BANK SUPERVISION DEPARTMENT BANKING SECTOR IN SERBIA

Transcription

1 BANK SUPERVISION DEPARTMENT BANKING SECTOR IN SERBIA Second Quarter Report 2014

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3 Banking Sector in Serbia Second Quarter Report 2014 Contents 1. BASIC INFORMATION SELECTED PARAMETERS OF THE SERBIAN BANKING SECTOR CONCENTRATION AND COMPETITION PROFITABILITY PROFITABILITY INDICATORS STRUCTURE OF THE RESULT OPERATING INCOME OPERATING EXPENSES BANKING SECTOR ASSETS LEVEL AND STRUCTURE CLASSIFIED ASSETS LOANS BANKING SECTOR LIABILITIES LEVEL AND STRUCTURE DEPOSITS BORROWING EXTERNAL RELATIONS SUBORDINATED LIABILITIES OFF-BALANCE SHEET ITEMS LIQUIDITY CAPITAL ADEQUACY FOREIGN EXCHANGE RISK NBS REGULATORY ACTIVITY

4 National Bank of Serbia Banking Sector in Serbia Second Quarter Report 2014 List of abbreviations IFRS Leverage mln bln NPLs Q1 Q2 Q3 Q4 International Financial Reporting Standards capital-to-assets ratio in the period under review million billion non-performing loans first quarter 1 January 31 March second quarter 1 April 30 June third quarter 1 July 30 September fourth quarter 1 October 31 December 2

5 Banking Sector in Serbia Second Quarter Report BASIC INFORMATION 1.1. Selected parameters of the Serbian banking sector 1 At end-q2, the Serbian banking sector numbered 29 banks, one less than at end It comprised 1,869 organisational units (headquarters, business units, branches, branch offices and teller units) and employed 25,684 people. Net banking sector assets amounted to RSD 2,853 bln and total capital to RSD 611 bln. Table Selected parameters of the Serbian banking sector Numb er of banks Assets RSD bln Share % Capital RSD bln Share % Networ k No.of business units * Share % Employme nt No.of employees Share % Banks in domestic ownership % % % 6, % State % % % 5, % Private % % % % Banks in foreign ownership % % % 19, % Italy % % % 4, % Austria % % % 3, % Greece % % % 5, % France % % % 2, % Оther % % % 3, % Total banking sector 29 2, % % 1, % 25, % * Business units include all business network forms: headquarters, branches, branch offices, teller units and other business units. In Q2 2014, there were no major changes in the basic parameters of the Serbian banking sector according to the criterion of the origin of ownership. The number of organisational units declined by 26, while employment contracted by 22. Foreign-owned banks kept their dominant position in the market, holding the largest part of banking sector assets and capital. These were primarily banks from Italy (which recorded a mild decline in assets and a moderate increase in banking sector capital), followed by banks from Austria 1 All data in the Report are based on financial statements that banks are required to submit to the NBS. These statements were not audited by external auditors nor verified by NBS on-site supervisors. 2 On 31 January 2014, the NBS delicensed Univerzal banka a.d. Beograd. 3

6 National Bank of Serbia Banking Sector in Serbia Second Quarter Report 2014 and Greece. Banks in domestic ownership, thanks primarily to the contribution of state-owned banks, had a somewhat larger business network and a relatively higher number of employees, compared to their share in banking sector assets and capital Concentration and competition The Serbian banking sector remained competitively segmented in all key categories. The Herfindahl Hirschman Index HHI 3 indicates the absence of concentration as the HHI values for all key categories were below 1,000. The highest level of concentration remained visible in household deposits and income from fees and commissions. The greatest fragmentation was traditionally recorded for household loans and interest income (up to Q3 2013, HHI was below 700). Table Concentration and competition indicators Top 5 banks Top 10 banks Share (%) HHI* Assets Loans (total) Household loans Corporate loans Deposits (total) Household deposits Income (total) Interest Commissions and fees * Herfindahl Hirschman Index of concentration. In terms of the level of balance sheet total, loans and deposits, the top ten banks accounted for 75.5% of balance sheet total and loans, and 77.5% of deposits. With a 15.1% share in total banking sector assets and a 15.8% share in total loans and deposits, Banca Intesa a.d. Beograd remained the largest bank in Serbia. 3 Herfindahl Hirschman Index (HHI) is calculated as the sum of square values of individual bank shares in the category observed (assets, loans, deposits, etc.). HHI up to 1,000 indicates that there is no market concentration; 1, indicates moderate concentration; above 1,800 indicates high concentration. 4

7 Banking Sector in Serbia Second Quarter Report 2014 Table Top ten banks according to the total assets criterion 30/06/ /03/ /06/2014 RSD bln % Ranking RSD bln % Rankin g RSD bln % Rankin g Г Т Banca Intesa A.D.- Belgrade ,6 % ,8 % ,1 % 1 Komercijalna banka A.D.- Belgrade ,0 % ,2 % ,4 % 2 Unicredit Bank Srbija A.D.- Belgrade 238 8,3% ,8% ,1% 3 Raiffeisen Banka A.D.- Belgrade 208 7,2% ,5% ,7% 4 Société Générale banka Srbija A.D.- Belgrade 205 7,1% ,6% ,6% 5 Eurobank A.D.- Belgrade 173 6,0% ,5% ,4% 6 Agroindustrijska komercijalna banka "AIK banka" A.D.- Niš 156 5,4% ,3% ,3% 7 Hypo Alpe-Adria-Bank A.D.- Belgrade 156 5,4% ,2% ,1% 8 Vojvođanska banka A.D.- Novi Sad 109 3,8% ,9% ,0% 9 Bank Poštanska štedionica A.D.-Belgrade 31 3,0% ,9% ,8% 10 Source: National Bank of Serbia In terms of the level of balance sheet assets, in Q Raiffeisen and Vojvođanska banks moved by one notch on the top ten ranking list. Société Générale bank replaced Raiffeisen on the fifth place, and Banka Poštanska štedionica replaced Vojvođanska bank on the tenth position. 5

8 National Bank of Serbia Banking Sector in Serbia Second Quarter Report PROFITABILITY 2.1. Profitability indicators Banking sector profitability improved relative to end In late Q2 2014, profit before tax almost reached its y-o-y figure, equalling 94.5% of profit recorded at end-q Chart Pre tax results RSD bln /2010 6/2011 6/2012 6/2013 6/2014 Profit Loss Net results As 20 banks operated with profit in the total amount of RSD 17.9 bln and nine banks recorded losses in the total amount of RSD 2.9 bln, the banking sector ended Q2 with a profit of RSD 15.0 bln. At end-q2 2014, ROA and ROE stood at 1.06 and 5.0 respectively. 6

9 Banking Sector in Serbia Second Quarter Report 2014 Chart Banking sector profitability indicators in % /2010 6/2011 6/2012 6/2013 6/ ROA ROE Cost to income (rhs) As before, the ranking of top five profit-makers included the largest banks operating in Serbia (four out of five of them, which at the same time recorded highest profit in the banking sector, belonged to the peer 1 group 4 ). The greatest losses in Q2 were posted by banks with a relatively small market share (holding 2% or below 2% of balance sheet assets). Table Banks posting highest profit and loss RSD mln 30/06/2014 Banks posting highest net profit Banca Intesa A.D.- Beograd 3,835 Raiffeisen Banka A.D.- Beograd 3,476 Unicredit Bank Srbija A.D.- Beograd 3,174 Komercijalna banka A.D.- Beograd 2,395 ProCredit Bank A.D.- Beograd 1,098 Banks posting highest net loss Srpska banka A.D.- Beograd -1,178 NLB banka A.D.- Beograd -698 Piraeus Bank A.D.- Beograd -346 Marfin Bank A.D.- Beograd -264 Telenor banka A.D. Beograd Banks holding over 5% of banking sector balance sheet assets. 7

10 National Bank of Serbia Banking Sector in Serbia Second Quarter Report Structure of the result The RSD 1.4 bln increase in net credit losses 5 was the key drag on banking sector profits. Net interest income continued to rise, up by RSD 1.6 bln y-o-y, while net income from fees and commissions fell by RSD 0.1 bln. Chart Structure of results RSD bln 20,000 16,000 12,000 8,000 4,000 0 Net result June 13 Net interest Net fees Other income Operating expenses Credit losses Exchange rate effect Net result June 14 The rise in net credit losses is due primarily to net expenses on account of indirect write-offs of loans and provisions which increased by RSD 3.8 bln relative to the same period last year. The increase in indirect write-off expenses was recorded with 15 banks, with only four banks accounting for almost 80%. Table Changes in key elements of bank profitability RSD mln Result Net interest Net fees Credit losses Exchange rate effect 30/06/ ,907 58,449 17,025 16,513 5,779 30/06/ ,031 60,018 16,900 17,877 4, % 2.7% -0.7% 8.3% -17.3% Change 5 Net credit losses represent the sum of income from the reversal of indirect write-off of loans and provisions and income from collected written-off receivables less expenses of indirect write-offs of loans and provisions and the expenses of the write-off of uncollectible receivables. 8

11 Banking Sector in Serbia Second Quarter Report Operating income 6 At end-q2 2014, operating income remained broadly unchanged y-o-y, equalling RSD 82,934 mln (Q2 2013: RSD 82,580 mln). Net interest income gained 2.7% and increased its share in total operating income from 70.8% in Q to 72.4% in Q At the same time, net interest income fell by 0.7%, making up 20.4% of total operating income (20.6% in Q2 2013). Q saw an important y-o-y change in the category of net income from securities, which turned negative (down by 159.3%) and the net exchange rate effect 7 (down by 17.3%). Excluding the effect of the two banks delicensed from Q to Q2 2014, operating income of the Serbian banking sector went up by 2.6%. Within operating income, net interest income rose by 4.8%, and net income from fees and commission was up by 1.1%. Chart Operating income structure RSD bln % 20.2% 67.5% % 8.3% 7.0% 5.8% 20.7% 20.9% 20.6% 20.4% 72.6% 69.1% 70.8% 72.4% 0 6/2010 6/2011 6/2012 6/2013 6/2014 Net interest Net fees Income from securities Other income Exchange rate effect Series6 6 For the purposes of this report, operating income means the sum of net interest, fees and commissions, income from securities, exchange rate gains and the change in value of assets and liabilities, and other income (on dividends and equity investments and operating gains). 7 Net effect of exchange rate gains/losses and the change in the value of assets and liabilities. 9

12 National Bank of Serbia Banking Sector in Serbia Second Quarter Report Operating expenses At end-q2 2014, operating expenses8 of the banking sector amounted to RSD 50,025 mln, down by 0.3% y-o-y. The costs of employee salaries shrank by 4.1%, which is largely attributable to the fact that Razvojna banka Vojvodine, Privredna banka Beograd and Univerzal banka were delicensed in the period observed. In addition, the number of employees contracted significantly in several banks given that the costs of employee salaries fell by 1.4% excluding the delicensing effect. At end-q2 2014, the expenses of bank operation amounted to RSD 29,409, up by 1.5% y-o-y. Chart Operating expenses structure RSD bln % 57.6% 57.9% 58.4% 60.0% % 42.4% 42.1% 41.6% 40.0% 0 6/2010 6/2011 6/2012 6/2013 6/2014 Staff costs Other operating expenses 8 Expenses of salaries, salary compensations and other personal expenses, operating expenses (materials, production services, amortisation, taxes and contributions) and other expenses (sale, removal from inventory, shortages, damages). 10

13 2,343 2,534 2,476 2,650 2,811 2,880 2,882 2,846 2,853 Banking Sector in Serbia Second Quarter Report BANKING SECTOR ASSETS 3.1. Level and structure Net assets of the Serbian banking sector rose by RSD 6.6 bln or 0.2% from end-2013 to RSD 2,852.8 bln at end-q Chart Total banking sector assets RSD bln. 3,500 3,000 2,500 2,000 1,500 1, June Source: National Bank of Serbia December Relative to end-2013, several categories of balance sheet assets declined, but the category of securities increased by RSD 74.1 bln, which sufficed to compensate for the reduction in other categories of balance sheet assets. It should be noted that the decline, observed in the majority of the key categories of balance sheet assets, was under a significant impact of the delicensing of Univerzal banka. Relative to end-q1 2014, all key categories of balance sheet assets witnessed an increase, most notably in the category of securities in the amount of RSD 28.7 bln. Namely, total balance sheet assets rose by RSD 29.0 bln. 11

14 National Bank of Serbia Banking Sector in Serbia Second Quarter Report 2014 Table Changes in key positions of banking sector assets Change relative to prior periods Amount Nominal Relative (RSD mln) 30/06/ /12/ /06/ /12/ /06/2013 Cash and cash equivalents 259,325-9,338 11, % 4.6% Callable deposits and credits 389,051-17,500-36, % -8.5% Lending and deposits 1,589,298-28, , % -6.2% Securities 417,414 74, , % 37.6% Fixed assets 66,320-2,912-2, % -4.1% Total assets 2,852,795 6,571-29, % -1.0% Lending and deposits remained dominant in total balance sheet assets with 55.7%, down by 0.5 pp relative to the previous quarter and by 1.1 pp relative to end The share of securities was up by 0.9 pp relative to Q and by 2.6 pp relative to end-2013, arriving at 14.6% in late Q Chart Banking sector assets structure June 2014 Property, plant and equipment, 66 bln, 2% Other assets, 131 bln, 5% Cash and cash equivalents, 259 bln, 9% Securities, equity and investments, 417 bln, 15% Callable loans and deposits, 389 bln, 14% Loans and deposits, 1589 bln, 56% 12

15 Banking Sector in Serbia Second Quarter Report 2014 FX and FX-indexed assets 9 continued to account for the bulk of banking sector assets at end-q2 their share was 60.5% and the share of dinar assets was 39.5% (a mild increase relative to Q when the share of dinar assets was 37.7%). As regards the foreign currency component, 87.9% was in EUR, 6.5% in CHF and 3.3% in USD. The most liquid type of assets demand deposits and deposits up to 14 days 10 made up 38.4% of total banking sector assets. The remaining short-term assets (up to one year) held a share of 14.4%. Long-term sources of funding (over one year) made up 47.2% of total assets Classified assets Classified assets of the Serbian banking sector fell by RSD 16.9 bln from end-2013 to RSD 2,550.7 bln at end-q A decline was recorded in categories B, C and D (RSD 30.8 bln, RSD 42.4 bln and RSD 28.3 bln respectively). Categories A and E showed an increase (RSD 41.7 bln and RSD 42.8 bln). Long-term loans accounted for the bulk of classified assets. Careful examination of the share of individual classification categories shows that there have been no major changes in the quality of banks loan portfolio relative to end Chart Total classified assets RSD bln 3,000 2,500 2,000 1,500 2,304 12% 7% 12% 24% 2,494 15% 6% 10% 23% 2,672 15% 5% 9% 22% 2,568 2,551 16% 17% 5% 4% 9% 8% 19% 18% 1, % 47% 50% 51% 53% А B C D E 9 The currency and maturity structure of assets is shown as the share in gross banking sector assets. 10 Due, assets with no set term, without remaining maturity (excluding property, plant and equipment, investment property, shares and intangible assets) and assets maturing within 14 days. 13

16 National Bank of Serbia Banking Sector in Serbia Second Quarter Report 2014 The fall in classified assets resulted primarily from a decrease in off-balance sheet items subject to classification (RSD 20.5 bln), mainly on account of contingent liabilities (RSD 15.7 bln) and payable guarantees (RSD 9.2 bln). At the same time, classified assets under balance sheet items increased by RSD 3.6 bln, with the main impetus arriving from a RSD 10.7 bln increase in due receivables. Notwithstanding the drop in total risk-weighted assets subject to classification, Q2 saw an increase in the calculated reserve for estimated losses by RSD 28.9 bln to RSD bln at end-q2 2014, mainly as a result of the RSD 31.4 bln rise in calculated reserve for balance sheet exposures Loans 11 Net loans of the Serbian banking sector declined by RSD 31.2 bln or 1.8% from end-2013 to RSD 1,654.9 bln at end-q The key impetus to the decline in total lending in Q2 came from two categories: loans to companies (RSD 26.9 bln) and loans to finance and insurance (RSD 19.5 bln). The largest increase was recorded for lending to foreign persons and foreign banks (RSD 12.5 bln) and the household sector (RSD 12.4 bln). Y-o-y, the steepest downturn in lending was registered for companies (RSD 91.7 bln), while the largest increase was seen in the household sector (RSD 18.4 bln). Table Change in the level of net loans Amount Nominal Change relative to prior periods Relative (RSD mln) 30/06/ /12/ /06/ /12/ /06/2013 Finance and insurance 123,119-19,532 17, % 16.5% Public sector 37,337-5,250-12, % -25.8% Public enterprises 85,457-8,593-15, % -15.4% Households 561,112 12,436 18, % 3.4% Companies 729,973-26,911-91, % -11.2% Foreign persons and foreign banks 32,324 12,528 1, % 4.6% Other sectors 85,586 4,161-5, % -6.5% Total loans 1,654,908-31,161-88, % -5.1% Relative to end-2013, the credit downturn in the corporate sector was observed primarily for current assets and investment loans. Broken down by sector, the largest decline was observed in retail and wholesale trade, manufacturing and transport. The currency structure of loans was predominantly FX-linked: at end-q2, 70.0% of loans were extended in foreign currency and the remaining 30.0% in dinars. The share of dinar loans expanded by 2.0 pp at the quarterly level as a result of shifting a part of the portfolio towards government securities. 11 Pursuant to the Guidelines on the Obligation and Manner of Collecting, Processing and Submission of Data on the Stock and Structure of Loans, Bank Receivables and Liabilities, loans in dinars or in a foreign currency include the following loans: callable, under repo transactions, transaction accounts, overnight, consumer, current assets, export, investment, housing, for the payment of imports of goods and services from abroad, for the purchase of real estate in the country for a natural person, and other loans. 14

17 Banking Sector in Serbia Second Quarter Report 2014 With an 86.4% share, EUR was dominant in the structure of FX and FX-indexed loans, followed by CHF with 8.5% and USD with 2.3%. Chart Banking sector loan portfolio structure RSD bln Јune 2014 Entrepr 29 bln 2% Other 126 bln 8% Financ sector 123 bln 7% Public enterpr 85 bln 5% Other 36 bln 2% Due 263 bln 14% Up to 3 m 215 bln 12% House holds 561 bln 34% Corpor sector 730 bln 44% RSD, 558 bln, 30% EUR, 1123 bln, 60% Over 1 year 1144 bln 62% 3 to 6 m 77 bln 4% USD, 30 bln, 2% CHF 111bln, 6% 6 to 12 m 158 bln 8% In terms of the maturity structure, there were no major changes relative to the quarter before. Long-term loans with the maturity over one year remained dominant with a 61.6% share, of which loans over five years accounted for 27.3%. The increase in the share of long-term loans was partly due to the reinvestment of matured loans. 15

18 National Bank of Serbia Banking Sector in Serbia Second Quarter Report Non-performing loans Monitoring the level and trend of non-performing loans (NPLs) is vital for identifying potential problems in the collection of receivables and monitoring the credit risk as it may signal deterioration in the quality of the loan portfolio. An additional analysis of the level of NPLs in relation to allowances for impairment, regulatory reserves and capital provides insight into the banking sector s capacity to absorb losses arising from NPLs. In accordance with the internationally accepted definition, an NPL implies the outstanding debt balance on individual loans (including the amount overdue): - where the payment of principal and interest is 90 days or more past due its original maturity date; - where interest at the quarterly level (and above) was ascribed to the loan balance, capitalised, refinanced or delayed; - where payments are less than 90 days overdue, but the bank assessed that the borrower s repayment ability deteriorated, assuming that payments will not be made in full. Gross NPLs Chart Gross non performing loans - NPL RSD bln % 15% % 30% 12% 13% % 14% % 15% % 65% 57% 60% 61% Corporates Households Other Total Gross NPL % 0 16

19 Banking Sector in Serbia Second Quarter Report 2014 Gross NPLs continued up to RSD bln in Q2, up by 5.2% q-o-q. The NPL ratio for the dominant category the corporate sector (companies and public enterprises) increased mildly to 27.4% at end-q2 2014, owing to the pick-up in lending (up by RSD 19.7 bln). The NPL ratio for the household sector remained significantly below the average, but with an upward tendency it exceeded the level of 10% for the first time, arriving at 10.24% by end-q Other clients, including entities in bankruptcy other than banks, continued to disclose the highest level of NPLs 36.3%. The assignment of due bank receivables to non-financial sector entities in Q2 helped relocate additional RSD 2.5 bln, excluding interbank transfers. Chart NPL - sector distribution in % Оther sectors Corporate sector (Public enterprises + Private corpora) Total NPL Households NPL coverage Considering the current level of NPLs, the banking sector s ability to absorb potential losses remained exceptionally stable in Q2. At end-q2 2014, the coverage of gross NPLs by regulatory provisions equalled 113.5%, while the coverage by IFRS provisions came at 54.4%. 17

20 National Bank of Serbia Banking Sector in Serbia Second Quarter Report 2014 Chart NPL coverage in % IFRS provision* / NPL Calculated reserve / NPL IFRS provision (NPL) ** / NPL Total calculated reserve / NPL Calculated reserve for potential losses on balance-sheet lending (loan loss reserve); * Total loan provision; ** Provision for non-performing loans; Total calculated reserve for potential losses (on- and off-balance sheet). Chart NPL coverage* across countries of origin of banks in Serbia in % Italy France Greece Austria Serbia * provisions for balance sheet exposure 18

21 Banking Sector in Serbia Second Quarter Report 2014 Corporate NPLs Relative to end-2013, the level of corporate NPLs increased by RSD 19.9 bln or 8.4%, equalling RSD bln by end-q Table Changes in gross NPLs by key sectors Change relative to prior periods Amount Nominal Relative (RSD mln) 30/06/ /12/ /06/ /12/ /06/2013 Manufacturing 93,011 11,026 19, % 26.0% Trade 74,402 10,750 16, % 28.7% Construction 43, , % -5.8% Education and real estate 25, , % 13.2% Agriculture 9, % -1.3% Transport, hotels/restaurants, communications 10,882-1, % 6.8% The highest NPL ratio (53.9%) was seen in the construction industry, which received 9.5% of gross corporate lending and accounted for 17.1% of total. Chart Private orporates NPL structure June 2014 Real estate and education 26 bln 10% Other 0. bln 0% 18.0% 38.2% Agriculture 9 bln 4% Gross NPL indicator Hotels, restaurants and communications 11 bln 4% 14.1% 30.2% 28.6% Manufacturing 93 bln 36% Commerce 74 bln 29% 53.9% Construction 44 bln 17% Electricity 0. bln 0% 19

22 National Bank of Serbia Banking Sector in Serbia Second Quarter Report 2014 The key branches of the economy manufacturing and retail and wholesale trade, accounting for 65.0% of total corporate NPLs, showed the NPL ratio of 28.6% and 30.2% respectively. Таble Corporate NPL ratio by sector Change relative to prior periods (pp) (%) 30/06/ /12/ /06/2013 Construction 53.9% Real estate and education 38.2% Manufacturing 28.6% Trade 30.2% Agriculture 18.0% Transport 14.1% NPLs of natural persons The NPL ratio for natural persons stayed significantly below the average for the overall portfolio. At end-q2, it equalled 11.47%. The bulk of natural persons NPLs was made up of housing loans (31.7%) which accounted for 46.6% of gross lending to natural persons. Table Changes in gross NPLs to natural persons by category Change relative to prior periods Amount Nominal Relative (RSD mln) 30/06/ /12/ /06/ /12/ /06/2013 Housing loans ,3% 19,2% Cash loans ,2% 26,1% Credit cards ,7% 9,0% Current account overdraft ,3% 9,6% Consumer loans ,4% 5,0% 20

23 Banking Sector in Serbia Second Quarter Report 2014 Chart Individuals gross NPL structure June 2014 Overdraft, 4 bln, 5% Consumer, 4 bln, 4% Credit cards, 5 bln, 7% 15.4% 26.9% Housing, 25 bln, 32% 14.3% 7.8% Gross NPL indicator 11.2% 18.9% Cash, 20 bln, 26% Other lending*, 21 bln, 26% *Other lending = agriculture, other activities, vehicle purchase loans and other loans In addition to housing loans, a significant share in total natural persons NPLs belonged to cash loans (25.7%). The cumulative share of these two types of loans in total natural persons NPLs was 57.4%, while the NPL ratios for these two categories equalled 7.8% and 11.2% respectively. Table NPL ratio for natural persons by category (%) Change relative to prior periods (pp) 30/06/ /12/ /06/2013 Housing construction 7.8% Cash loans 11.2%

24 National Bank of Serbia Banking Sector in Serbia Second Quarter Report BANKING SECTOR LIABILITIES 4.1. Level and structure Banking sector liabilities were favourably structured. The primary source of bank funding were received deposits 12, making up 61.0% of bank liabilities. At end-q2, own sources of funding made up 21.4% and borrowings 12.1% of total liabilities. Table Changes in the value of elements of banking sector liabilities Change relative to prior periods Amount Nominal Relative (RSD mln) 30/06/ /12/ /06/ /12/ /06/2013 Deposits 1,739,657 12,376 39, % 2.4% Borrowing 344,273-14,974-49, % -12.7% Liabilities under securities 3, % -15.8% Other liabilities 154,468-7,320-25, % -14.3% Equity capital and other capital 404,904-22,603-15, % -3.6% Reserves 188,191-1,182 2, % 1.4% Accumulated losses 18,094 40,452 19, % % Total liabilities 2,852,795 6,571-29, % -1.0% Total liabilities of the banking sector declined by RSD 10.1 bln from end-2013, led by the contraction in received loans (by RSD 15.0) and other liabilities (RSD 8.3 bln). Within liabilities, the major rise was noted for received deposits (RSD 12.4 bln), mainly transaction deposits (RSD 46.8 bln), whereas other deposits declined (RSD 34.4 bln). The maturity structure of total liabilities remained unchanged sources of funding with the maturity of over one year (capital included) accounted for 38.0% of total liabilities compared to 38.4% in Q The currency structure showed no significant changes in Q At end-q2 2014, dinar liabilities (capital included) accounted for 40.1% (Q1: 39.2%) and FX and FX-indexed liabilities for 59.9% of total liabilities. As regards the FX portion of liabilities, EUR was the dominant currency, accounting for 91.9%. The rest of FX liabilities was denominated chiefly in CHF (3.4%) and USD (4.1%). 12 Including transaction and other deposits. 22

25 ,864 1,956 2,243 2,278 2,242 Banking Sector in Serbia Second Quarter Report 2014 Chart Banking sector capital and liabilities RSD bln 2,500 2,000 1,500 1, Capital Liabilities A rise in own sources of funding in Q sufficed to maintain the share of capital in total sources at the previous-quarter level of 21.4% Deposits Total deposits of the Serbian banking sector rose by RSD 12.4 bln from end-2013 to RSD 1,739.6 bln at end-q The increase was mainly due to a RSD 19.7 bln rise in household deposits, whereas the category of foreign persons and foreign banks saw a RSD 10.0 bln decline. Table Changes in deposit levels Amount Nominal Changes relative to prior periods Nominal (RSD mln) 30/06/ /12/ /06/ /12/ /06/2013 Finance and insurance sector 66,643-6,934-3, % -5.1% Public sector 19, , % -33.6% Public enterprises 54, , % -12.5% Households 1,042,726 19,714 52, % 5.3% Corporates 361,720 3,342 2, % 0.7% Foreign entities and foreign banks 93,371-9,977-14, % -13.4% Other sectors 100,768 5,751 20, % 25.1% Total deposits 1,739,657 12,377 39, % 2.4% 23

26 National Bank of Serbia Banking Sector in Serbia Second Quarter Report 2014 At end-q2, the share of FX and FX-indexed deposits was 73.3%, with the euro accounting for 67.4% of the portfolio. The rest of the FX portfolio concerned mainly the US dollar (3.6%) and the Swiss franc (1.7%). Short-term deposits were prevalent up-to-three-month and over-one-year deposits accounted for 60.8% and 8% respectively. Household savings 13 expanded by RSD 2.4 bln to RSD bln in late Q2. Dinar savings deposits continued up in Q2 2014, by RSD 2.8 bln or 8.6%, while FX deposits lost RSD 0.4 bln or 0.1%. The share of dinar household savings rose by 0.4 pp q-o-q, but remained low at 4.3%. Chart 4.2. Banking sector deposits structure June 2014 Sector distribution Currency structure Maturity structure Foreign entities 93 bln 5% Other depositors 187 bln 11% Other currencies 102 bln 6% RSD 465 bln 27% 3 to 6 m 357 bln 20% 6 to 12 m 192 bln 11% Over 1 year 133 bln 8% Corp. (public and private) 417 bln 24% Household s 1043 bln 60% EUR 1172 bln 67% Up to 3 m 1058 bln 61% 4.3. Borrowing Total borrowing of the banking sector amounted to RSD bln at end-q2 2014, down by RSD 9.5 bln or 2.7% relative to the previous quarter. 13 Accounts 402 and 502 in the Chart of Accounts, Sector 6 (domestic natural persons and foreign natural persons residents). 24

27 Banking Sector in Serbia Second Quarter Report 2014 Table Changes in the level of bank borrowing Changes relative to previous period Amount Relative Relative (RSD mln) 30/06/ /12/ /06/ /12/ /06/2013 Repo transactions % 0.0% Overnight 38,847 7, % 0.7% Borrowing 300,904-22,144-50, % -4.3% Other financial liabilities 4, % 2.4% Total borrowing 344,273-14,974-49, % -12.7% Loans maturing in the period over one year (71.7%) had the dominant share in banking sector borrowing. The euro was the dominant currency of borrowing, accounting for RSD bln (Q1 2014: RSD bln), followed by the Swiss franc with RSD 23.5 bln (Q1 2014: RSD 24.1 bln). Bank debt in dinars, arising from loans disbursed, totalled RSD 29.0 bln (Q1 2014: RSD 27.0 bln). The key item in total borrowing were loans received, accounting for 87.4% (Q1 2014: 86.9%) External relations The downward tendency in banking sector external borrowing, in place as of Q3 2013, continued into the quarter observed. At end-q2, banks total external debt under credit transactions stood at RSD bln, down by RSD 8.5 bln or 3.0%. However, it should be noted that almost 90% of the reduction in external credit borrowing in Q2 concerned five banks. Credit exposure was also highly concentrated, with four banks accounting for 63.3% of total debt. Long-term loans held a dominant share in foreign borrowing (the same level as in Q1 2014: 80.0%). Table Changes in bank external borrowing (RSD mln) Amount Nominal Change relative to prior periods Relative 30/06/ /12/ /06/ /12/ /06/2013 Overnight 1, , % -70.9% Borrowing 272,427-22,827-53, % -16.3% Other financial liabilities 1, % 30.9% Total borrowing 274,731-22,283-55, % -16.9% In terms of the currency composition of external borrowing, 89.3% of loans were granted in euros and 8.5% in Swiss francs (Q1 2014: 89.5% оr 8.5%). 25

28 National Bank of Serbia Banking Sector in Serbia Second Quarter Report Subordinated liabilities Total subordinated liabilities of Serbian banks reached RSD 71.1 bln at end-q2, down by RSD 0.4 bln or 0.6%. The bulk would mature within two five years (46.3%) and within one two years (26.8%). Liabilities denominated in euros made up 93.6% of total liabilities, followed by Swiss francs (6.3%) and dinars (0.1%). High concentration was recorded in Q2 as well since two banks held 44.5% of all subordinated liabilities, with four banks accounting for as much as 63.0%. Of total subordinated liabilities worth RSD 71.1 bln, banks included RSD 37.9 bln in supplementary capital. 26

29 Banking Sector in Serbia Second Quarter Report OFF-BALANCE SHEET ITEMS Off-balance sheet items increased by 1.9% during Q2 on account of a decline in derivatives receivables, whilst the most important increase was recorded for securities received in pledge. At end- Q2 2014, total off-balance sheet items amounted to RSD 3,125.8 bln. Chart 5.1. Off-balance sheet items 3,500 3,000 2,500 2, , , , , ,000 1,500 66% 65% 68% 71% 73% 1, % 12% 12% 10% 9% 23% 20% 17% 15% 14% Other off-balance sheet items Derivatives Contigent liabilities Suspended interest Operation on behalf of third parties Off-balance sheet items remained the most concentrated segment of banks' operation, not only in aggregate terms (at end-q2, 84.7% of total off-balance sheet items concerned ten banks only), but also individually (close to a half of total derivatives receivables were held by two banks, over a half of other off-balance sheet assets were held by three banks, with only four banks accounting for more than a half of all banking sector guarantees). The majority of off-balance sheet items (82.3%) were risk-free14 (guarantees and other sureties accepted, custody operations and other off-balance sheet assets). The portion of off-balance sheet items subject to classification (considered risk-bearing) amounted to RSD bln at end-q2, down by RSD 12.1 bln or 2.1% q-o-q. 14 Risk-free positions are positions under which a bank is not exposed to credit risk. Off-balance sheet assets considered riskbearing in terms of credit risk exposure are subject to classification under which banks are required to calculate reserves for estimated losses. 27

30 National Bank of Serbia Banking Sector in Serbia Second Quarter Report 2014 At end-q2 2014, contingent liabilities 15 equalled RSD bln, down by RSD 10.4 bln (2.3%) q- o-q, making up 14.1% of total off-balance sheet items (unchanged relative to Q1 2014). Table 5.1. Changes in off-balance sheet items in the Serbian banking sector (RSD mln) Amount Changes relative to prior periods Nominal Relative 30/06/ /12/ /06/ /12/ /06/2013 Guarantees and other sureties issued 249,026-10,631-7, % -3.0% Derivatives receivables 336,055 27,083 56, % 20.4% Contingent liabilities and other irrevocable commitments Receiv. from susp. rates and repo agreements 21, , , % -88.1% 79,521 16,096 3, % 4.8% Sureties 196,574-30,381-32, % -14.4% Other off-balance sheet assets 1,909,025-90, , % -5.3% 15 Guarantees and other sureties (RSD bln), irrevocable commitments regarding undisbursed loans (RSD bln) and other irrevocable commitments (RSD 34.7 bln). 28

31 Banking Sector in Serbia Second Quarter Report LIQUIDITY Serbia s banking sector featured exceptionally high liquidity levels according to all relevant criteria. At end-q2 2014, the average monthly liquidity ratio equalled 2.57 and the narrow liquidity ratio was 1.96 (vs. regulatory floors of 1.0 and 0.7 respectively). Chart 6.1. Liquidity indicators for the Serbian banking sector Liquidity indicator Loan to deposit ratio LTD Narrow liquidity indicator Liquid assets to total assets The share of liquid assets declined to 38.0% at end-june (vs. 38.8% at end-q1 2014) due to a mild drop in liquid assets on the one hand, and rising total balance sheet assets on the other. Q2 saw the largest decline in second-order liquid assets, including other bank receivables maturing within one month from the day of calculation of liquidity ratios. The portfolio of NBS repo securities rose by RSD 3.8 bln in Q2 2014, reaching RSD 93.0 bln at end-june. At the same time, the portfolio of government securities expanded by RSD 26.8 bln to RSD bln. The share of dinar securities amounted to 66.7% in late June. 29

32 National Bank of Serbia Banking Sector in Serbia Second Quarter Report CAPITAL ADEQUACY Given the fulfilment of regulatory requirements concerning the capital adequacy ratio, the Serbian banking sector can be considered well-capitalised. At end-q2 2014, the average capital adequacy ratio for Serbia's banking sector was 20.4%, which is far above the regulatory minimum both according to domestic regulations (12%) and Basel standards (8%). By end-q2 2014, banking sector core capital, prior to reduction for the deductibles from total regulatory capital, stood at RSD bln, down by RSD 8.5 bln q-o-q. The reduction in banking sector core capital in Q2 was under the strongest impact of a reduction in total paid equity capital of banks, apart from preferential cumulative shares (RSD 2.5 bln q-o-q), on account of the coverage losses, as well as an increase in required reserve for estimated losses under balance sheet assets and off-balance sheet items of RSD 9.2 bln due to deterioration in the credit portfolio quality. On the other hand, supplementary capital increased by RSD 1.7 bln, primarily on the back of rising subordinated liabilities of banks eligible for inclusion in supplementary capital, whereas the amount of deductibles from regulatory capital remained broadly unchanged relative to the previous quarter. Given the above, total regulatory capital, following a reduction for deductibles, fell by RSD 6.6 bln in Q Chart 7.1. Regulatory capital and CAR* RSD bln, CAR in % Deductibles Tier 2 Tier 1 CAR 0 * CAR = Regulatory capital adequacy ratio 30

33 Banking Sector in Serbia Second Quarter Report 2014 Q2 saw a reduction in the capital adequacy ratio (CAR) due to an increase in capital requirements (primarily for credit risk) by RSD 3.3 bln, and a decline in the level of regulatory capital. In Q2, one bank conducted recapitalisation of EUR 25.1 mln. Chart 7.2 Capital requirements 1.5% 12.6% 85.9% Credit risk Market risk Operational risk The leverage 16 ratio was highly favourable. At end-q2, capital accounted for 21.4% of balance sheet assets, with top-quality equity capital (66.2%) making up the bulk of balance sheet capital. 16 Capital to balance sheet assets ratio. 31

34 National Bank of Serbia Banking Sector in Serbia Second Quarter Report FOREIGN EXCHANGE RISK At end-q2 2014, Serbia s banking sector featured a long open FX position worth RSD 9.4 bln, whereas the FX indicator stood at Banks operated at net long open positions in euros (RSD 6.56 bln) and US dollars (RSD 1.93 bln), while at the same featuring a net short open position in Swiss francs (RSD 0.87 bln). Chart 7.3 Quarterly breakdown of the sector's long and short FX position (in EUR) and foreign exchange risk ratio RSD bln Long EUR Short EUR FX ratio

35 Banking Sector in Serbia Second Quarter Report NBS REGULATORY ACTIVITY At the meeting of 8 May 2014, the NBS Executive Board adopted the Decision Amending the Decision on Risk Management by Banks (RS Official Gazette, No 51/2014). Transitional and final provisions of Article 426 of the Decision envisage an extended deadline from 1 January 2015 to 1 January 2018, for banks to assign a risk weight of 0% to all exposures to the Republic of Serbia and the National Bank of Serbia (including exposures which are not denominated and funded in dinars), as well as to exposures to central governments of member states and central banks of member states whose credit assessment is associated with credit quality step 3 or above (investment grade) and which are denominated and funded in the domestic currency of any member state. The decision to extend the deadline for the application of a more favourable credit risk weight was made following the analysis of the regulatory treatment of exposure towards countries and central banks in EU regulations adopting Basel III standards and envisaging the same type of more favourable treatment up to 31 December The extension is expected to prop up the stability of Serbia's banking sector and preserve its solid capitalisation, and is aligned with the NBS's strategic commitment to harmonise the regulatory framework for bank operation with the EU acquis in this field. 33