase was primarily a result of increased other operating income, although this category accounted for only 9.0 percent of total non-interest income while income from fees and commissions declined by 0.1 percent. Other operating income, which include net income from foreign exchange and income from rent and repossessed assets, until June 2015 recorded a significant annual growth of 25.1 percent. The category of income from revaluation was characterized by an increase of euro 0.7 million from euro 0.2 million in June 2014 which also resulted in increased share of the category to total income of the sector. The increase was generally a result of realization of income from the sale of tradable assets (financial instruments) with the most favorable price/revalued, but the high growth mainly reflects the effect of the low base considering the low share of income from revaluation in the sector. Expenditures Total expenditures of the banking sector, until June 2015, reached a value of euro 74.8 million, marking an annual decline of 21.0 percent. Expenditures structure is dominated by the category of general administrative expenditures which until June 2015 expanded its share to 66.1 percent (51.3 percent in June 2014). Increased share of general and administrative expenditures in the framework of the general expenditures was mainly due to the reduction of interest expenditures and non-interest expenditures. Interest expenditures represent the second largest category with a share of 16.2 percent of total expenditures, followed by the category of non-interest expenditures with a share of 11.5 percent. Both these categories were characterized by a significant narrowing of share in the structure of total expenditures over the last year (figure 52). General and administrative expenditures recorded a growth of 1.9 percent until June 2015, compared with the decline of 1.0 percent that was recorded in June 2014 (figure 53). Within the general and Figure 52. Banking sector expenditures, in percent 100% 90% 80% 70% 60% 50% 43.6% 45.2% administrative expenditures, general expenditures were characterized by a decline of 5.5 percent, implying that the increase in the category of general and administrative expenditures mainly reflects the increase of personnel expenditures by 0.5 percent and the increase of other expenditures from non-interest with 16.2 percent. 51.3% 66.1% 40% 27.6% 23.5% 18.3% 30% 20% 11.5% 26.7% 29.4% 10% 27.2% 16.2% 0% Interest expenditures Non-interest expenditures General and administrative expenditures Rvaluation losses Fees provisions Figure 53. Banking sector expenditures, annual change 80% 60% 40% 20% 0% -20% -40% -60% 36.2% 8.3% 11.1% 4.8% -1.4% -19.0% -1.0% -19.2% -32.0% 1.9% -50.6% -53.0% Interest expenditures Non-interest expenditures General and administrative expenditures 47

52 In millions of euro Financial Stability Report Interest expenditures, until June 2015, marked an annual decline of 53.0 percent (a decline of 19.2 percent until June 2014), thus becoming the main contributor to the reduction of total sector expenditures. The deepening of the decline is mainly attributed to the reduction of interest expenditures on deposits as the main component of this category (with a share of 75.3 percent). Interest expenditures on deposits marked an annual decline of 58.8 percent, mainly as a result of low interest rates on deposits that are characterizing the banking sector since the second quarter of 2014 (figure 54). The category of non-interest expenditures was characterized by an annual decline of 50.6 percent in June The decrease is mainly attributed to the annual decline of 73.7 percent of expenditures for loan loss of provisions. The reduction of expenditures for loan loss provisions during this period was due to the improved quality of the loan portfolio, namely the reduction of the value of non-performing loans compared to the Figure 54. Interest and non-interest expenditures by categories, annual change 60% 30% 0% -30% -60% -90% 30% 20% 10% -10% Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Interesi në depozita Tarifat dhe komisionimet Provizionet për humbjet e kredive Figure 55. NPL and loan loss provisions, annual change 0% previous year (figure 55). Despite the reduction of provision expenditures, the coverage rate of non-performing loans by provisions remains satisfactory standing at percent in June 2015 (116.4 percent in June 2014). 22.7% 20.7% 23.3% 18.1% 9.2% 13.1% Loan loss provisions Non-performing loans -4.0% -6.2% Profitability and efficiency The significant increase of the profit until June 2015 resulted in a considerable improvement of the profitability indicators of the banking sector compared with the previous year. Return on Average Assets (ROAA) reached 2.8 percent from 2.0 percent in Return on Average Equity (ROAE) also marked an increase, reaching 25.9 percent from 20.3 percent in 2014 (figure 56). Figure 56. Profitability indicators of the banking sector * annualized 25.9% 20.3% 7.1% 9.4% 2.8% 0.7% 0.9% 2.0% * Profit ROAA (right axis) ROAE (right axis) 30% 25% 20% 15% 10% 5% 0% The significant reduction of expenditures, despite the income decline, it has had an impact on the improvement of the overall efficiency indicator, which is expressed through expenditures to total income ratio. In June 2015, this indicator decreased to 62.5 percent from 77.9 percent in the previous year (figure 57). 48

53 Financial Stability Report The slight efficiency improvement of the banking sector was observed in the operational expenditures to total assets ratio, which in June 2015 decreased by 0.1 percentage points compared with the same period of the previous year (table 4). On the other hand, net interest margin 10 increased by 0.2 percentage points, reaching 3.0 percent in June The growth of this indicator reflects the faster growth of net interest income (as a result of lower interest expenditures on deposits) compared with growth of interest-bearing assets. Figure 57. Expenditures to income ratio of the banking sector 100% 90% 91.8% 87.7% 80% 77.9% 70% 60% 62.5% 50% 40% Table 4. Key efficency indicators of the banking sector, in percent Description Operational expenditures/total assets 1.9% 1.8% 1.6% 1.5% Net interest margine 3.2% 2.9% 2.8% 3.0% Table 5 shows some indicators of the banking sector capacity, whose developments in the recent years indicate an increase in utilizing the capacities of the sector. This is expressed through indicators that show the ratio of the average value of assets managed by an employee and the ratio of the average number of loans issued by an employee. The data for both indicators until June 2015 suggest a capacity utilization increase by the Kosovo s banking sector. The improvement of these two indicators was influenced by higher growth of the banking sector activity in the first half of 2015 in addition to the slight increase in the number of employees in the banking sector, which in June 2015 amounted to from in the same period of the previous year. Another indicator of banking capacity, expressed as the ratio of the realized profit per employee, has improved significantly as well. This came as a result of higher realized profit until June 2015 along with an increase in the number of employees. Whereas the ratio of total personnel expenditures and the number of employees in June 2015 decreased slightly compared to the same period of the last year, which represents a better management of the cost of the labor factor by banks in Kosovo, considering the slower increase of personnel expenditures compared with the increasing number of employees in the reporting period. Table 5. Indicators of the banking sector capacity Description Assets/no. of employees (in thousands of euro) Number of loans/no. of employees Profit/no. of employees (in thousand of euro) Personnel expenditures/no. of employees The net interest margin represents the ratio between net interest income and the average profitable assets. 49

54 Financial Stability Report 6.4 Banking sector risks Risks to which the Kosovo s banking sector is exposed remained at a low level during the first half of Furthermore, exposure to credit risk and solvency has decreased due to the decline of non-performing loans and accelerated growth of total lending and the increase of the banking capital as a result of the profit growth. Accelerated lending growth has lowered the liquidity indicators but it still remains at a satisfactory level. Figure 58 which presents the key indicators of the banking risks and the performance of the sector, shows that all risk indicators have marked improvements. This overall improvement of important developments is reflected in a significant increase of the banking sector performance compared to the previous year. An improvement is observed also in the external macroeconomic environment, where the euro area was characterized by a higher growth rate of 1.5 percent in 2015 unlike the increase of 0.9 percent in Regarding the domestic macroeconomic environment, also the Kosovo s economy is forecasted to mark a higher growth rate (3.5 percent) in 2015 compared with the growth of 2.7 percent in The capital of the banking sector increased during the first half of 2015 as a result of increased net income, resulting in an increased quality of the capital as well as the sector's capitalization indicators. The strengthened capital position suggests higher sustainability of the banking sector and satisfactory ability for coping with potential losses. Credit risk has decreased during the first half of 2015, resulting in a lower rate of non-performing loans to total loans and declining trend in concentration of the credit risk, with which was characterized the banking sector during the past three years. Also, the coverage of non-performing loans by loan loss provisions has increased, indicating a satisfactory ability of the sector to cope with potential losses. The liquidity position of the banking system remains at a satisfactory level, although characterized by accelerated growth of loans and slowdown growth of deposits compared to the previous year. The slowdown growth of deposits compared with the previous years and the orientation towards shorter maturities and the accelerated lending growth have had an impact on the slight decline of liquid assets to short term liabilities indicator. However, the latter remains well above the minimum level as defined by the regulatory requirements. Kosovo s banking sector continues to have low exposure to market risk, given the fact that almost all loans and deposits continue to have fixed interest rates and the balance sheet of the banking sector almost completely is denominated in euro currency and therefore has low exposure to exchange rate risk Liquidity risk Figure 58. The map of the banking sector risks, in percent) The banking sector s exposure to liquidity risk remains low despite the decline of liquid assets to short-term liabilities during the first half of Deposits which constitute the main source of financing of the banking activity marked an increase but at a slower pace compared with the same period of the previous year. Also, deposits showed an orientation to shorter maturity (1-7 NPL CAR Economic growth in Kosovo Economic growth in euro area Net interest margine ROAE The annual growth rate of GDP of Kosovo for 2015 is an estimate of the CBK, while the annual growth rate of euro area GDP is obtained from IMF statistics. 50

55 Financial Stability Report days), partly reflecting the increase in deposits sensitivity to interest rate decline. The orientation of deposit towards shorter maturities has increased the short-term liabilities. The loans to deposits ratio marked a slight decrease to 77.9 percent in June 2015 from 78.1 percent in June 2014 as a result of higher annual growth of deposits compared to the lending growth (figure 59). Increased lending activity, in the first Loans Deposits Loans to deposits ratio (right axis) half of 2015, and investment orientation towards longer maturities in financial markets has slowed down the growth rate of short-term liquid assets. In June 2015, short-term assets recorded a growth of 4.5 percent, compared with the annual growth of 25.9 percent in June On the other hand, short-term liabilities recorded a higher annual growth of 9.1 percent as a result of the orientation of deposit towards shorter maturity. Figure 60. Broad liquid assets ratio to short term Consequently, the broad liquid assets to liabilities % short term liabilities ratio 43.7% 38.5% comprehensive decreased to 41.9 percent % 40% in June 2015 compared with 43.7 percent % in June 2014, but continues to remain 1500 well above the minimum level of 25 20% 1000 percent as required by the Central Bank 10% 500 (figure 60). In the context of liquid assets, a more significant increase was marked by government tradeable bonds and tradable treasury bills of the Kosovo s Government, while a higher decline was marked by foreign securities of short maturities, indicating an orientation towards investments in securities with longer-term maturities. On the liabilities side, the expansion of transferable deposits, liabilities to the parent bank and shortterm borrowings have had an impact to the growth of short-term liabilities and have a faster growth rate than liquid assets growth. 3,000 2,500 2,000 1,500 1,000 Figure 59. Loans and deposits of the banking sector, in millions of euro Mar jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun June 2013 June 2014 June 2015 Broad liquid assets Short-term liabilities Broad liquid assets ratio to short term liabilities Figure 61. Banking sector reserves, in millions of euro Also, required reserves of the banking 300 sector continued to remain higher than 250 the regulatory requirements. In June , the required reserve stood at euro million, while the total value of 50 reserves held by banks exceeded the TM2 required reserve for 47.9 percent (figure 2015 Required reserves Balance with the CBK 61). Holding reserves at the high level Cash Total reserves can be considered as positive for the sector sustainability because the sector reduces exposure to developments with potential risk to the liquidity position. However, this 0% 86% 84% 82% 80% 78% 76% 74% 72% 70% 68% 51

56 Financial Stability Report represents an opportune cost for banks that do not collect interest on excessive reserves, which can be transmitted to a cost increase of the banking services. During the first half of 2015, the Kosovo s banking sector was characterized by an increase of the structural liquidity risk, as reflected by an increase in the maturity mismatch of assets and liabilities of the same maturity range (figure 62). 12 Liquidity gap has increased for almost all the categories. A more significant growth was recorded in the category of 1-7 days, where the gap has doubled to euro from euro million in June This made the negative for the cumulative period of up to 3 months to Figure 62. Liquidity gap, in millions of euro ditë 8-30 ditë ditë ditë ditë Më shumë se 1 vit increase to euro million from euro -558 million in June The considerable growth of the negative gap for the period '1-7 days' had an impact on the growth of the negative gap for the cumulative period of up to 1 year, but its negative effect is mitigated to some extent by being moved to a positive gap of the category days and from the growth of the positive gap for the categories days and 181 to 365 days. In June 2015, assets of all maturity categories marked a growth except assets with a maturity of '1-7 days' which recorded a decline of euro 66.8 million. Within this category, the highest decline was recorded in securities and tradable assets. While, the category of assets with maturity of 'over 1 year' recorded the highest growth of euro million, which is a result of the shift of investments in securities into longer maturities and the loans growth with a maturity 'over 5 years. On the liabilities side, the highest annual growth was recorded for the category with maturity of "1-7 days", which increased the value for euro million, mainly as a result of the growth of transferable deposits, liabilities to the parent bank and short-term borrowings. Whereas, liabilities with maturity of 'more than 1 year" marked an increase of euro 40.7 million, which resulted mainly from the increase in equity. The increase of the negative gap mainly for the category with shorter maturity of '1-7 days' was influenced by developments in the main items of the balance sheet. Lending growth was reflected in the reduction of assets with short term maturity and an increase in those with maturities longer than one year. On the liabilities side, the growth of transferable deposits, liabilities to parent banks and short-term borrowings led to a growth of liabilities for the category with a maturity of '1-7 days', while a more significant decline of deposits with interest for all other categories of maturity shows a shift of deposits with shorter maturities. This development coincides with the decline of interest rates on deposits, which reduced the depositors willingness for depositing. These developments in the structure of deposits signify the need for deposits growth with longer term of maturity, because such development would reduce the risk of liquidity and will also create higher opportunities for the growth of long-term lending, which represents a development highly needed to improve the conditions for financing investments. 12 The negative gap means that assets for the determined interval of maturity exceed the liabilities and vice versa. 52

57 Financial Stability Report External funding, which traditionally was used at considerably low level by the Kosovo s banking sector, during the period until June 2015 recorded a significant increase as a result of increased liabilities to parent banks. Given that some of the parent banks of the banks operating in Kosovo are part of the euro area, the increase in funding in the foreign market may be affected by the program of quantitative easing of the ECB, a policy that is reflected in the growth of the bank liquidity in the foreign market and easing the lending conditions in the Figure 63. NPL to total loans ratio, in percent foreign market Credit risk 9% 8% 7% One of the main risks to which the banking sector in Kosovo is exposed is the credit risk. In June 2015, the nonperforming loans (NPL) to total loans 6% 5% 4% 3% ratio declined to 7.2 percent from 8.2 percent in June 2014 (figure 63). The decline of the NPL rate compared with 2% 1% 0% the previous year is attributed to the improvement of the quality of loans portfolio (which is reflected by the annual decline in the value of NPL) and faster growth in the stock of loans Figure 64. Annual growth of total loans and NPL, during the first half of 2015 (figure 64). annual change Non-performing loans in June % 23.3% recorded an annual decline of euro % 20.7% million representing a significant 15% improvement compared with the annual 9.2% 10% 9.3% growth of euro 12.9 million recorded in 5% 6.1% June 2014 (26.4 million June 2013). 2.8% 3.5% Also, the stock of total loans in the past two years marked a significant annual 0% -5% -6.2% -10% increase reaching euro million in June 2015 compared to previous years (64.2 million in June 2014 and 49.5 million in June 2013). To the credit Total loans NPL quality improvement may have contributed also the implementation of stricter standards of most banks in the past as regards to lending. Also, licensing the bailiffs may have had a positive effect in the decline of the NPL value considering its impact on facilitating the implementation of credit contracts. Compared with the region countries, Kosovo has the lowest level of non-performing loans compared to average in the region which in June 2015 stood at 17.2 percent. The downward trend of NPL rate was more significant in the first half of 2015 compared with the increasing trend during the longest period of the second half of During this one-year period, the higher level of NPL was in October 2014 (8.7 percent) and in January 2015 (8.6 percent), while the lowest rates were observed in May and June 2015 when the value of NPL was 7.6 percent and 7.2 percent, respectively. 6.5% 7.8% 8.2% 7.2% 53

58 Financial Stability Report The banking sector has higher credit exposure on loans to enterprises, within which energy and manufacturing loans have higher NPL rates (figure 65). Moreover the loan portfolio for the energy sector recorded a growth of NPL rate in the last year, reaching 19.1 percent in June 2015 (14.8 percent in June 2014). While, the loans portfolio for the manufacturing sector was characterized by an improved quality, where the NPL rate declined to 10.6 percent (12.2 percent in June 2014). The trade sector, which dominates the structure of loans to enterprises, recorded a lower NPL rate of 9.9 percent compared with the previous year (11.5 percent in June 2014). Improved loan portfolio, namely a decline of NPL rate, was marked also by loans of the agricultural sector, tourism and hotel services, and real estate sector. The NPL rate for the agricultural sector declined to 7.2 percent (9.7 percent in June 2014), for the sector of tourism and hotel services the NPL rate declined to 7.4 percent (9.3 percent in June 2014), and for real estate sector NPL rate decreased to 9.7 percent (11.5 percent in June 2014). Household sector continues to remain with lower exposure to credit risk, with an NPL rate of 2.6 percent (2.8 percent in June 2014). Figure 65. NPL by economic sectors 25% 20% 15% 10% 5% 0% June 2013 June 2014 June 2015 Figure 66. Structure of loans by classification 100% 95% 90% 85% 80% 75% 4.3% 5.2% 6.2% 6.0% 6.5% The reduction of exposure to credit risk 20% 12.3% compared with the previous period was 11.0% 9.5% 10.1% 15% shown also through the migration of 10% loans from categories with lower quality 11.5% 13.2% 15.2% 5% to the category of loans without delay 12.4% 0% (figure 66). Loans categorized as standard increased their share for 2.8pp, while on the other hand, loans Delayed Classified Non-performing categorized as watch and substandard decreased their share for 0.6pp and 1.2pp, respectively. Similarly, two other constituent categories of non-performing loans marked a reduction in their share for 0.8pp ('doubtful') and for 0.1pp ('loss'). 2.1% 3.0% 2.0% 88.5% 2.5% 3.2% 2.2% 86.8% 2.0% 1.2% 2.9% 4.1% 2.3% 3.0% 84.8% 87.6% Standard Watch Substandard Doubtful Loss Figure 67. Loans movements by credit classification, in percent 40% 35% 30% 25% 7.8% 8.2% 7.2% 54

59 In millions of euro Financial Stability Report The reduction of exposure to credit risk can be observed also in figure which reflects changes in the three main categories of loans with problems. Compared with the previous period, a more significant decline was observed in loans with delays, whose ratio to total loans was 12.4 percent (15.2 percent in June 2014). Meanwhile, the ratio of classified loans (which represent loans with a delay of over 61 days to total loans) in June 2015 decreased to 10.1 percent from 12.3 percent in the previous year. In addition to improving the overall loan portfolio, the level of provisioning of the sector has increased. The coverage ratio of nonperforming loans by provisions increased to percent from Figure 68. NPL and provisions % % percent in June 2014 (figure 68). Also, % the more significant decline of loans in 124% 120 the category of 'substandard' has % 120% influenced the coverage ratio of % 119.3% 118% provisions for loans classified as % 116% ('substandard', 'delayed' and 'loss') to % 114% reach a more pronounced growth of % 0 110% percent in June 2015 from 77.8 percent in June NPL (in millions of euro) Provisions/NPL (right axis) Lending recovery can have a positive impact on the expansion of the activity of enterprises and can be reflected in the improvement of their capacity to return the existing loans and the new ones. The easing of credit standards by banks in the recent period as well as offering better conditions for obtaining loans (more favorable interest rates) can apply for loans also the customers who have had lower classification in terms of their financial surveys. Therefore, it is required that further expansion of lending to be done in accordance with the principles of sound lending, aiming at avoiding possible deterioration of credit quality. Concentration of credit risk A very important aspect of credit risk is the degree of concentration of credit exposures. Concentration of credit risk in the banking sector declined in the first half of 2015 compared with the same period of the previous year. Exposure to credit risk, which is measured as the ratio of total large exposures to Tier 1 capital, decreased to 81.2 percent from percent in June 2014 (figure 69). This decrease is largely attributed to the Tier 1 capital growth of 30.2 percent in June 2015, as a result of Figure 69. Concentration of credit risk the high growth of profit during this period. The value of large exposures in June 2015 was euro million, representing an annual decline of 14.7 percent. To the decline of exposure to credit risk during this period, a significant impact was marked by three largest banks, in which the 72.0% 91.0% 124.0% 81.2% Overall large exposures Total Tier 1 capital Large exposures to total Tier 1 capital (right axis) 140% 120% 100% 80% 60% 40% 20% 0% 13 According to CBK Regulations on credit risk management, the abovementioned credit ratings are grouped into three categories of credit risk exposure: overdue loans, which include watch, sub-standard, doubtful and loss categories; Classified loans which include categories that include sub-standard, doubtful and loss loans, and nonperforming loans that include doubtful and lost loans. 55

60 Financial Stability Report ratio of large exposures to Tier 1 capital decreased to 69.7 percent (118.3 percent in June 2014). In other banks, in June 2015, this ratio was percent (138.2 percent in June 2014). Besides the decline in value, a decrease was observed also in the number of large credit exposures. In June 2015, the number of large exposures decreased to 51 from 64 as it was in June However, the average value of large exposures was higher than in the previous year, standing at euro 5.4 million in June 2015 (euro 5.1 million in June 2014). This suggests a higher concentration of credit risk in a small number of credit exposures. The downward trend of credit exposure during this period compared to last year, is demonstrated also by reducing the amount of three largest exposures to total exposures, which decreased by 2.5 percentage points, standing at 58.2 percent in June Solvency risk Kosovo's banking sector continues to further strengthen its capitalization position. In June 2015, the Capital Adequacy Ratio (CAR), which represents the total regulatory capital to risk weighted assets ratio, amounted to 19.0 percent compared with 17.4 percent in the previous year (figure 70). 14 The increase of capitalization indicator was a result of higher annual growth rate of the regulatory capital of 20.2 percent, compared with the annual growth of 10.5 percent of risk weighted assets (RWA) (figure 71). Also, the rate of Tier 1 capital to risk weighted assets improved to 15.9 percent from 13.5 percent in June The capitalization of the banking sector in the country was also above the average of the region countries, where the average of the capital adequacy ratio in the region was 17.5 percent, in June Another indicator for assessing the level of capitalization is the leverage ratio, which in June 2015 reached to 11.7 percent from 10.1 percent in June of Figure 70. Banking sector capitalisation 20% 15% 10% 5% 0% 17.2% 16.5% 17.4% 19.0% CAR Tier 1 capital/risk weighted assets Equity to assets ratio Figure 71. Regulatory capital and RWA the previous year. The increase resulted mainly due to the major growth of total equity (annual growth of 24.1 percent in June 2015) compared to the growth of total assets (annual growth of 6.9 percent). Increased equity was primarily a result of increased profit realized by banks, while the lower increase of the total assets of the banking sector was mainly a result of the slowdown growth of deposits in the banking sector. The current leverage ratio exceeds the regulatory requirement of the minimum rate of 7 percent. 15 However, the current level is below the level of 7.1% 7.0% -0.2% -4.1% 16.8% 20.2% 10.7% 10.5% June 2012 June 2013 June2014 June 2015 Regulatory capital RWA Annual change of regulatory capital growth (right axis) Annual change of RWA growth (right axis) 25% 20% 15% 10% 5% 0% -5% -10% 14 According to CBK regulation on Capital Adequacy, banks are required to maintain at least 12 percent of total regulatory capital to RWA ratio and at least 8 percent of Tier 1 capital to RWA ratio. 15 CBK regulation on Capital Adequacy. 56

61 Financial Stability Report the region, which in June 2015, on average, had the leverage ratio of approximately 13.9 percent. 16 Regulatory capital Regulatory capital of the banking sector, in June 2015, amounted to euro million, thus exceeding the minimum regulatory capital requirement for euro million. The quality of capital, expressed by the share of Tier 1 capital to total capital, has improved compared to the previous years, when the quality of capital had decreased as a result of increased funding of regulatory capital from sources of Tier 2 capital (figure 72). The value of Tier 1 capital amounted to euro million in June 2015, representing an annual increase of 30.2 percent. The share of Tier 1 capital to total regulatory capital reached 83.6 percent in June 2015 (77.1 percent in June 2014). The value of Tier 1 capital amounted to euro million in June 2015, representing an annual increase of 30.2 percent. The share of Tier 1 capital to total regulatory capital reached 83.6 percent in June 2015 (77.1 percent in June 2014). Figure 72. Structure of regulatory capital, in percent 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 16.5% 19.0% 22.9% 83.5% 81.0% 77.1% 16.4% 83.6% Tier 1 capital Tier 2 capital The significant profit growth of the sector, in 2014, which continued also in the first half of 2015, was reflected in a considerable increase of the Tier 1 capital. While negative impact on the amount of regulatory capital had the distribution of the dividend by banks, which had an impact through the reduction of retained profit. The good financial performance in the recent years is an indication that the banking sector has the potential to further increase the quality of capital by increasing the level of capital, which would be reflected also in the increase of the leverage ratio. The structure of Tier 1 capital remains similar to previous periods. Shareholders capital continues to be the dominant category of the Tier 1 capital, but with a slight decline of its share (78.1 percent compared to 86.2 percent in June 2014) as a result of increased share of the second category by size which consists from the profit (retained from the previous year and accumulated until June 2015) (figure 73). Tier 2 capital, on the other hand, recorded an annual decline of 13.8 percent, reaching euro 67.2 million, in Figure 73. Structure of Tier 1 capital, in millions of euro June This decrease was due to the reduction of subordinated debt for 20.6 percent. In June 2015, the value of subordinated debt was euro 45.5 million and accounted for 67.3 percent of the June 2013 June 2014 June 2015 Investments in equities and deferred tax Lending to bank related persons intangible assets and good will Retained profit, current year to date, reserve assets Capital (shareholders capital, surplus, preferred shares) 16 Leverage average ratio for the region (Western Balkan countries such as: Bosnia and Herzegovina, Montenegro, Macedonia, Albania and Serbia) calculated by the CBK from the balance sheets of the appropriate countries, reported at the appropriate Central Banks. 57

62 Financial Stability Report Tier 2 capital (figure 74). The remainder of 32.2 percent of the Tier 2 capital consisted of general loan provisions. 17 Unlike the previous years when, although in very small percentages, banks used debt instruments compulsory convertible into shares for capital completion, which in the past four years these instruments were not applicable. Figure 74. Structure of Tier 2 capital, in millions of euro Risk-weighted assets The value of risk weighted assets (RWA) in June 2015 reached euro 2.16 billion from euro 1.95 billion as it was in the previous year. The increase of RWAs was mainly a result of the growth of riskweighted assets with 100 percent risk weight, which include loans and offbalance items. The value of these assets in June 2015 reached euro 1.70 billion (1.41 billion in June 2014) increasing their share to total RWA to 78.9 percent (72.5 percent in June 2014) (figure 75). The increase of this RWA category was influenced by the accelerated lending activity, whose major parts of assets are within the risk weight of 100 percent. On the other hand, risk weighted assets from 75 percent have decreased significantly, reducing the effect of the total increased RWA of the significant increase of assets with risk weight of 100 percent. These assets, which consist of loans covered by collateral of the first class 18 declined to euro million from euro million in June 2014, while their share to total RWA declined to 9.7 percent from 15.1 percent in the previous year General provision for loans (Standard and Watch) Figure 75. Structure of RWA by risk weight 100% 80% 60% 40% 20% 0% 78.7% 78.7% Subordinated debt 9.9% 9.5% 8.9% The category of assets with the highest RWA to toal assets ratio (excluding operational risk assets) weight of risk (150 percent), which include direct requirements with maturities of '1 year or less" and which require a prior approval from the CBK, but which have credit rating with high risk of non-payment (below B- by Fitch assessments) marked an increase, but their share to total RWA is low (0.1 percent). Their value in June 2015 amounted to euro 1.9 million from euro 1.2 million in the previous year. 15.7% 72.5% 16.3% 15.1% 78.9% 9.7% Weight 150 % Weight 20% Operational risk Weight 50 % Weight 75% Weight 100 % Figure 76. RWA to total sector assets ratio 64% 62% 60% 58% 56% 54% 52% 50% 61.8% 61.8% 59.4% 59.4% 54.8% 60.6% RWA to total assets ratio 62.2% 56.7% 17 Value of provisions allocated by banks on loans with standard and watch rating is calculated as shear of Tier 2 capital, limited to 1.25% of risk- weighted assets. 18 Specifically, the assets weighted by 75 percentage points of risk include loans or parts thereof covered by collateral of the first order in the form of residential mortgages and loans for the builders to finance immovable property construction, where the financed property has been sold or rented out. 58

63 Financial Stability Report Other categories of RWA did not experience any significant change. While, the total assets of the sector 19, the value of which do not carry risk, or which have a risk weight of 0%, declined to 58.1 percent of the RWA value from 59.7 percent, in June This can imply also an increase in risk-taking level by the banking sector. This can be supported also by the fact that the RWA to total assets ratio increased during the past two years (figure 76). In June 2015, the share of riskbearing assets to total assets of the banking sector reached 62.2 percent from 60.6 percent in June Market risk The banking sector s exposure to market risk, which implies the risk of exchange rate movements and the movements in the interest rates remains at a low level. Net aggregated open position in foreign currency to Tier 1 capital has decreased significantly, thus further decreasing the low sensitivity of the sector to changes in exchange rates. Loans in foreign currency recorded an annual growth of 5.5 percent, but at the same time having very low share to total loan portfolio (0.3 percent in June 2015), do not pose risk to the banking sector. Exposure to interest rate risk continues to remain low. Main items of the balance sheet of the banking sector, namely loans and deposits, mainly have fixed interest rates and are not affected by movements in interest rates in the short term. However, there is the risk of interest rates in terms of refinancing and reinvestment of funds where possible changes in interest rates are reflected faster on the sector liabilities side due to shorter maturity of liabilities which bear interest in relation to assets. Because the gap of assets and liabilities sensitive to interest rates has not very high share to total assets, thus changes in interest rates may have little impact on the sustainability of the sector. Exchange rate risk The net aggregated open position in foreign currency decreased in the first half of This resulted from the decline of assets in foreign currency to euro million (equivalent value) from million in June A similar trend resulted on the foreign currency liabilities, which declined to euro million equivalent value in June 2015, from million in June 2014 making the net open position to slightly narrow to euro -1 million equivalent value (euro -1.1 million in the equivalent value in June 2014). On the Figure 77. Opened positions in foreign currencies against Tier 1 capital 3.5% 2.5% 1.5% 0.5% -0.5% -1.5% -2.5% -3.5% June 2014 June 2015 US$ UK CHF Other Opened net aggregated positions/tier 1 capital other hand, the net aggregate opened position for all currencies 20 declined to euro 2.8 million equivalent value in June 2015 from euro 6.9 million equivalent value in the same period of the previous year. This decline, together with the increased level of the Tier 1 capital of the banking sector during this period, made the aggregate net open position of foreign currency to Tier 1 capital ratio decline to 0.8 percent compared with 2.6 percent in June 2014 (figure 77). 19 Off-balance assets are included in the calculation due to their involvement to the calculation of total RWA. 20 Aggregated net open position means the amount of long and short positions in all currencies. For example, a short net position (-) in dollars equivalent to 1 million euro, and a net long position (+) in Swiss francs worth of 1 million euro equivalent resulting in aggregated net position of euro 2 million, whereas net open position would be 0. 59

64 Financial Stability Report In terms of currency disaggregation, higher net open position to Tier 1 capital reached the Swiss franc, unlike the same period of the previous year when higher position was marked by the US dollar. In June 2015, this ratio of the Swiss franc changed the direction to -0.23% (from 0.38% in June 2014), while the US dollar ratio declined to -0.02% (from -0.65% in June 2014). The ratio of net open positions for individual currencies against the Tier 1 capital remains well below the maximum of 15 percent as allowed by the CBK. Based on these data, it can be suggested that the banking sector remains well protected from movements in the exchange rates. Lending in foreign currency from the banking sector continues to be quite low, however in June 2015, increased to euro 6.3 million from euro 5.9 million equivalent value, in June The equivalent value However, their ratio to total loans portfolio was 0.31 percent which is almost the same as in June of the previous year, as along with the total growth of loans in foreign currency, there was marked an increase also in the total stock of loans. On the other hand, deposits in foreign currency have higher share to total deposits, however in June 2015, it was observed a decline to 4.6 percent from 5.7 percent as it was in Figure 78. Loans and deposits in foreign currency the same period of the previous year. 7.0% Total value of deposits in foreign 5.7% 6.0% 6.3% 5.7% 5.5% currency declined to million from 5.7% 5.3% 5.0% 4.6% million equivalent value of euro, in 4.0% June Higher decline of deposits 3.0% 4.3% compared to the increase of loans in 2.0% foreign currency led to loans to deposits 0.4% 1.0% 0.4% 0.3% 0.3% ratio in foreign currency to increase to 0.0% 5.3 percent from 4.3 percent, in June 2014 (figure 78). The share of loans in foreign currency in total loan portfolio The share of liabilities in foreign currency in total liabilities Loans in foreign currency against deposits in foreign currency Interest rate risk The banking sector is relatively well protected against changes in interest rates, due to the fact that loans and deposits have mainly fixed interest rates and interest income and expenditures from these items are not affected by movements in interest rates until their maturity. Around 91.2 percent of total loans had fixed interest rates, in June 2015, while 100 percent of total deposits have fixed interest rates (figure 79). Figure 79. Loans and deposits sensitivity to interest rates, by interest rate type 100% 90% 80% 70% 60% 50% 9.5% 8.8% 90.5% 91.2% 100.0% 100.0% June 2014 June 2015 June 2014 June 2015 Loans sensitivity to interest rate Deposits sensitivity to interest rate However, the changes in interest rates Fixed interest rate Changeable interest rate can have an impact in terms of refinancing risk and reinvestment of assets depending on the composition of the maturity of assets and liabilities that bear interest (figure 80), and movement direction of the interest rates. Assets to liabilities ratio which bear interest is almost the highest in the category with the maturity up to 30 days, where interestbearing liabilities exceed assets for euro 393 million. During June 2015, this gap has increased to million from million euro in June Given that the gap is negative for this category of maturity (the volume of interest-bearing liabilities is higher than assets), possible changes in interest rates in short term are reflected more in expenditures compared to revenues of the sector. Consequently, the banking sector is exposed to any possible increases in interest 60

65 Financial Stability Report rates in short-term period as the cost of refinancing of deposits will grow faster than the interest income may grow regarding the longer maturity of assets. Figure 80. The gap of assets and liabilities sensitivity to interest rate, in millions of euro However, during the period of six 400 months, the cumulative gap widened and 200 remained positive mainly due to the 0 decline of the interest-bearing liabilities In June 2015, interest-bearing assets -400 and liabilities for the period of maturity -600 up to 1 year reached euro million 1-30 days days days days 1-5 years Over 5 years as unlike the gap of euro 20.1 million, in June In this situation of the positive gap, the interest rate changes in June 2014 June 2015 the one-year period affects more the revenues than in expenditures of the sector, thus the overall sector exposure to interest rates increase is almost neutralized. Box 4. Identification of systemically important Banks in Kosovo The model for identifying banks with systemic importance represents a tool for continuous assessment of the degree of systemic importance of commercial banks in the country. Primarily, a bank is considered to be of systemic importance if it is expected that its potential failure would be manifested with significant negative consequences for the functioning and stability of the entire sector and for the economy in general. Therefore, continues monitoring of the degree of systemic importance is considered to be of particular importance for financial stability as it enables the identification of banks whose potential failure might have a larger impact on the financial sector and the economy in general. Table 6. Indicators used to identify systemic importance of the banks in Kosovo Criteria Size (weight 40%) Replacement (weight 40%) Interconnection (weight 10%) Complexity (weight 10%) Indicators The share of cash and balance w ith the CBK The share of sector assets The share in the market of the sector deposits Ow n capital of the bank to total sector capital ratio The share of the sector securities The number of depositors to total depositors The share of liquid sector assets The share of agricultural loans of the sector The share of consumer loans of households The share of loans to industry, manufacturing, energy and construction The share of trade loans The number of transactions to total transactions throught payment system The share of Kosovo's Government securities The share of total market loans The share of deposits and borrow ings from other financial corporations and other banks The share of loans for other financial corporations The share of placements in other banks (not including parent bank) Off-balance items share This article presents an assessment of the degree of systemic importance for all the banks and their branches operating in the Kosovo s banking market, based on the data of June For assessing the systemic importance of banks the model is based on four basic criteria: size, substitutability, 61

66 Financial Stability Report interconnectedness and complexity criteria. The first two criteria suggested by base model (size and substitutability) are considered as fundamental criteria for determining the systemic importance in the case of Kosovo, therefore, their weight in the model is dominant with 40 percent each. While the other two criteria (interconnectedness and complexity) are weighted with 10 percent based on the fact that Kosovo s banking sector has low degree if interconnectedness of institutions in terms of cross lending and borrowing and it is based on traditional banking activities where the complexity degree is low. For each of these criteria, respective indicators have been identified through which the systemic importance of each bank is assessed. The indicators used are shown in table 6, and each of the indicators within a particular criterion is given equal weight. The selection of indicators is done according to the suggestions of framework based on which this model was developed. 21 The general assumption in relation to size criteria, is considered as the main criteria for measuring the systemic importance of an institution, is that the larger the share of the bank is to the total sector the more significant it is its systemic importance as the affected parties from possible shocks in this bank are more numerous and the costs for the entire sector and the economy are larger. The size of the institution is intended to be measured both in terms of the total share of the assets to total assets of the sector, as well as in specific aspects of the balance sheet such as the share of deposits of the appropriate bank to total deposits of the sector, the number of depositors, the share of the cash and reserves, etc. in order to reflect the importance of the respective bank in the specific aspects/ segments of the banking activity, as for instance, the number of depositors who might be affected in case of problems or potential bankruptcy of a particular bank. Substitutability criteria aims at measuring the extent of substitutability of products and services offered from the respective bank by other banks in the market, in case of the failure of the respective bank. Key assumption for the substitutability criteria is that the larger the share of a bank in a particular market segment or in a certain type of service the higher is its technical capacity and knowledge for effective functioning in the relevant segment (e.g. assessing credit risk for the agricultural sector), which make it more difficult the replacement of its role in that respective segment by existing or new banks in the market. Therefore, the systemic importance of an institution increases when the difficulties in substituting its services and products are larger. Interconnectedness criterion is intended to measure the degree of interconnectivity of the banking institutions among themselves and with other financial institutions in the country in order to identify the risk of the spill-over effect of the crises to the other financial institutions and to the real sector. This criterion is of particular importance in measuring systemic risk in the countries with developed financial sectors where interconnection between institutions are numerous and complex. In Kosovo, the inter-bank market is almost non-existent and interconnections between financial institutions are limited to deposits and loans that other financial institutions as insurance companies, microfinance institutions and other financial auxiliaries have at commercial banks in the country. Consequently, the interconnection between financial institutions will be attempted to be measured by the share of placements with other banks and credit exposure to other financial corporations, as well as the share of deposits and borrowings from other financial corporations. Regarding the complexity criteria, it should be noted that its aim is to measure the degree of complexity of the business model and operations of a bank under the assumption that the more complex the activity of a bank is, the higher the interconnections and agreements with the third parties are, which increase the costs and time of addressing the problems in case of bankruptcy. In the case of Kosovo, a proxy for measuring the complexity of a bank has been suggested to be the share of the off-balance sheet items to total portfolio of the assets of that bank. To identify the systemic importance of a bank, the value of every indicator has been compared with the average value of the corresponding indicator for the entire sector. In cases where the value of the indicator of an institution has exceeded the average value of the sector, then that institution was considered to have 21 The model for the identification of systemically important banks is developed based on the basic principles of the model for the identification of systemically important banks developed by the Basel Committee on Banking Supervision in June 2012, as well as in the previous model of the Central Bank of the Republic of Kosovo for Identification the systemically important banks in Kosovo (Financial Stability Report no. 3, 2012). Evaluation and modification of the specifications of the model is done consistently in order to enhance it. 62

67 Financial Stability Report systemic importance for that specific indicator. When the indicator was above the average of the sector (thus it is of the systemic importance), it was given the value of 1, while on the contrary its value was set to 0. Afterwards, these values were multiplied by the respective indicator weight, and when a bank resulted to have systemic importance in half or more than half of the indicators of a single criterion, then this bank was considered to be systemically important for that criteria. At the end, banks which had a sum of the weighted average of each of the criteria equal to or higher than 50%,25 then those banks were considered to have systemic importance. The higher the weighted average is, the higher the systemic importance of that institution is. Results General results of the model with the data as of June 2015 are presented in table 7. Results remain similar those of the same period of the previous year. The four largest banks operating in Kosovo continue to be considered of an overall systemic importance. However, the interval of the degree of systemic importance marked a slight decreased and extends from 65 percent for systemic bank with the lowest degree of systemic importance, up to 91 percent for systemic bank with the highest degree, unlike June 2013 when the interval was 65 percent 94 percent. Among others, a contribution to this decline was given by a bank with a general non- systemic importance whose interval increased to 40 percent in June 2015 from 9 percent in June The increase of the weight of this bank with a general non-systemic importance was as a result of the lending activity expansion and investments in securities compared to the previous period. Two of the banks with overall systemic importance, similarly to the previous periods, resulted with systemic importance in all criteria. While two others, despite the overall systemic importance, did not result to have systemic importance in the interconnectedness criterion. Table 7. Results of the banks in Kosovo with systemic importance, by criteria (Listing of the banks was performed randomly) Banks/Criteria Size Replacement Interconnection Complexity TOTAL Bank 1 Bank 2 Bank 3 Bank 4 Bank 5 Bank 6 Bank 7 Bank 8 Bank 9 The results also suggest that one of the smaller banks, which did not result with general systemic importance due to lower its lower share in the market, however turned out to have systemic importance in two criteria - the interconnectedness and complexity (in June 2014 it had not systemic importance bank in any of the above mentioned criteria). Also, it is worth noting that some of the banks, although it proved to be systemically important for the criterion of substitutability and interconnectedness, appear to have a significant share in some indicators such as number of transactions to total transactions through the payment system, the share in securities of the Kosovo s Government, its share to total loans issued to the industry sector (mining, manufacturing, energy), and the share of deposits and borrowings from other financial corporations and placements with other banks excluding parent banks. Such an outcome, where banks are systemically important in several indicators and specific criteria, but not systemically important in general, suggests that the effect of possible failures of these banks, however, may be important for sectors and certain aspects of the financial and real sectors. 63

68 Financial Stability Report 6.5. Stress-test Analysis Stress-test analysis represents an important tool to assess the sustainability of the sector against potential shocks in the credit portfolio as well as in liquidity position, which may result from unfavorable macroeconomic developments and changes in the market conditions. This analysis assesses the impact of these shocks in the quality of credit portfolio, the bank's income, liquidity position as well as its capital level. The results discussed below are based on the Kosovo s banking sector data of June 2014, which were used to assess the sustainability of the sector against the credit risk, combined with interest rate risk and exchange rate risk (market risk). In the analysis it was also tested the ability of the banking sector to maintain liquidity under hypothetical assumptions about significant withdrawal of deposits (liquidity risk). The results of the stress tests analysis suggest satisfactory abilities of the sector to handle 'extreme situations' of exposure to these risks Credit risk Methodology Baseline scenario: The analysis is based on the hypothetic scenario when the economic situation in the euro area and in the region would deteriorate, and this would reflect the Kosovo s economy mainly through a reduction in remittances and exports, thus discouraging overall demand in the country. As a result, the economic growth in the country is supposed to deteriorate by expanding the output gap and negatively impacting the quality of credit portfolio. In this scenario it is considered the average rate of economic growth in Kosovo of around 3.4 percent in the past five years and it is supposed an economic decline of 2.6 percent for 2015, which would make the output gap to stand at 6.0 percent, whereas the impact on the credit portfolio quality, respectively in non-performing loans (NPL), it is estimated by considering a coefficient of elasticity of the NPL to the output gap of 0.8, 22 where the share of NPL to total loans of the banking sector would grow by 4.8 pp. As a result of the shocks to the real sector, it is considered that the following year will not be marked by an increase in lending. In an additional scenario to the baseline scenario, besides the credit risk, are also considered the effects of the market risk in the sector revenues. Hence, the credit risk is combined with the interest risk and exchange rate risk. Interest rates on assets are assumed to decline for 2.0pp, while interest rates on liabilities are assumed to mark an increase of 1.5pp mainly as a result of interbank competition. The depreciation of euro currency against other currencies was supposed to be 20 percent. The effects of the abovementioned assumptions on the banking sector reflect as follows: the increase of the NPL share to total loans has an impact on the provision increase; depreciation of euro has an impact on the revaluation of loss/profit from net open positions, and the reduction of interest rates affects the losses/profits of net interest income considering the maturity of loans and liabilities and their reinvestment/refinancing. In addition to these assumptions, it is considered the expected profit as loss absorption from these shocks. In this context, it is assumed that the profit will also be affected by the abovementioned shocks, mainly through the decline of the ability of generating interest income as a result of the failure of loans (NPL growth). Therefore, the expected profit of banks was calculated for the first six months of the year while the profit for the second half of the year was calculated based on the net profit after the tax of the year 2014, by initially applying first shock 22 IMF unpublished note "CESE Bank Loss Projection and Stress Testing Exercise", July

69 Financial Stability Report of 40 percent to reflect the effect of no lending growth, and then were deducted the revenues that would be received if NPL did not increase. 23 The assumed increase of NPL is expressed through the migration of performing loans by categories (standard, watch, substandard) towards non-performing categories (doubtful and loss). This increase is proportionally distributed within the category of doubtful loans and loss loans, taking into account the initial of these categories to total NPL. NPL growth is reflected in the level of provisions based on the CBK regulations for loan provisioning. The assumption for the NPL growth is applied also to off-balance items which include unused commitments, guarantees, available credit notes, and commercial credit notes. Despite the fact that in the additional scenario was considered the depreciation of euro against foreign currencies to assess the risk of the exchange rate, it is important to note that the impact of this risk on the balance sheet of the banking sector continues to be minor due to the low value of net open position in foreign currency. The scenario on the interest rate risk implies a reduction of interest rates on assets for 2 pp the increase of balance sheet liabilities for 1.5pp. The reduction of interest rates may affect the net interest margin (NIM), especially taking into account the maturity of loans and deposits because the majority of loans and deposits in the banking sector have fixed interest rates and changes in interest rates are not reflected until maturity. The negative effect on revenues from the interest rate decline on assets side is furtherly emphasized from the negative effect that has increased interest rate on liabilities. Other additional scenarios: Besides basic scenarios mentioned above, additional scenarios on credit risk analysis are also considered the failure of the largest borrowers in each of the banks, as well as the coping level of NPL for each bank before the problems with capitalization appear. As a conclusion, the stability of the banking sector in this analysis is assessed in terms of impact of the hypothetical scenarios on the level of regulatory capital of the banking sector, risk weighted assets and, consequently, the Capital Adequacy Ratio (CAR). Results The banking sector level in terms of capitalization of banks, in June 2015, was very favorable, with the CAR to 18.5 percent (table 8). The banking sector continued to have a good level also in terms of non-performing loans to total loans, which stood at 7.2 percent, as well as their coverage level by provisions which in June 2014 reached percent. Therefore, as a result of the good initial position and the higher profitability since the beginning of its operation, the banking sector has shown a high level of resistance to the credit risk also under conditions of the assumption of a hypothetical scenario as described above. Under baseline scenario assumptions for assessing the credit risk (balance and off balance sheet), in which the share of NPL to loan portfolio would increase by 4.8pp, while the expected profit for the whole year would be used to absorb losses - CAR of the banking sector would decrease to 18.2 percent, 24 which is above the minimum of 12 percent as required by the CBK. However, at the level of individual banks, CAR for one of the banks would decline below 12 percent. Additional needed assets to restore the capitalization to the required level would amount to euro Assessment of 'loss' revenues as a result of rising NPL was originally made by calculating ex post of the interest rate on loans for each bank, which is then multiplied by the value added to NPL. 24 It is worth mentioning that in this edition there is methodical change, the same as in Stability Report no. 6, in credit risk assessment, where the estimated annual losses henceforth are not deducted from risk-weighted assets for purposes of calculating the capitalization rate (CAR) after the shocks. This change is in accordance with practice that loans classified as loss do not happen to be deleted from the balance sheet before passing a year, and since time horizon of stress test analysis is one year, it is suggested that such losses remain within risk-weighted assets by a factor (weight) of the same risk. This methodological change represents a conservative approach to assessing credit risk in comparison with previous editions. 65

70 Financial Stability Report million (equivalent to percent of the value of GDP forecasted for 2015). In these circumstances, the share of NPL to total loans of the banking sector would amount to 12.0 percent, while at the level of individual banks the highest level of the NPL rate would reach 14.6 percent. Based on the above assumption shocks, total loss of the banking sector would reach a value of euro 75.6 million (1.3 percent of GDP). However, this value can not be considered fully as possible loss of the sector to be taken into account that a large part of this loss would be absorbed by the expected profit for the considered period. Also, a part of losses it is assumed that can be offset by the realization of collateral or by reprogramming, but this aspect is not considered for purposes of this analysis. Results of additional scenario, in which credit risk is combined with market risk, which along with the increased NPL rate of 4.8 pp, it is included also the depreciation of euro and the decline of interest rates in aforementioned levels, CAR of the banking sector would decline to 17.5 percent. Two banks would mark a decrease below the minimum regulatory of CAR of 12 percent, and the needs for recapitalization would reach euro 1.84 million (0.03 percent of GDP). In this scenario, the effect of the euro depreciation is represented at a low level due to the low value of the net open position in comparison with the effect of the in interest rates decline which was more significant. An additional scenario assumes the failure of large exposures. The results of the scenario in which it is supposed the failure of the three largest borrowers in each of the banks suggests that CAR would drop to 17.1 percent. In these circumstances, at one bank CAR would drop below the required minimum level of 12 percent and additional needed assets for increasing the capital at the minimum required level would be euro 8.48 million (equivalent value of 0.15 percent of GDP estimated for 2015). Assuming the failure of the five largest borrowers in each bank, the CAR of the sector would decline to 15.6 percent, while the number of under-capitalized banks would reach two of them. The value needed for the recapitalization of the banking sector would amount to euro 13.1 million (equivalent value of 0.23 percent of GDP estimated for 2015). Table 8. Summary of stress-test results: credit risk Description CAR <0 Number of banks 1/ CAR % NPL % Ricapitalisation CAR 0-8% CAR Level of the Level of the In millions of 8-12% Low er level Higher level sector Low er level Higher level sector euro As % to GDP Levels prior to the shocks % 23.2% 18.5% 4.7% 9.8% 7.2% Macroscenario shocks Base scenario % 23.3% 18.2% 4.8% 14.6% 12.0% % Combination with trade risk % 22.5% 17.5% 4.8% 14.6% 12.0% % Failure of three borrowers % 20.3% 17.1% 4.6% 27.3% 15.4% % Failure of five borrowers % 17.6% 15.6% 4.6% 33.3% 18.5% % Note: 1/ Out of the nine banks considered in the stress-test analysis, the number of banks that drop below the required regulatory level, classified by categories. Note: 2 / In reporting the minimum and the maximum values of indicators at banks level, in some cases are excluded the high values of CAR and the NPL value of 0 percent, with which banks are characterized in the beginning of their activity. Coping levels of NPL of each of the banks before the problems with capitalization would appear (before CAR would decrease below 12 percent) seem to be quite high for most of the banks. In one of the banks, NPL would increase up to 39.2 percent of total loans portfolio of that bank before the need for additional capital would appear. In some banks, the capable NPL rate levels appear lower, where the lowest level in one of the banks was 13.0 percent (representing a higher level of 4.8 pp of NPL prior the shock appeared). The banking sector as a whole is able to afford an NPL 66

71 Financial Stability Report ratio up to 19.1 percent without a need for additional capital injection would appear to maintain the CAR of the sector at the required regulatory level of 12 percent Liquidity risk Methodology 25 Baseline scenario: Analysis of liquidity risk is based on the baseline scenario of withdrawing a significant value of deposits from the banking sector, thus assessing the ability of the sector to withstand such shock. More specifically, it is considered the withdrawal of 8 percent of deposits on daily basis, over a period of five days in sequence, allocating 5 percent of remaining deposits after each day due to operational purposes of the bank in the following days. Allocating 5 percent of the deposits for operational purposes implies that, under these conditions, the required reserve of 10% would be halved. The scenario is also built on the assumption that during this period the possibility of converting liquid assets into cash would be 80 percent of liquid assets, while the possibility of converting non-liquid assets into cash would be only 1 percent of these assets within a day. Also, this scenario assumes that banks were unable to be financed through external funding sources. Additional scenario: Besides the aforementioned scenario, as an additional scenario on credit risk analysis, the failure of the largest depositors in each bank, as well as the capable level of withdrawals of deposits for each bank have been considered, before the need for additional liquidity rises. Finally, the stability of the banking sector in this analysis is tested in terms of assessing the adequacy of banks liquid assets to cope with quite high withdrawal of deposits level, as well as the adequacy of liquid assets to cope with potential risk of deposits concentration. Results The banking sector of Kosovo was characterized with high liquidity in June 2014, where the key indicator of liquidity (liquid assets to short term liabilities ratio) stood at 41.5 percent. Thus, due to high liquidity position, banking sector showed satisfactory level of stability to cope with the very assumed conservative scenarios of deposits withdrawals. Results of the baseline scenario of withdrawals of 8 percent of deposits per day, in five consecutive days, suggest that Kosovo s banking sector would start to have needs for additional liquidity only on the third day, where two of the banks would have lack of liquid assets of euro 3.5 million (table 9). At the end of day four, problems with liquidity would have four banks, whose need for liquidity would reach euro 28.3 million. At the end of the first day, problems would appear also at another bank increasing the number of banks which would have problems with liquidity for coping the supposed deposits withdrawal would reach a total number of 5 banks. The rate of total withdrawal of deposits on day five would reach 34 percent, and the amount of additional liquid assets needed to overcome liquidity problems would amount to euro 63.5 million (1. 15 percent of projected GDP for 2015). The assumption of the largest depositors failure in each bank results to be not significant for the liquidity level in general in the banking sector. Results of this scenario suggest that Kosovo s banking sector does not have significant concentration of funding sources (deposits as the main components of liabilities): therefore the immediate withdrawal of deposits from individuals or companies with larger amounts of deposits does not pose serious risk for the sector. 25 Methodology of calculation of liquid assets has been changed in order to be in compliance with the CBK Regulation on liquidity risk management. Previously liquid assets with aim of stress-test analysis were calculated according to the methodology of IMF Financial Soundness Indicators. 67

72 Financial Stability Report The endurable levels of deposit withdrawals for each of the banks before liquidity problems would appear are generally considered to be quite high. The bank with the lowest threshold stands at 14.5 percent, whereas the one with the highest threshold reaches 38.8 percent. At the sector level, the threshold of total withdrawal of deposits was close to 28.3 percent, which means that the banking sector may be able to cope with the withdrawal of one-thirds (1/3) of the total deposits without needing additional liquid assets. In this case, under the assumption that the loans value would not increase, loans to deposit ratio for the banking sector would reach percent. Table 9. Summary of stress-test results: liquidity risk Description Number of banks 1/ Additional liquid needed assets (in thousands of year) After the first day 0 0 After the second day 0 0 After the third day 2 3,518 After the fourth day 4 28,312 After the fifth day 5 63,533 Note:1/ Out of nine banks considered in the stress-test analysis, the number of banks which would drop under the needed regulatory level, classified by categories Financial infrastructure in Kosovo Payment System Payment systems have an important role in the financial system and the economy of a country, considering that their efficient and safe operation represents a very important factor in maintaining and promoting the financial stability. In Kosovo, there is a single system for interbank payments, Electronic Interbank Clearing System (EICS), operated and supervised by the Central Bank of the Republic of Kosovo. Electronic Interbank Clearing System (EICS) is a hybrid system of payments, whereby payments of low and high value are processed, as well as urgent payments. The number and the value of transactions that EICS processed until June 2015, reached 4.7 million (4.3 million until June 2014), marking an annual growth of 9.0 percent. Whereas, the value of total transactions until June 2015, reached euro 3.34 billion (3.18 billion until June 2014), marking an annual growth of 5.0 percent. The daily average of EICS transactions reached 39.0 thousands, while their value amounted to euro 27.8 million. In relation to the number of transactions, the regular massive payments continued to have the highest share within the payment instruments with 39.1 percent of the number of total payments (table 10). These payments are primarily realized from for governmental institutions, followed by the massive priority payments with a share of 36.2 percent mainly generated by governmental institutions (execution of wages and pensions) and the Giro payments with a share of 13.7 percent, which mainly belong to utilities payments. Giro payments represent the payments which marked the highest increase in number (641,423 until June 2015 from 452,014 until June 2014). 68

73 Financial Stability Report Table 10. The share of payment instruments to total EICS transactions Number of total transactions Value of total transactions Description June 2014 June 2015 June 2014 June 2015 Regular 10.7% 10.5% 48.2% 46.6% Priority 0.3% 0.3% 9.4% 10.0% Regular - massive 41.7% 39.1% 8.3% 8.5% Priority - massive 36.6% 36.2% 9.6% 10.3% Giro payments 10.5% 13.7% 13.3% 13.5% Securities 0.0% 0.0% 11.2% 10.9% Driect debit 0.2% 0.2% 0.1% 0.1% In relation to the value of transactions, regular payments continue to lead the payment structure (46.6 percent of the total value of transactions). Giro payments continue to be listed as second with a share of 13.5 percent until June Prioritized payments and Prioritized-massive payments were characterized by a more significant increase in value, during this period, which was also reflected in their substantial increase of their share in the payments structure. Priority payments processed through EICS increased their share to 10.0 percent in June 2014 from about 9.4 percent in June 2014, mainly as a result of their significant increase in value (euro million in June 2015, from euro million until June 2014). Prioritized-massive payments increased their share to 10.3 percent from 9.6 percent in June 2014 and reached a value of euro million (305.5 until June 2014). Securities payments through EICS during this period marked a slower growth rate (euro million until June 2015 from euro million until June 2014) which resulted in the decrease of their share in the structure for 0.3 pp. This decline in share of the total value of EICS transactions may be affected by the slowdown of securities in the banking sector compared with the pronounced increase over the same period of the last year. Total number of valid bank accounts reached 1.87 million accounts in June 2015, implying that on average almost every citizen in Kosovo is equipped with a bank account. 26 If we compare the number of bank accounts in the country with June 2014 there is a decrease of 0.3 percent of total bank accounts. 27 E-banking accounts through which users access online the banking services have continued to grow. Until June 2015, the total number of e-banking accounts reached , representing an annual increase of 11.4 percent. Consequently, the number and the volume of transactions through e-banking service have increased. Total number of transactions executed through e- banking accounts reached 1, until June 2015 (680,315 until June 2014). Total value of transactions executed through e-banking accounts until June 2014 amounted to euro 2.44 billion (euro 1.67 billion until June 2014). The structure of e-banking accounts continues to be dominated by resident accounts with a share of 97.5 percent in June Within the accounts of residents, individual bank accounts constitute around 78.8 percent of the total accounts of residents and the remainder of 21.2 percent is comprised of business accounts. Similarly, the structure of the accounts of nonresidents is dominated by individual accounts (90.9 percent in June 2014), while business accounts have a share of 9.1 percent. The total number of cards (debit and credit cards) that provide services for cash withdrawals and various payments marked an annual growth of 8.9 percent in June The number of cards with a debit function, in June 2015, reached , while the credit cards reached 126,812. The 26 According to the Kosovo Agency of Statistics, in December 2014 the total resident population was 1,804, The total number of bank accounts includes: number of current accounts, savings and other bank accounts. 69

74 Financial Stability Report number debit cards was characterized with an annual growth of 9.0 percent, while credit cards with an annual growth of 8.2 percent in June Higher share of debit cards and credit cards until June 2015 had Visa cards (71.9 percent and 89.2 percent, respectively), followed by Master Card cards (27.9 percent and 9.3 percent, respectively). Banking Infrastructure in terms of Automated Teller Machines (ATM) networks and Point of Sales (POS) has marked an increase. The number of ATMs and POSs (enabling payments at the point of sales) marked an annual increase of 3.7 percent and 2.8 percent, respectively, in June Total number of ATMs installed by commercial banks, in June 2015, was 505 while the number of POSs reached 9,449 (table 11).Until June 2015, the number of withdrawals through ATMs reached to 5.0 million (4.7 million until June 2014), with a total amount of euro million (450.1 million until June 2014). The number of payments through POS terminals, until June 2015, reached 2.5 million, amounting to euro million. Table 11. Banking Sector Network Description Number of ATM Number of POS 7,713 9,039 9,191 9,449 Number of e-banking accounts 100, , , ,583 The value of cash withdrawal through ATMs to total card transactions reached to 74.6 percent by June 2015, which shows the high level of cash usage. While the value of payments through POS to total card transactions reached 20.1 percent as of June 2015 (table 12). Table 12. The share of transactions value with cards by terminals to total value of cards, in percent Description ATM cash w ithdraw als 81.4% 81.1% 79.7% 74.6% ATM depositing 0.0% 0.1% 0.6% 4.4% Credit transfers through ATM 0.1% 0.1% 0.1% 0.0% Cash w ithdraw als through POS 1.8% 1.7% 1.3% 0.9% Payments through POS terminals 16.6% 17.1% 18.3% 20.1% Despite the high share of cash withdrawals in the total value of card transactions, table 12 shows that compared with previous years the share of cash withdrawals to total value of card transactions has decreased. While cash withdrawals at ATM terminals in June 2012 accounted for 81.4 percent of the total value of card transactions, cash withdrawals in June 2015 comprised 74.6 percent of the total value, decreasing their share by 6.8 percentage points. The increased number of ATMs that enable money depositing in customer accounts had an impact on this category to increase the share to 4.4 percent until June 2015 from 0.6 percent as it was until June of the last year. 70

75 Financial Stability Report 7. Pension Sector 7.1 Structure of pension sector Pension sector continues to be the sector with the highest growth rate of asset within the Kosovo s financial system. The value of the pension sector assets, until June 2015 amounted to euro 1.18 billion, recording an annual increase of 18.1 percent. The majority of pension savings in Kosovo continues to be administered by the Kosovo Pension Saving Fund (KPSF), which manages 99.5 percent of total assets of the pension sector. While, the rest of the assets is managed by the Slovenian-Kosovo Pension Fund (SKPF) (table 13). Table 13. Structure of pension funds by ownership Description Kosovo 99.3% 99.4% 99.4% 99.5% Slovenia-Kosovo 0.7% 0.6% 0.6% 0.5% Regarding KPSF, the structure of assets Figure 81. Structure of pension sector investments, in until June 2015, was dominated by percent investments in the foreign market with a 100% share of 89.5 percent of total 90% 80% investments (figure 81). The remainder 70% of assets consists of investments in 60% 50% securities of the Kosovo s Government 40% (6.8 percent) and deposits at CBK (3.7 30% 20% percent). Compared with the period until 10% June 2014, KPSF has withdrawn the 0% In the country Abroad In the country Abroad majority of the deposits held at CBK and KPSF SKPF has invested in investment funds in the external sector mainly due to the higher return rate. The majority of these investments abroad are in the form of shares and treasury bills of foreign governments. Investments abroad dominate the structure of SKPF assets as well. In June 2015, 85.3 percent of total SKPF assets were invested abroad, while the remaining of 14.7 percent represents investments in Kosovo. In figure 81 can be observed a continuing growth trend of SKPF investments in the external sector. 71

76 In millions of euro Në milionë euro Financial Stability Report 7.2. Performance of the Pension Sector Pension sector during the first half of 2015 was characterized by positive financial performance. Both funds recorded a positive return on investments and an increase in share price (figure 82 and 83). Until June 2015, KPSF has realized gross euro 37.5 million gross investment returns compared to the value of euro 31.9 million in the first half of The value of contributions received until June 2015 amounted to euro 57.7 million, while the number of contributors was increased for 29 thousands. The value of KPSF share price, 28 on the last day of June 2015 reached euro 1.33, marking an annual increase of 6.4 percent. At the same time, the share price of KPSF in June 2015 reached the highest value ever recorded, recovering from the significant decline in 2008 due to the global financial crisis. Figure 82. Assets of KPSF With increased activity and positive performance, in the first half of 2015, was characterized SKPF as well. Until June 2015, the gross return on Assets (in millions of euro) Share price, in euro (right axis) investments of SKPF amounted to euro thousands (euro thousands until June 2014). The value of contributions received until June 2015 amounted to euro thousand with 3,973 contributors. On the last day of June 2015, the share price of SKPF reached euro (euro in June 2014) ,178.3 Assets (in millions of euro) Figure 83. Assets of SKPF Share price, in euro (right axis) Base value of the share price for the KPSF is = 1, whereas the base value of SKPF is =

77 Financial Stability Report 8. Insurance Sector 8.1 Structure of Insurance Sector The structure of the insurance sector continues to be dominated by non-life insurance which represents 90.2 percent of the insurance market, while the remaining of 9.8 percent accounts for life insurance. During the last year two new companies were licensed in the domestic market with domestic capital, increasing their number to 15. Out of these, 12 companies offer non-life insurance products, while three companies continue to offer life insurance products. The insurance sector in Kosovo is dominated by foreign-owned companies, which in June 2015 managed 72.5 percent of total insurance sector assets. The number of insurance companies with the origin from Albania increased by one. Consequently the number of companies originating from Austria and Albania increased to six companies as a result of the change of ownership of a local company. In June 2015, insurance companies originating from Austria and Albania comprised 45.0 percent of total assets of the insurance sector. In the insurance market operate five companies which together represent 27.5 percent of the sector assets. Despite the fact that during this period were added two local companies, selling of one relatively large local company, led to a share decrease in the insurance market by 6.1 percentage points compared to June Slovenia is represented by two companies which manage 14.0 percent of total sector assets. While Turkey and Croatia are represented with one company each which manage 7.7 percent and 5.8 percent, respectively, of total assets of the insurance sector (figure 84). The degree of market concentration in the insurance sector can be considered low, especially compared with the degree of concentration of the banking market. Herfindahl-Hirschman Index calculated for the assets of insurance companies shows points in June 2015 (901.0 points in June 2014). However, the degree of concentration to premiums ratio was higher than to assets ratio, where in June 2015 the Herfindahl- Hirschman index for premiums was points ( points in June 2014). Similar difference is observed also when compared to the share of the three largest companies to total assets and premiums of the sector, where in June 2015 the share to total assets was 33.3 percent, while to total premiums was 42.9 percent. The reduction of concentration in assets was affected by the expansion of the insurance market for two companies and the faster annual growth of assets of smaller companies (14.7 percent) compared to the three largest companies (5.7 percent). While the increase of the concentration in the premiums market, in June 2015, with annual growth of 3.5 percent were characterized three largest companies compared with the decline of 2.4 percent of other companies Activity of the Insurance Sector Figure 84. Structure of insurance companies assets, by ownership 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 8.8% 8.3% 8.9% 7.7% 8.2% 6.7% 7.6% 5.8% 5.3% 5.3% 26.0% 29.5% 30.0% 28.6% In June 2015, the value of insurance companies assets amounted to euro million, marking an annual increase of 11.5 percent, representing an acceleration of growth compared with the annual growth rate of 4.2 percent in June The structure of assets of insurance companies 17.1% 34.1% 15.9% 14.6% 34.2% 33.6% 16.4% 5.8% 14.0% 27.5% 0% Austria-Albania Kosovo Slovenia Croatia Albania Turkey 73

78 In millions of euro In percent Financial Stability Report continued to be dominated by deposits, which represent 58.9 percent of total assets. The rest is represented by fixed assets, technical assets, cash, etc. (figure 85). Within total assets of the insurance sector, the categories that marked more significant increase were technical assets (33.5 percent), followed by the debtors of the premiums (10.4 percent) and deposits (14.1 percent). Meanwhile, intangible assets and cash declined by 12.5 and 8.3 percent, respectively. Within liabilities, technical reserves lead with 56.7 percent of total liabilities, while the remainder is comprised of own capital, other liabilities and loans (figure 86). The value of own capital in June 2015 recorded an annual growth of 8.4 percent. On the growth of own capital, higher contribution was given by the increase of the share capital of two new companies which have begun operating in the insurance market. Figure 85. Structure of insurance sector assets, in percent 58.9% 4.1% Cash Other financial assets Technical assets Intangible assets 7.5% 9.1% 11.4% 7.2% 1.5% 0.2% Deposits Premium debits Fixed assets (net value) Other Figure 86. Liabilities and equity of insurance companies, in percent 56.7% 7.4% 1.5% Until June 2015, the value of gross written premiums amounted to euro 40.3 million, marking an annual decline of 0.1 percent (table 14). Within non-life insurance, the gross value of written premiums of non-life insurance amounted to euro 38.9 million and marked an annual decline of 0.1 percent. Within 'non-life' insurance, premiums received from the third party liability (TPL) amounted to euro 21.4 million until June 2015, representing an annual decline of 2.9 percent. While premiums received from 'border policies' and 'voluntary policies' recorded an annual increase of 3.5 percent and 4.9 percent, respectively, until June The value of written premiums within 'life' insurance recorded an annual growth of 5.0 percent, reaching euro 1.4 million, until June The value of claims paid by insurance companies and Kosovo Insurance Bureau (KIB) until June 2015 amounted to euro 19.5 million, marking an annual increase of 14.3 percent, mainly as a result of increased paid claims to non-life insurance (table 15). Within 'non-life' insurance, during this period was recorded an expenses increase of claims paid to the category of "third party liability" which amounted to euro 12.3 million until June 2015 (9.7 million until June 2014). 34.4% Loans Own capital Technical reserves Other liabilities Figure 87. Primiums received and claims paid, in millions of euro % % % % % 50% 40% 30% 20% 10% Premiums received Claims paid Claims/Premiums (right axis) 0% 74

79 Financial Stability Report Table 14. Goross premiums received, in millions of euro Description June 2013 June 2014 June 2015 Total gross w ritten premiums Non-life gross premiums Life gross premiums Claims paid by 'life' insurance until June 2015 amounted to euro 0.1 million, while claims paid by KIB amounted to euro 2.2 million (euro 1.9 million until June 2014). Claims paid to premiums written ratio in June 2015 amounted to 48.4 percent compared to 42.4 percent in June 2014 (figure 87). Table 15. Claims paid, in millions of euro Description June 2013 June 2014 June 2015 Claims non-life Claims life Claims KIB Performance of the Insurance Sector Key indicators of the performance and stability of the insurance sector, in the first half of 2015, decreased compared to the first half of Profitability continues to present the major concern in terms of the sector performance. Until June 2015, the insurance sector recorded a loss in value of euro 2.5 million, compared with the loss of euro thousands of the previous year. Non-life insurance continues to be characterized by loss compared to the positive financial performance of the life insurance. By June 2015, non-life insurance had a loss of euro 2.8 million compared with losses of euro thousand during the same period of the previous year. Meanwhile, life insurance recorded a profit from an amount of euro thousands compared to euro thousand until June Operation with loss of the insurance sector had an impact of further decline of profitability indicators such as Return on Average Assets (ROAA) and Return on Average Equity (ROAE). ROAA decreased to -3.6 percent (-0.2 percent in 2014) while ROAE to percent (-0.7 percent in 2014). 29 The state of the insurance sector is better in terms of capitalization. The sector remains well capitalized, with capitalization rate of 34.4 percent, implying that the market will be in good conditions to cope with potential shocks. Also, insurance companies during this period had a satisfactory level of liquidity. Cash and its equivalents to technical reserves ratio stood at percent in June 2015 (119.1 percent in June 2014), whereas cash and its equivalents to total liabilities stood at percent (102.8 percent in June 2014). 29 ROAA and ROAE are annualized based on the data of the sector until June

80 In millions of euro Financial Stability Report 9. Microfinance Sector and Financial Auxiliaries 9.1. Microfinance Sector The microfinance sector was characterized by expansion of its activity during the first half of The value of assets of the sector, in June 2015, amounted to euro million, representing an annual increase of 2.8 percent (0.2 percent in June 2014) (figure 88). Loans remain the main category of sector assets given that represent 67.0 percent of total assets. In June 2015, loans were characterized by annual growth of 2.8 percent, reaching a value of euro 77.9 million. The majority of loans (65.2 percent of total loans) are intended for households, followed by 34.8 percent of loans intended for enterprises (figure 89). Despite the smaller weight, loans intended for enterprise gave the main contribution to the sector expansion of lending activity considering that they recorded an annual growth of 9.4 percent. Whereas, loans to households were characterized by an annual decline of 0.4 percent, mainly as a result of competition from the banking sector given that lending to households by this sector during the same period was characterized by a double growth rate. The structure of loans by economic sectors remains similar to the previous year where lending to the services sector continues to lead the structure with a share of 45.2 percent. In June 2015, one of the most credited sectors by commercial banks represented by the agricultural sector, which as regards the IMF, represents one of the sectors less credited. As a result of the decline Figure 88. Assets of microfinance institutions, in millions of euro in loans issued to agriculture, the share to total MFI lending to economic sectors contracted to 25.2 (27.8 in June 2014), however agriculture remains one of the sectors most credited in the microfinance sector, unlike bank lending where it has more limited access to financing. Meanwhile, lending to industry sector expanded its share to 29.6 percent as a result of the % -6.1% 0.2% % Total assets Annual change (right axis) Figure 89. Structure of MFI sector loans 32.7% Households June % Enterprises 34.8% Households June 2015 Figure 90. Structure of MFI sector loans, by economic activity 45.9% Agriculture June % 26.3% Industry, energy, and construction Services 45.2% June % Enterprises 25.2% 29.6% 8% 5% 2% -1% -4% -7% -10% -13% Agriculture Industry, energy, and construction Services 76

81 Financial Stability Report significant growth of loans intended to construction. Loans to construction represent the category with the highest share of 70.6 percent of total lending to the industrial sector (figure 90). According to the maturity, the structure of loans to this sector remains similar to the same period of the previous year, being dominated by medium-term loans "over 1 to 5 years' which represent 84.1 percent of total loans. Short-term loans 'up to 1 year' account for 15.6 percent of loans, and the remainder is represented by long-term loans (figure 91). Compared with the previous period, an increase of medium-term loans to companies is observed, while those intended for households decreased their share. Microfinance institutions continue to be characterized by good quality of loan portfolio. In June 2015, non-performing loans (NPL) to total loans ratio decreased to 5.4 percent (5.9 percent in June 2014) mainly due to the decline in the value of non-performing loans, while the stock of total loans increased. To the decrease of non-performing loans may have had an impact the role of bailiffs and wage increases in the public sector since the majority of loans issued by MFIs are intended for households. Also, the coverage of non-performing loans by provisions remains satisfactory, improving to percent in June 2015 compared with the level of percent in June Figure 91. Structure of MFI sector loans, by maturity 27% Average interest rates on MFI loans 25% continue to be significantly higher than 23% the interest rates applied by the banking 21% sector. The average interest rate on MFI 19% loans, in June 2015, was 24.2 percent 17% 15% (25.2 percent in June 2014) (figure 92). The interest rate on loans to households decreased to 24.6 percent from 25.3 Enterprises percent as it was in June Also, the interest rate on loans to enterprises decreased to 23.5 percent from 24.6 percent as it was in June 2014 (figure 93). The average interest rate for the agricultural sector, in June 2015, was reduced to 25.2 percent (25.6 in June 2014), for the services sector interest rate decreased to 23.7 percent (26.1 percent in June 2014). On the other hand, the interest rate for the industrial sector increased to 23.4 percent from 22.4 percent in June % 83.2% June % Up to 1 year 1-5 years Over 5 years 22.7% 23.1% 23.5% 22.6% 23.5% 24.8% 24.0% 0.3% 84.1% Figure 92. Average interest rate on loans 26% 25% 25% 24% 24% 23% 23% 22% 22% 21% June % Up to 1 year 1-5 years Over 5 years 22.6% 25.2% 24.1% 23.4% 23.3% 24.1% 24.2% Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun 29% Figure 93. Average interest rate on loans, be sectors Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Households 77