CENTRAL BANK OF MONTENEGRO ANNUAL REPORT 2011

Transcription

1 CENTRAL BANK OF MONTENEGRO ANNUAL REPORT 2011 Podgorica, 2012

2 PUBLISHED BY: WEB SITE: CENTRAL BANK COUNCIL: TRANSLATED BY: DESIGNED BY: PRINTED BY: PRINTED IN: Central Bank of Montenegro Bulevar Svetog Petra Cetinjskog Podgorica Telephone: , Fax: Radoje Žugić, PhD, Governor Milojica Dakić, MS, Vice-Governor Velibor Milošević, PhD, Vice-Governor Asim Telaćević Milivoje Radović, PhD Milorad Jovović, PhD Srđa Božović, PhD Translation Services Division Andrijana Vujović Printing Stock Company OBOD 100 copies Users of this publication are requested to make reference to the source of information whenever they use data from the Report.

3 ABBREVIATIONS ARIMA GDP BIS CBCG CMS CPI DNS EC ECAI ECB EMU EONIA ESCB ETSC EU EUR EUROFIMA EC FED AFI ICAAP IDA MFI IMF MONSTAT NATO NBY NPI OLAF VAT PEP RTGS FDI SREP SAA UN VaR Auto-Regressive Integrated Model with Variable Average Gross Domestic Product Bank for International Settlements Central Bank of Montenegro Central Monitoring System Consumer Price Index Deferred Net Settlement European Commission External credit assessment institutions European Central Bank Economic and Monetary Union Euro Over Night Index Average European System of Central Banks European Technical & Scientific Centre European Union Euro European Company for the Financing of Railroad Rolling Stock European Community Federal Reserve System Annual financial reports Internal Capital Adequacy Assessment Process International Development Association Microcredit financial institution International Monetary Fund Statistical Office of Montenegro North Atlantic Treaty Organization National Bank of Yugoslavia National Programme for Integration European Anti Fraud Office Value Added Tax Pre-accession Economic Programme Real-Time Gross Settlement Foreign direct investments Supervisory Review and Evaluation Process Stabilization and Association Agreement United Nations Value at Risk

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5 CONTENTS FOREWORD BY THE GOVERNOR OF THE CENTRAL BANK OF MONTENEGRO 7 1. MACROECONOMIC ENVIRONMENT AND ECONOMY Macroeconomic Environment Banking System Real Sector Trends in the Most Important Sectors of Montenegro s Economy Real Sector Indicators after the Processing of Annual Financial Statements IMPLEMENTATION OF THE CBCG POLICY IN THE REPORTING YEAR Central Bank of Montenegro Policy for Activities on the Implementation of the CBCG Policy Monetary And Financial Stability Payment System International Reserves Management Vault EU Accession and Cooperation with International Financial Institutions Human Resources Management Public Relations and Transparency CBCG as a Socially Responsible Institution CBCG`s Financial Performance in Profit and Loss Account of the CBCG as at 31 December Balance Sheet of the CBCG as at 31 December Report on Changes in Capital as at 31 December MACROECONOMIC FORECASTS FOR Forecast of Macroeconomic Indicators Inflation Forecast Montenegro s GDP Projection for Projection of Other Macroeconomic Aggregates for CENTRAL BANK OF MONTENEGRO POLICY FOR Central Bank of Montenegro Policy for Guidelines for carrying out Central Bank Policy for ANNEXES 81

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7 Foreword by the Governor of the Central Bank of Montenegro 7 FOREWORD BY THE GOVERNOR OF THE CENTRAL BANK OF MONTENEGRO Year 2011 may be characterized as the year in which Montenegro followed two directions. During the first three quarters, the real sector trends (recovery of tourism, construction and trade) pointed to a relatively good revival. However, deepening of problems at international and domestic markets, especially uncertainty caused by the sovereign debt crisis in some European economies, led to a significant slowdown in Q4 and a change in growth prospects for the upcoming period for Montenegro as well. In December 2011, the annual CPI inflation amounted to 2.8 percent, while the average annual rate was 3.1 percent. Inflation was similar to that in the Euro area, but lower than the inflation rate in the EU. The banking sector was relatively consolidated during 2011, but vulnerabilities and risks still remain. Problems emerging as a result of the rapid growth in loans and real estate prices in the past period also had adverse effects on asset quality in the banking system, resulting in low risk appetites and consequently lower lending activity of banks. Negative trends at the international market have led to more expensive and limited liquid assets intensifying the tendencies of slow recovery and resulting in high interest rates in the country. Internal and external misbalances, shown as a result of the crisis, deteriorated the perception of country risk, which has led to reduced inclinations towards investing into the Montenegrin economy, lower investment inflows and adverse effects on the economic recovery. Problems with liquidity (and solvency) of the corporate and public sectors additionally slowed economic recovery and contributed to stronger pressures on the banking sector. Consequently, activities of the CBCG were directed towards strengthening instruments for securing financial stability. The key activities focused on preventive actions, stabilization and recovery of the banking sector and thus indirectly to the revitalization of economic activities of Montenegro. To that end, the CBCG continued activities aimed at a further strengthening of the banking sector and improving risk management processes in banks, risk-based supervision, strengthening transparency and market discipline, compliance with business requirements in the international market, and further harmonization with the EU legislation. A set of secondary legislation was passed, providing for the system strengthening and better resilience to future shocks, which is one of important priorities of the CBCG. Thus, the CBCG completed the legislation for which passing and implementation it was

8 8 Central Bank of Montenegro Annual Report 2011 responsible (pursuant to the Central Bank of Montenegro Law, Banking Law, Deposit Protection Law, Bank Bankruptcy and Liquidation Law, and Financial Stability Council Law). The adoption of the Capital Adequacy Decision in July 2011 had a strong impact on the strengthening of the supervisory function of the CBCG and the banking sector s stability. This Decision is in compliance with the EU Directives 2006/48 and 2006/49, so EU requirements in this area have been met. The implementation of Pillars II and III of the Basel Capital Accord will allow banks to establish efficient risk management systems as well as internal assessment of capital adequacy in accordance with their risk profiles. In parallel, it enables the supervisors to assess a bank s capital adequacy as per material risks it is exposed to and, based on such information, take adequate measures which would result in the mitigation of both systemic risk and risks in individual banks. An ongoing increase in savings was also present in 2011, being a sure indicator that the confidence crisis is largely behind us. The restructuring process was rather dynamic, resulting in significant cleaning of banks balance sheets through sale or relocation of non-performing assets. Still, recovery of the real sector and its restructuring and refinancing will largely affect the portfolio quality and banking operations. The CBCG gave full contribution to Montenegro s European integration process. The CBCG activities were aimed at the preparation of documents for national reports referring to the degree of meeting requirements regarding European integration (annual Progress Report for Montenegro, Pre-Accession Economic Programme (PEP), National Programme of Integrations (NPI), Report on the Implementation of Commitments from Stabilization and Association Agreement (SAA)) and other documents. Progress of the CBCG in the harmonization of both primary and secondary legislation with the acquis communautaire was noted in the EC s Progress Report. By operating pursuant to the highest principles of transparency, the CBCG timely informed both domestic and international public on all important issues. Through regular and periodical publications and press releases, the CBCG contributed to raising awareness and economic knowledge of the society. During 2011, as a socially responsible institution both to its employees and the society as a whole, the Central Bank largely contributed to the attainment of objectives of a modern civil society through numerous and various activities, primarily those of humanitarian character and preparations for opening the Money Museum. When it comes to expectations for the upcoming year 2012, all projections indicate a mild economic recovery largely conditioned by recovery in the EU, yet weighed down by internal misbalances. The key challenge in 2012 refers to financial stability. The extremely rapid growth of public debt and ongoing fiscal deficit has been causing certain concerns in the last few years. Not less important are challenges coming from our environment, primarily those related to a slower growth than expected in SEE and the EU. This may slow the recovery of Montenegro that is highly vulnerable, which may further burden the fiscal policy, real sector, and consequently the banks. This all requires more prudent fiscal policy in the upcoming period in order to prevent the jeopardizing of financial stability.

9 Foreword by the Governor of the Central Bank of Montenegro 9 Trends in the international market and Montenegrin economy show that 2012 will be even more challenging for the CBCG. Taking into account that conservatism, stability and transparency are guiding principles of the CBCG s operations, this practice will be continued in the upcoming period, as set out in the CBCG s Policy and Working Programme for The position and trends in the banking sector will be closely monitored through ongoing supervision and onsite inspections based on qualitative risk assessment, as well as preventive policies with a view to early warning of potential vulnerabilities and disorders. Moreover, temporary measures will be replaced with permanent regulations and solutions which will be in line with the International Accounting Standards (with special regard of IAS 39) and that will provide full implementation of the Basel II standard. These changes are supposed to result in better risk assessment by banks, which will further on have positive effects on the stability of the entire financial system. Guvernor Radoje Žugić

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11 1MACROECONOMIC ENVIRONMENT AND ECONOMY

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13 Macroeconomic Environment and Economy Macroeconomic environment Following negative trends throughout most of the economic sectors and a 5.7% decline in GDP in 2009, in 2010 Montenegro s economy recovered. Most of the available statistical indicators show that the trend in 2011 is similar to that of Growth of GDP in 2011 was mostly a result of the growth in tourism, trade, forestry, manufacturing industry and mining and quarrying. This period was characterized by the annual rate of inflation of 2.8%, as well as by a moderate growth in the number of employees 1 and a decrease in the number of registered unemployed persons. Gross and net earnings each recorded a moderate growth of 1%. Montenegro s economy remains vulnerable, in particular due to liquidity problems in the real sector, insufficient credit support and a growing number of natural and legal persons with frozen accounts. Problems in the metal industry are deepening and additionally complicate the situation in the industrial sector, threatening to affect the level of total economic activity in the following period. In 2011, the labour market recorded relatively good trends, growth of employment and a decline in unemployment. Considering the aforesaid problems in the real sector, their belated effects on the labour market is to be expected, as it happened after the crisis year The annual CPI inflation amounted to 2.8% in December 2011, while the average annual rate amounted to 3.1%. Inflation was at the level that recorded in the Euro area, while it was lower than inflation in the EU. Eight of twelve categories of consumer prices recorded the annual growth, with the prices in the category alcoholic beverages and tobacco recording the highest growth, which was mostly due to changes in excise duties on certain groups of products. Otherwise, the most distinct growth in 2011 was recorded by the prices of administratively regulated products and their growth is expected to continue in 2012, precisely due to the announced increase in excise duties on some of the products under the food and non-alcoholic beverages category (coffee and aerated beverages) and alcoholic beverages and tobacco (cigarettes). According the report of the Food and Agriculture Organization (FAO) of the United Nations food prices were at their record highs in February Despite the fact that a certain decline in food prices occurred in the second half of 2011, they remain high and subject to changes. The annual growth in the prices under the food and non-alcoholic beverages category was significantly above the level of growth of total prices (total inflation) in the first six months of 2011, while in the next six months it declined, resulting in the annual growth in these prices of 0.5% in December Data are not completely comparable due to the change in their sources. As of April 2010, the source has been Central Register of the Tax Administration (CPRO), while the previous source for the data on employed persons had been the Pension and Disability Fund and regular monthly Monstat surveys on employed persons and their earnings.

14 14 Central Bank of Montenegro Annual Report 2011 Graph 1.1 Consumer prices (annual change in %) The annual core inflation amounted to 0.95% in December 2011, being 1.86 percentage points lower than total annual inflation. Throughout 2011, core inflation was lower than total inflation, being negative in the first two months. A decrease in the prices of certain products which comprise core inflation and an increase in the prices of certain excluded products (prices of housing and public utilities services, tobacco, fuel, and the like) resulted in a significant decline in the annual core inflation in relation to total inflation (as shown in Graph 1.1). Exercising the fiscal policy was difficult and influenced by numerous problems in the real sector. Total revenues of the Budget and State Funds, as per preliminary data of the Ministry of Finance, amounted to EUR 1,342.7 million in In relation to 2010, the budget revenues were 2.3% lower, yet 0.5% above the plan. Total Budget expenditures amounted to EUR 1.429,8 million or 43.7% of the estimated GDP. In comparison with 2010, the budget expenditures were 0.6% lower and 2.1% higher than planned. Expenditures that recorded the main divergence from the plan in terms of their increase were expenditures for social insurance, pension and disability insurance, gross salaries, subsidies and reserves, whereas the capital budget expenditures recorded a decline. The Budget of Montenegro recorded a EUR million deficit, or 4.2% of GDP in However, added to this should also be the amount of EUR million that fall under the category financing and it involves debt repayment and other liabilities. Source: Monstat and CBCG Calculations Table 1.1 Public debt structure, in million EUR Total public debt Domestic debt External debt Source: Ministry of Finance 1, % of GDP % of GDP 1, % of GDP At end-2011, the public debt of Montenegro, as per the Ministry of Finance data, amounted to EUR 1,483.5 million or 45.3% of the estimated GDP for In relation to end-2010, the public debt increased by 16.7%. This brings us to the conclusion that during the past period, the public debt uptrend was the matter of major concern, while currently the most worrying are the level of the debt and the costs of borrowing, bearing in mind that a further increase in the public debt is expected in The currency structure of the public debt is favourable. The entire domestic debt is in euros, as is the major portion of the external debt (88.5%), whereas a part of the obligations toward the Paris Club, as well as the obligations for IDA credits and the debt to EUROFIMA are in other currencies.

15 Macroeconomic Environment and Economy 15 Total issued guarantees as at 2011 year-end amounted to EUR million, so the total public debt amounted to 57.0% of GDP. Certain guarantees carry a high risk of being called or converted into public debt. The number of employed persons in 2011 amounted to 163,082, thus being 0.8% higher than the average number of employees in the previous year. Increase in the number of employed persons was recorded in nine sectors. Sectors recording the highest increase are the real estate (14.4%), financial intermediation (6.6%), other public utility and personal services (6.5%). An average decline in the number of employed persons is recorded in six sectors, with the sharpest decline recorded in the mining and quarrying (13%), manufacturing industry (7.6%) and transportation, warehousing and communications (3.5%). As per the Employment Agency s records, the number of registered unemployed persons averaged at 30,869 in 2011, which is 3.1% less than in the same period last year. The highest number of unemployed persons was recorded in February (33,062). Following February, the number of registered unemployed persons had been recording a downward trend until September, when it started increasing again. The unemployment rate announced by the Employment Agency of Montenegro in December 2011 amounted to 11.57%, which is 0.59 percentage points lower than in December The Labour force survey, published by Monstat on quarterly basis, shows that the highest unemployment rate (21.2%) was recorded in the first quarter of During the remaining three quarters, the unemployment rate decreased to 19.9%, 19.5% and 18.1%, respectively. Monstat data show that an average salary in Montenegro in 2011 amounted to EUR 722, being 1% higher than in the previous year. An average salary without taxes and contributions totalled EUR 484, also showing the year-on-year increase of 1%. A downward trend in the current account deficit that persisted as of the beginning of the crisis continued in The current account deficit amounted to EUR million or 19.4% of GDP or 17% less than in Reasons behind this should be sought in the lack of recovery of domestic demand and a growth in external demand (export of goods and revenues from tourism). Therefore, in 2011, the export of goods increased Current account structure, in million EUR Graph 1.2 by 33.6%, while at the same time import recorded a decelerated growth of 9.8%. Despite a significant growth in the value of export, a deficit on the goods account remains high, amounting to 39.9% of GDP or 3% more than in the previous year. Simultaneously, as a result of the travel-tourism revenues increase of 12%, the services account shows a surplus increase of 29.3%, amounting to EUR million (16.2% of GDP). The income and current transfers accounts recorded a surplus of EUR 25.8 million and EUR million, respectively, as a result of an increase in the inflow based on remittances from abroad. Source: CBCG

16 16 Central Bank of Montenegro Annual Report 2011 The coverage of foreign trade deficit with surpluses recorded in other accounts amounted to 51.5%, showing an increase of 11.8 percentage points in relation to Preliminary data show that net FDI inflows in 2011 amounted to EUR million or 11.9% of GDP, which is 29.5% less than in Of total FDI inflow, the share of equity investments was 69%, while the share of debt investments amounted to 26.8%. The unfavourable structure and the lack of greenfield investments in the production sector remain the major problems. Graph 1.3 Solvency ratio and its elements (in million EUR) Graph 1.4 Average liquid funds in the country and abroad (in million EUR) Source: Banks daily reports 1.2. Banking system The banking system relatively stabilized in Banking operations were characterised by a restrictive lending policy, as well as the sale or relocation of a part of loan portfolios to factoring companies or parent banks. These activities had a positive effect on improved quality of the banks loan portfolios and consequently leading to significant changes in market shares of certain banks. A decrease in non-performing assets was more dynamic in relation to a decrease in capital, leading to an increase in the solvency ratio from 15.85% at 2010 year-end to 16.51% or 0.66 percentage points more at 2011 year-end. At end-2011, total own funds of banks amounted to EUR million and total risk-weighted assets amounted to EUR 2,028.7 million. Banks total capital amounted to EUR million as at 2011 year-end, but total capital declined by EUR 5.7 million or 1.8% as compared to the previous year due to recorded losses by certain banks. Despite the fact that eight banks reported profit, high levels of loss in three banks led to the reported end-year loss of EUR 3.2 million at the entire banking system level. Main reasons for such a high loss should be sought in high loan loss provision expenses and high operating costs of banks. Attention should be paid also to the fact that the loss is considerably lower in relation to 2010 (-EUR 81.7 million) and 2009 (-EUR 21.6 million).

17 Macroeconomic Environment and Economy 17 Graph 1.5 Selected liquidity indicators, in % Liquidity of the banking system was satisfactory in Due to a decline in liquid assets of banks, the key liquidity indicators recorded slight annual declines (Graph 1.5); however they can be rated as satisfactory. Daily and ten-day liquidity indicators were above the prescribed minimum. Total loans amounted to EUR 1,955.8 million at 2011 year-end, showing the year-on-year decline of 11.1%. 2 Observed by banks, three banks reported a decline, while eight banks reported growth in lending activity in the reporting year. The main reasons for the decline in lending activity were: the sale and transfer of parts of loan portfolios of some systemic banks, defaults in repayment of previously granted loans, high dispersion of liquidity shortfalls in the real sector, inadequate maturity match of sources and placement of funds, high interest rates, still present high operating risk and, consequently, banks` prudence. As for the maturity structure of total loans, long-term loans accounted for 79.7% and short-term loans made up the remaining 20.3%, thus continuing the uptrend in long-term loans share in total loans which increased by 1.25 percentage points. The most important loan beneficiaries were private companies and natural persons (holding credit cards) with the share of 90% in total loans granted until 2011 year-end. Loans granted to private companies amounted to EUR million (47.3% of total loans), and loans granted to natural persons amounted to EUR million (42.6% of total loans). Foreign currency loans accounted for a mere 2.3% of total loans. Banks total deposits amounted to EUR 1,817.1 million at 2011 year-end and they showed the yearon-year increase of 1.5%. Household deposits increased by almost 8.6%, confirming that the crisis of confidence is generally over. Corporate deposits increased by 6.2% and declines were recorded in deposits by general government (33.7%), financial institutions (25.2%), non-profit organisations (4.3%) and deposits of the category other (19.0%). The most important depositors were natural persons and private companies, accounting for 56.9% and 24.5% of total deposits, respectively. The maturity structure of deposits improved as the share of demand deposits decreased from 40.9% (2010 yearend) to 39%. Deposits in euros prevailed in the currency structure, while deposits in other currencies made up 3.5% of total deposits. 2 If we were to exclude the relocation of loans to parent banks and factoring companies balance sheets, then the actual decline in loans would amount between 2% and 3%.

18 18 Central Bank of Montenegro Annual Report 2011 Loan to deposit ratio was negative at the system level, amounting to EUR million. The most obvious negative relationship of loans and deposits was in trade, construction and service sectors, as well as in tourism and hotel management industries. Beside households, the most important net lenders on the aggregate level were the financial and energy sectors. Table 1.2 Net position of placements and sources of funds by sectors, in thousand EUR Loans % Deposits % Net position Agriculture, hunting, fishing, etc. 23, , ,358 Mining 29, , ,939 Energy 6, , ,854 Construction 130, , ,685 Trade 405, , ,850 Services, tourism, hotel management 119, , ,142 Transport, warehousing, telecommunications 60, , ,579 Finance 53, , ,170 Real estate trade 45, , ,504 Administration, other public services 84, , ,675 Households 833, ,033, ,720 Other 164, , ,877 TOTAL: 1,955, ,817, , Real sector Trends in the most important sectors of Montenegro s economy Graph 1.6 Industrial output Source: Monstat Industrial output in Montenegro declined by 10.3% in 2011, thus ceasing the positive trend recorded in the previous year. Decline was recorded in electricity, gas and water supply (32.7%), while the sectors mining and quarrying and manufacturing industry recorded an increase of 6.3% and 6.8%, respectively. In the mining and quarrying sector, the highest growth was recorded in the extraction of other raw materials (18.5%), while seven manufacturing industry branches recorded output growths on the year-on-year level. The highest growth in manufacturing industry was recorded in the manufacturing of wood and wood products (34.6%) and the manufacturing of machinery and equipment, oth-

19 Macroeconomic Environment and Economy 19 er (26.4%). Significant growth was recorded in the production of basic metals and metal products (17.5%), contributing to the total growth of manufacturing industry because of a high share of this branch in total industrial production (21.6%). Growth was recorded in the manufacturing of textile and textile products (14.1%), the production of other non-metal minerals (9.4%), the manufacturing of transport equipment (3.5%), as well as in the manufacturing of rubber and plastic products (3.3%). The year-on-year decline in production was recorded in manufacturing industry, other (51%), the manufacturing of chemical products and fibres (23.4%), paper; publishing and printing (13.5%), and in food products, beverages and tobacco (2%). There was no production in the manufacturing of leather and leather products in Positive growth trend in tourism recorded in 2010 continued in In 2011, according to Monstat data, the number of tourists visiting Montenegro amounted to 1,373.5 thousand or 8.7% more than in The number of tourist overnights amounted to 8,775.2 thousand, or 10.2% more than in the previous year. The number of domestic tourist overnights decreased by 3.1%, while foreign tourists accounted for 7,818.8 thousand overnights or 12.1% more than in the previous year. The main share of overnights was recorded in seaside resorts (96.8%), followed by mountain resorts (1.2%), the capital (1.2%) and other tourist resorts (0.8%). An increase in overnights in 2011 was recorded by tourists from Romania (67.7%), Ukraine (61.5%), Russia (47.1%), the United Kingdom (20.9%), Germany (20.3%), Czech Republic (3.7%), as well as from neighbouring countries: Croatia (35.8%), Slovenia (28.4%), Bosnia and Herzegovina (2.6%) and Serbia (0.6%). As regards forestry, 293,734 m³ of wood products were produced in 2011, which is 14.6% more than in the same period of the previous year. The recovery of construction, which had begun in Q4 2010, continued in According to preliminary Monstat data, the total value of performed construction works in 2011 amounted to EUR million, being 10.7% higher in relation to the comparative period of the previous year, whereas measured by effective working hours, it increased by 19.4%. The value of new contracts on buildings amounted to EUR 37.7 million, which is 26.3% less than in the same period of 2010, and the value of new contracts on other constructions amounted to EUR 66.9 million or 33% less than in the same period of According to Monstat data, the majority of transport recorded the year-on-year decline in Road passenger transport and road freight transport declined by 0.8% and 38.5%, respectively. Railway passenger transport declined by 28.2% (measured by passenger kilometres), while railway freight transport decreased by 10.1% (measured by tonne kilometres). The total number of passengers in air transport amounted to 1,258.8 thousand or 4.4% more than in 2010, while the air freight transport decreased by 50.3%. Marine freight transport (measured by tonne miles) declined by 17.5% in relation to the same period of Total turnover in ports amounted to 1,750 thousand tonnes or 0.5% less than in Total turnover in retail trade increased by 20.5% on the year-on-year level, while the sale and purchase of products in agriculture, forestry and fishing increased by 36.2%.

20 20 Central Bank of Montenegro Annual Report Real sector indicators after the processing of annual financial statements In 2011, the Central Bank of Montenegro continued with the project of processing annual financial statements (AFS) of legal persons in Montenegro that are obliged to submit these reports to the Tax Administration, in line with the Business Organisation Law and the Accounting and Auditing Law. By 28 February 2011, legal entities submitted their AFS for The Central Bank of Montenegro processed AFS 3. It has to be noted that there were no unprocessed AFS this year either that would otherwise be the case in the event of incorrectly or inadequately completed forms, which points to a significant improvement in the application of basic rules for compiling financial reports. Good quality in compiling financial statements is very important since AFS are used for the compilation of Montenegro s GDP, thus inaccurate financial reports may lead not only to incorrect forecasts of this macroeconomic aggregate, but to wrong analytic conclusions stemming from a non-quality statistical base. The same applies to any type of macro analysis, like trends in short and long term indebtedness of some sectors, their liquidity, profitability, which may lead to misinformation in the bank awareness on a client s creditworthiness, increasing the asymmetry between banks (both national and international) and clients legal persons, affecting risk growth and contributing to an increase in interest rates and non-performing assets in the banking sector. Since the percentage of processed AFS is lower in comparison to the total number of registered legal persons obliged to submit these statements, aggregate indicators obtained after the processing of the submitted, i.e. appropriately completed AFS, can be taken with reservation with respect to being representative for the Montenegrin economy. The results obtained through the processing of AFS show that Montenegrin economy recorded a positive result net profit amounting to EUR million. The results obtained through the processing of AFS show the end of negative trends induced by the global financial crisis which had considerable effects on results in the corporate sector in Montenegro in 2009, resulting in a net loss of EUR million. The positive financial result is reflected primarily in an increase in revenues of EUR million, which is the annual increase of 7.5%. The analysis by sectors shows positive results in seven out of 17 sectors. Profit increase recorded the following sectors: transport, warehousing and communications (EUR million or 13.1%), the production of electricity, gas and water supply (EUR 18 million, i.e. over five times higher), and construction (EUR 7.49 million, i.e. over eleven times higher in relation to 2009). Positive results were recorded in wholesale and retail trade; however recording a decrease in profit by 55.2% in relation to the comparative period. Lower net profit, yet a positive result, was recorded in the following sectors: financial intermediation (87.2%), agriculture, forestry and water supply (4.5%), and education (12.4%). 3 The remaining 426 balance sheets were not processed: of 202 companies and 18 NGOs because of technical difficulties (defective CDs), while establishments and institutions (142), union organisations (20), the stock exchange and brokers (10), (re) insurance companies (12) and privatisation funds (5) were not processed.

21 Macroeconomic Environment and Economy 21 The analysis also showed a decrease of loss in five sectors. The greatest decrease (82.6%) was recorded in manufacturing industry where the loss amounted to EUR million (EUR million in 2009). Loss in the mining and quarrying sector was EUR million or 76.9% lower in relation to 2009 (EUR million). A significant decline in loss was recorded in the real estates, where the loss reported amounted to EUR 7.84 million (EUR million in 2009), as well as in hotels and restaurants, where loss decreased by over 50% coming down to EUR million (EUR million in 2009). On the other hand, the following sectors recorded an increase in loss: public utilities and personal services (over 3.6 times), health care and social welfare (more than twofold), and public administration and social insurance (25.7%). Income statements of legal persons in 2010, observed by geographical area, showed a significant improvement in financial situation of companies in the municipality of Podgorica, an increase in profit by 14 times. Companies in the municipalities of Pljevlja, Kotor, and Tivat also recorded positive results, while in 2009 they recorded loss. Despite recording a decline in loss in relation to the previous year, the municipality of Nikšić still reported the highest loss (EUR million). The reason behind this condition lies in the fact that some of the systemic companies that experienced troubles in 2008 are seated in this municipality. A decline in loss (39%) was recorded in the municipality of Budva, which reported a loss in the amount of EUR million (EUR million in 2009). The most significant deterioration in financial results was recorded in the municipality of Herceg Novi, which reported a loss of EUR million, while in 2009 it recorded a net profit of EUR 1.18 million. Financial situation deteriorated in Bar as well, reporting a loss in the amount of EUR million, i.e. over 11 times more in relation to the previous year (EUR 1.39 million). The analysis of eight financial indicators (net profit margin, ROA, ROE, overall liquidity ratio, liquidity ratio which does not treat stocks, level 2 liquidity ratio (so called Acid Test) and ratio of coverage of total liabilities with assets and own capital), represented in table below, clearly shows a partial improvement in the output of the Montenegrin economy. This is indicated by an increase in revenues as well as by stagnation in the coverage of short-term liabilities by current assets and total liabilities and assets of Montenegrin economy. Table 1.3 Selected operating indicators of Montenegrin legal persons (Net profit (loss)/ Total income)* (Net profit (loss)/ Total assets) (Net profit (loss)/ Total capital) Liquidity ratio 1=current assets/short-term liabilities Liquidity ratio 2=(current assets - stocks)/ short-term liabilities Liquidity ratio 3= Cash and cash equivalents/ short-term liabilities Indebtedness ratio 1= total liabilities /total assets Indebtedness ratio = total liabilities /total capital

22 22 Central Bank of Montenegro Annual Report 2011 General conclusion with regard to the output of the Montenegrin economy in 2010 is that the negative trend driven by the global financial crisis, which primarily affected companies in 2009 and several previous years, was stopped. A positive trend was noticeable through the stagnant corporate sector indebtedness, i.e. the establishing of a more favourable relation between companies` own funds and those obtained from short-term and long term sources of financing but with a considerable increase in liquidity shortfalls. In 2011, the Ministry of Finance submitted requests for initiating proceedings against companies that did not submit their financial statements on time. Thus the total fines charged to companies operating in Montenegro amounted to over EUR 30 thousand. The enforcement of concrete sanctions which foresees criminal charges against companies that have not made the requested corrections in timely fashion and removed irregularities in their financial statements for the previous year, was announced to continue in 2012.

23 2IMPLEMENTATION OF THE CBCG POLICY IN THE REPORTING YEAR

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25 Implementation of the CBCG Policy in the Reporting Year Central Bank of Montenegro Policy for 2011 The Council of the Central Bank of Montenegro, at its meeting held on 30 November 2010, established the CENTRAL BANK OF MONTENEGRO POLICY FOR 2011 In line with the constitutional obligations and statutory authorities and accountability for monetary and financial stability and the banking system functioning, and adhering to the principles of transparency and independence, in 2011 the Central Bank of Montenegro (CBCG) shall carry out the following policy: 1. Continue, with a view to further enhancing and preserving monetary and financial stability, to develop monetary instruments and take all other necessary actions under its authority to strengthen confidence in overall financial system. It shall pay special attention to encouraging and preserving sound banking system. In that respect, it shall continuously monitor and analyze situation in the banking system and, if needed, take corrective measures, promote the strengthening of corporate governance and risk management in banks, and continue implementing internationally accepted banking standards and principles; 2. Provide full support to the Government of Montenegro in accomplishing economic policy, particularly for the purpose of boosting economic growth and development to the extent that will not jeopardise attaining of objectives and constitutional responsibilities of the Central Bank of Montenegro; 3. Maintain, as an important part of financial stability, a sound and efficient national payment system and further improve it through the implementation of international standards, principles and best practises for the functioning of modern payment systems and payment system transactions in general; 4. Manage international reserves, with the main objective to ensure the safety of investments and undisturbed fulfilment of Montenegro s international financial obligations, without jeopardizing liquidity, as well as further analyzing new investment opportunities and increasing income; 5. Actively participate in Montenegro s EU accession process and work on further harmonisation of regulations under its authority. It shall continue cooperation with international financial institutions and international organisations, which scope of activities are connected with the attaining of objectives and exercising of functions of the Central Bank of Montenegro, and the central banks, and other international institutions responsible for the banking supervision; 6. Develop organisation with highly motivated staff having professional qualifications that correspond to work processes in the Central Bank of Montenegro; 7. Carry out policy with high level of transparency and actively communicate with all interested target groups; 8. Function on the principle of socially responsible organisation and be actively involved in development of modern society.

26 26 Central Bank of Montenegro Annual Report Activities on the implementation of the CBCG Policy One of key elements for economic development of the country is the safe and sound financial system. The banking system has the key function in the Montenegrin financial sector. It is of key importance that the creditors and depositors have confidence into the system, which requires good legislative and institutional infrastructure in compliance with international standards and efficient supervision of financial institutions as preconditions. The Central Bank of Montenegro, as banking sector s supervisor, enacts bylaws and initiates adoption of laws which regulate banking operations in Montenegro on the basis of generally accepted international standards, with a view to establishing sound banking system and financial stability at the macro level Monetary and financial stability Activities of the Central Bank of Montenegro on the implementation of financial and monetary stability policy are aimed at recognizing threats to financial system stability and at creating responsible policies. In this sense, the activities are focused in the analysis of the banking sectors exposure to operational risks, as well as to creation of financial buffers for managing these risks, then to assessing soundness and vulnerability of financial sector as a whole through monitoring and analysis of macroeconomic conditions, financial system oversight and the financial infrastructure. Thereby, they take into account financial sector vulnerabilities that may cause the liquidity or solvency crisis, intensify macroeconomic shocks and lead to spreading instability to the whole economic sector, as well as the manner of managing these vulnerabilities. Depending on the estimated level of financial system stability, the stability preservation policy means preventive acting (when the financial system is stable), corrective measures (in the case of instability threat) and crisis measures (when facing the instability). Pursuant to constitutional responsibility for monetary and financial stability and functioning of the banking system, as well as statutory powers of the Central Bank of Montenegro, the Council of the Central Bank of Montenegro passed the Central Bank of Montenegro Crisis Management Plan in December 2011( Contingency Plan ). The purpose of the plan is to allow the Central Bank to act in case of contingencies and/or bank crisis or a systemic crisis in an efficient, effective, consistent and comprehensive manner. The plan rests on three financial stability pillars monitoring, prevention, and crisis management (Figure 2.1). Financial crisis planning is an ongoing activity of the Central Bank. This implies continuous monitoring of changes in the macroeconomic environment, the identification and monitoring of the systemic risk indicators, the assessment of financial condition of all banks in the system, taking of timely (preventive) actions to solve problems and readiness to solve these in an efficient manner with a view to diminishing their impact on the economy and taxpayers.

27 Implementation of the CBCG Policy in the Reporting Year 27 Figure 2.1 Three financial stability pillars The activities defined by this plan direct the Central bank s operations towards preserving the financial system stability. Maintaining the financial sector s stability, as defined by the plan, means avoiding serious disorders in the operations of financial institutions subject to Central Bank s supervision and regulation, aimed at removing the disorders in the functions performed by financial sector: payments, savings, credit allocations, efforts on clients due diligence, as well as mitigating risks and providing liquidity services. Within this wide definition, financial stability may be set as a condition in which the financial system may be operative inside stable frames. The function of the Central Bank in this area has been set to preventively act on all potential vulnerabilities near the limit of instability with a view to their identification and timely prevention of their further deepening. Moreover, through the Financial Crisis Management Plan at the Financial System Level ( National Contingency Plan ), adopted at the moment of writing this report, the Central Bank and other financial market regulators (Ministry of Finance, Securities and Exchange Commission and Supervision Insurance Agency) agreed on joint acting during the crisis that would eventually jeopardize the whole financial system Monetary policy In 2011, as an institution responsible for monetary policy, fostering and maintaining financial system stability, including fostering and maintaining sound banking system and safe and efficient payment operations, the Central Bank focused on fulfilling the goals set by the Bank s Policy and the Central Bank of Montenegro Law. Moreover, the Central bank performed ongoing oversight and analysis in the area of price stability and thus implemented one of fundamental objectives of monetary policy, achieving and maintaining the price stability. The Central Bank of Montenegro Law 4 lays down the following CBCG s primary monetary policy instruments: open market operations, credit operations, lender of last resort and reserve requirements. 4 OGM nos. 40/10 and 46/10

28 28 Central Bank of Montenegro Annual Report 2011 During H1 2011, CBCG passed a set of new decisions governing the use of monetary policy instruments in the area of open market operations, credit operations and lender of last resort. Thus, the CBCG s possibilities of acting pursuant to objectives set by the Constitution and the Central Bank of Montenegro Law have been expanded. The CBCG amended the reserve requirements policy in H The Decision on Open Market Operations 5 interprets the use of this monetary policy instrument in a manner that the Central Bank, with a primary objective of regulating the banking system s liquidity, purchases from and sells to banks securities issued by the State of Montenegro, EU Members States and international financial institutions or other securities. Moreover, this instrument indirectly affects the level of the banks lending potential, their lending activity, and consequently to total economic activity in the country. Due to limitations in sources of funds available to CBCG, the use of this instrument has been rather limited in practice and has not been used so far. The Decision on Detailed Conditions for Granting Liquidity Loans to Banks 6 closely defines the regular needs for banks liquidity. Pursuant to this decision, the CBCG may grant the liquidity loan to banks in the form of: intraday liquidity loan; overnight liquidity loan; short-term liquidity loan. With this decision, the CBCG has gives banks the possibility of bridging short-term liquidity needs appearing in regular operations, thus acting to stability of banking and financial system. Due to assessed monetary and financial stability condition, this monetary policy instrument has not been activated in Decision on Granting Last-Resort Financial Assistance 7 foresees the possibility of providing credit support to banks and financial institutions to the period not exceeding 180 days, with a view to preventing jeopardizing the banking system stability and soundness, providing that a financial institution has been unable to provide necessary funds from other sources. This instrument increases the resistance of the financial sector to potential sources of financial instability through timely reaction and prevention of risk execution. This monetary policy instrument has also not been used in In July 2011, the reserve requirement policy was amended, from the focus of providing liquidity to the banking sector to improving maturity adjustment and banks placements. With this change, the Central Bank tends to improve maturity structure of time deposits, for a longer period, in order to reduce the potential business vulnerability of banks. The new Decision on Bank Reserve Requirement 5 OGM 15/11 6 OGM 15/11 7 OGM 15/11

29 Implementation of the CBCG Policy in the Reporting Year 29 to be Held with the Central Bank of Montenegro 8 foresees that banks calculate the reserve requirement by applying the rate of: 9.5% for the part of the base consisting of the demand deposits and deposits with maturity up to one year, i.e. up to 365 days. 8.5% for the part of the base consisting of deposits with maturity over one year, i.e. over 365 days. This Decision came into force on 1 October 2011, whereby banks were enabled a gradual adjustment to the new reserve requirements regime. Reserve requirement policy Reserve requirement amounted to EUR million at end-december 2011, and it showed the yearon-year increase of EUR 8.2 million or 3.8% (Table 2.1). Table 2.1 Allocated reserve requirement, deposits, borrowings, in million EUR III VI IX XII III VI IX XII Allocated reserve requirement Total deposits 1, , , , , , , ,817.1 Total borrowings The share of reserve requirement in total deposits of banks grew from 9.2% (2010) to 9.4% (2011) (Table 2.2). Table 2.2 Reserve requirement/ total deposits and banks borrowings ratio, % Description/ Period III VI IX XII III VI IX XII Reserve requirement/total deposits Reserve requirement/(total deposits and borrowings) Table 2.3 shows that the reserve requirement to total deposits and/or banks assets in Montenegro was amongst the lowest in the region, yet it significantly exceeded the level prescribed by the European Central Bank. 8 OGM 35/11

30 30 Central Bank of Montenegro Annual Report 2011 Table 2.3 Reserve requirement to total deposits and banks assets at 2011 year-end, in % Reserve Requirement/Deposits Reserve Requirement/Assets Bosnia and Herzegovina 22.0% 13.0% Montenegro 9.4% 6.1% Croatia 11.1% 7.7% Macedonia 13.2% 8.0% The structure of reserve requirement changed as compared to At the 2011 year-end all banks used the possibility to allocate a portion of their reserve requirements in the form of T-Bills, thus they allocated EUR 41.7 million from the reserve requirements for the purchase of T-bills or 24.4% of total allocated reserve requirements. Some 65.0% of calculated reserve requirements were allocated to the reserve requirement account in the country and 10.6% to the Central Bank account held abroad Banking system supervision and regulation Banking supervision and regulation, as the key activities of the Central Bank aimed at fostering and maintaining a sound banking system, were implemented in the reporting year through an ongoing strengthening of prudential supervision and supervisory capacity as well as through improving regulatory framework with a view to its harmonization with EU regulations and compliance with operating requirements in the international financial market through the implementation of the Basel standards. Through an integrated system of on-site and off-site inspections, the situation in the banking system was monitored on an ongoing basis and the analysis thereof resulted in adequate corrective measures. The supervisory activities particularly addressed the comprehensiveness of risk assessment in banks, especially of credit risk which is the most distinctive, as well as on the supervisory oversight of the capital adequacy assessment process in banks. Moreover, mechanisms and procedures necessary for a successful prevention of money laundering and terrorism financing were additionally intensified. Intensive cooperation with regulatory and supervisory bodies in the financial system in Montenegro, as well as with home supervisors of parent banks operating in Montenegro also continued in Supervision of the banking system Due to the obvious instability in external financial markets and risks recognized in the Montenegrin banking sector, on-site inspections of banks and MFIs were intensified as well as the ongoing monitoring of their operations on the basis of reports submitted to the Central Bank. Thirteen on-site inspections of banks and two on-site inspections of MFIs were performed in The inspections covered all banks, with particular focus on the systemic banks, some of which were subject to several targeted inspections of individual risky business areas.

31 Implementation of the CBCG Policy in the Reporting Year 31 Pursuant to Article 115 paragraph 2 of the Banking Law (OGM 17/08 and 44/10), the irregularities in a bank s operations are considered to be: 1. inadequate managing of risks to which the bank is exposed in its operations; 2. bank s action (and/or failure to act) which is not in accordance with the law and regulations passed on the basis of the law; 3. applying unsafe or unsound banking practices. The analysis of measures imposed against banks and MFIs during the reporting period shows that the most common reasons for imposing measures were inadequate managing of risks to which a bank is exposed in its operations, as well as the bank s actions (and/or failure to act) which are not in accordance with the law and regulations passed on the basis of the law. The application of unsafe or unsound practices in banks and MFIs operations was a basis for imposing measures only in few individual cases. The analysis of inadequate managing of risks to which banks and MFIs are exposed in their operations showed that most of these financial institutions inadequately manage credit risk. Consequently, in most of measures imposed as orders, the Central Bank obliged banks to classify their assets into higher risk groups on the basis of exposures to credit risk. In many banks it was disclosed that risk taking was not separated from credit risk management operations. Inadequate operational risk management was also one of the irregularities identified in banks and MFIs` operations and in most cases it reflected as inadequate IT system management. Improper management of other risks was not identified or it was insignificant and thus did not require imposing any measures. The analysis of banks or MFIs` actions (and/or failure to act) that were not in compliance with the law and regulations passed on the basis of the law has shown that these actions primarily reflected as: incorrect reporting to the Central Bank, non-compliance of banks` and MFIs` general internal acts with the law and regulations of the Central Bank, inadequate functioning of internal control and internal audit systems and breaching regulations violating the rights of bank and MFI clients. During 2011, as a result of inspection findings and banks exposures to risks, the CBCG introduced the following supervisory measures: four written warnings, of which one to an MFI and three to banks; A written agreement bounding a bank to remove the irregularities in operations; Four orders imposing measures against banks to remove the irregularities identified in their operations and One resolution on cancelling measures against a bank; Credit risk Credit risk still represents the most important risk in the Montenegrin banking system.

32 32 Central Bank of Montenegro Annual Report 2011 The assessment of quality of the credit risk management is based, inter alia, on the assessment of adequacy of classification of risk assets and off-balance sheet items and allocated loan loss provisions pursuant to regulations. Total non-performing assets of banks (C, D, and E) amounted to EUR million at 2011 year-end and made up 11.8% of total assets. They showed the year-on-year decrease of EUR million or 34.9%. Simultaneously, the share of non-performing assets in total assets declined by 5.5 percentage points. Substandard assets (C) reported a nominal decline of EUR 58.9 million or 19.66%, while loss (E) declined by EUR 89.6 million or 69.66%. Doubtful assets (D) declined by EUR 29.2 million or 36.04%. Criticised assets (B, C, D, and E) amounted to EUR million at 2011 year-end, showing a decline of EUR million or 20.46% over the one-year period. Criticised assets made up 40.2% of total assets. The level of criticised assets was high, amounting to % of total capital and reserves. They declined by percentage points over the one-year period. Special mention assets (B) made up 63.09% of criticised assets. All categories of criticised assets reported declines in the previous year. Table 2.4 Classification of assets and off-balance sheets of banks as at 31 December 2011, in thousand EUR On balance sheet and off balance sheet assets Cash Classification Collateral collateral A B C D E TOTAL 1 Loans 88,425 93,633 1,016, , ,490 28,527 16,308 1,885,825 2 Matured receivables 4, ,362 14,809 20,844 11,595 18,004 69,942 3 Interest ,890 4,285 1,824 1,070 4,061 12,700 4 Other receivables 11, ,836 12,253 3,047 9, ,371 5 Total ( ) 92, ,508 1,314, , ,205 50,388 38,457 2,278,838 6 Assets to which loan loss provisions are not calculated 642, ,560 7 On balance sheet items total: (5+6) 92, ,508 1,957, , ,205 50,388 38,457 2,921,398 8 Guarantees 23,860 5, ,184 61,342 4, ,630 9 Letters of credit 539 2,136 2,767 5, Other off balance sheet commitments 2,390 4,542 65,133 21,429 1, , Off balance to which reserves are calculated (8+9+10) 26,789 10, ,453 85,538 6,431 1, , Off balance to which reserves are not calculated 12,298,514 12,298, Off balance sheet total (11+12) 26,789 10,115 12,495,967 85,538 6,431 1, ,626, Total on and off balance sheet items (7+13) 119, ,623 14,453, , ,636 51,890 39,042 15,547, Total on and off balance to which reserves are calculated (5+11) 1,512, , ,636 51,890 39,042 2,371, Established provisions 1,999 14,105 55,738 39,833 15, ,675 Coverage ( 16/15 ) * Excluding positions classified as E

33 Implementation of the CBCG Policy in the Reporting Year 33 Table 2.5 Key asset quality ratios, in thousand EUR / Special mention assets B 620, , Substandard assets C 299, , Doubtful assets D 81,123 51, Loss E 128,694 39, Total criticised assets (B + C + D + E) 1,129, , Non performing assets (C + D + E) 509, , Non performing assets / capital + reserves Non performing assets / total assets Criticized assets / capital + reserves Established provisions 161, , Loans classified as A declined by EUR million or 8.89% in the previous year. Table 2.6 Past due loans as of 31 December 2011, in thousand EUR DESCRIPTION days past due loans days past due loans days past due loans TOTAL TOTAL % of days past due loans in total loans Loans to Government of Montenegro Government agencies Funds Municipalities (public organisations) 7,652 3,776 2,332 13, State companies 7,053 1, , Private companies 141,676 47,751 26, , Entrepreneurs 1,157 1, , Banks Financial institutions Non profit organisations 1, , Households 65,272 46,341 14, , Credit cards 2,094 1, , Other 300 3,146 3, TOTAL 226, ,505 46, , ,00 % in total past due loans The percentage of past due loans at the system level amounted to 19.33%, while the same indicator was 23.75% at 2010 year-end. In absolute terms, past due loans declined by EUR million or 27.65%. The largest portion of past due loans, EUR million or 57.23%, referred to private companies. The structure of past due loans was the following: days past due loans made up 59.87%, while 91-

34 34 Central Bank of Montenegro Annual Report days past due loans made up 27.91%. Past due loans granted to natural persons, excluding credit cards, made up 33.41% of total past due loans. The largest portion of these loans (58.54%) were days past due. Loans that were past due amounted to EUR 46.2 million. The largest portion referred to loans granted to private companies (58.3%). Established reserves for losses on asset and off-balance sheet items amounted to EUR million at 2011 year-end. These reserves reported a nominal decline of EUR 44 million or 27.12% in one year period. Loan loss provisions amounted to EUR 99.6 million and they made up 5.09% of total loans or 89.2% of total allocated reserves. Liquidity risk Liquidity of the banking sector was satisfactory in the reporting year. Banks liquid assets amounted to EUR million, showing the year-on-year decrease EUR 2.8 million or 0.5%. However, liquid assets to total assets ratio increased to reach 19.93%. Liquid assets to short-term liabilities ratio declined by 0.1 percentage points and it amounted to 32.78%. Simultaneously, short-term loans to short-term liabilities ratio declined and amounted to 40.58% on the aggregate level due to a decrease in the loan portfolio in the previous year. Table 2.8 Aggregate level of liquid assets to short term and total liabilities of banks, year-end Liquid assets (in EUR 000) 562, ,883 Short term loans (in EUR 000) 829, ,077 Total assets (in EUR 000) 2,943,655 2,809,720 Short term liabilities (in EUR 000) 1,711,747 1,707,879 Total liabilities (in EUR 000) 2,632,748 2,504,491 Liquid assets/total assets (%) 19.11% Liquid assets / Short term liabilities 32.87% Short term loans / Short term liabilities 48.44% Liquid assets / Total liabilities 21.37% Table showing the maturity match of financial assets and financial liabilities at the aggregate level points to a negative maturity gap in periods days, while total cumulative gap at the system level was negative in periods of days. Total cumulative gap at the system level amounted to EUR million and made up 7.22% of total sources of funds and it significantly improved in relation to 2010 (32.62%).

35 Implementation of the CBCG Policy in the Reporting Year 35 Table 2.8 Maturity structure of financial assets and financial liabilities at aggregate level as at 31 December 2011, in thousand EUR over days days days days days days years 5 years TOTAL 1 Financial assets in the balance sheet 474,279 42,344 87, , , , , ,335 2,802,758 2 Financial liabilities in the balance sheet 285,722 80, , , , , , ,212 2,477,253 3 Difference 1-2 a) Maturity gap 188,557-38,373-88, ,699-97, , , , ,504 b) Cumulative gap 188, ,184 61, , , ,231 97, , ,769 % of total sources of funds 7.61% 6.06% 2.50% -4.67% -8.63% % 3.93% 13.14% 7.22% Short-term loans were properly covered by short-term deposits, as opposed to long-term loans which were not adequately covered by long-term deposits, indicating intensified financing of these loans from borrowings. Table 2.9 Maturity coverage of loans by deposits, aggregate level, in thousand EUR 31/12/ /12/2011 Short term loans 829, ,077 Short term deposits 1,486,502 1,463,762 Coverage (%) 179,29 211,20 Long term loans 1,370,869 1,262,690 Long term deposits 303, ,298 Coverage (%) Market risks In 2011, total level of market risks was relatively low. Banks identified, measured, controlled and monitored market risks in line with the regulations. Based on the analysis of banks on-site reports, interest rates and FX positions were identified as potential sources of market risks in the Montenegrin banking system, but the level of risk is currently insignificant. FX risk was low. Since euro is the payment currency and all payments are primarily made in euros, the exposure of the Montenegrin banking system to direct FX risk was limited.

36 36 Central Bank of Montenegro Annual Report Issuing licenses and granting approvals One decision issuing the licence approval to an MFI was passed in Twelve decisions were made to rule on the application for granting approvals for the election of members of the board of directors in banks. Twenty-two decisions were made based on the application for granting approval for the election of the executive directors in banks. Based on the application for granting approval for acquiring qualified participation in banks, four decisions were made. Ten approvals were granted for the election of an audit firm in banks. Three approvals were granted for performing internal audit in banks. Based on the applications for granting approvals for performing operations not defined in the decision on licence, one approval was granted. Based on the applications for granting approvals for performing operations not defined in the decision on licence, one decision was issued on denying the approval. Based on the applications for granting approvals for establishing a bank branch, one approval was granted Change in the regulatory framework Regulatory activities in the banking area were dominantly focused on further improvement of the secondary legislation in the banking area and their harmonisation with relevant EU regulations. Within the Twinning Project: Strengthening the Regulatory and Supervisory Capacity of the Financial Regulators, with the assistance of the Bulgarian National bank, the most important regulation which was passed was the Capital Adequacy Decision (OGM 38/11) which includes guidelines for internal capital adequacy assessment process (ICAAP) and guidelines for supervisory review and evaluation process (SREP). The decision was passed in July 2011 with the implementation date as of 1 January In October 2011, the Central bank passed: 1. General guidelines for cooperation with supervisors of other countries within the supervisory colleges; 2. General guidelines for supervisory review and evaluation process (SREP), 3. General guidelines for recognition of external credit assessment institutions (ECAI);

37 Implementation of the CBCG Policy in the Reporting Year 37 With the passing of the Capital Adequacy Decision and General guidelines for supervisory review and evaluation process (SREP), the CBCG legislation is fully in compliance with Pillars I and II of the Basel Capital Accord, except regarding advanced approaches for calculating necessary capital for credit and operational risk. In November 2011, the CBCG passed a Decision Amending the Decision on Minimum Standards for Bank Investment in Immovable Property and Fixed Assets (OGM 2/12), which extends the deadline for selling assets that banks acquired for the settlement of debts from debtors having problems in loan repayment. In December 2011, the Central bank passed: 1. Decision on Public Disclosure of Information and Data by Banks (OGM 2/12), which harmonized CBCG regulations with the Directive 2006/48/EC (Annex XII - Technical Criteria on Disclosure), thus implementing Pillar III of the Basel Capital Accord, 2. Decision Amending the Decision on Bank Reporting to the Central Bank pursuant to the Banking Law (OGM 2/12), which complied reporting forms on bank s own funds and on capital needed for risks with new Capital Adequacy Decision. This decision shall come into force as of 1 April Decision Supplementing the Decision on Temporary Measures for Credit Risk Management in Banks (OGM 2/12), which established preventive supervision of banks purchase or sell loan receivables by the Central Bank. 4. Decision Amending the Decision on Banking Ombudsman (OGM 2/12) Other segments of financial stability Micro-credit financial institutions (MFIs) Total MFIs` assets and liabilities amounted to EUR 44.4 million in December The annual decline of MFIs` assets and liabilities of 24.5% in December was the result of a decline in the category business premises and other fixed assets (36.1%), a decline in cash and deposit accounts held with depositary institutions (33.2%) and a decline in total loans (23.0%). In relation to 2010 year-end, as regards liabilities, borrowings declined by 42.2%. Uncertainty about future economic growth limited the private sector demand for MFIs` loans, which total loan portfolio has been continuously declining since At 2011 year-end, total loans amounted to EUR 33.5 million, which represents the year-on-year decline of 23%. Long-term loans were still dominant in maturity structure of MFI loans (88.40%). Sectoral allocation of loans showed the main share of household loans (97.66%), while in the structure of MFI loan portfolio by industries, dominant share was in loans granted to agriculture sector (39.13%). Past due loans amounted to EUR 2.9 million at 2011 year-end or 8.71% of total loans granted by MFIs.

38 38 Central Bank of Montenegro Annual Report 2011 MFI granted loans for start-up of small entrepreneurial programmes but under very unfavourable conditions since these were small amounts and short repayment deadlines. MFI average weighted effective interest rates reached 28.54% in December 2011, while the nominal interest rate amounted to 19.21%. At end-2011, MFIs reported a positive financial results totalling EUR 2.0 million. Bearing in mind that MFIs do not accept deposits, and their small share in total assets of the financial system, currently they do not represent a threat to the financial stability Insurance market 9 Insurance sector indicators at 2011 year-end pointed to positive tendencies in growth and development of this sector in comparison to the previous year. Balance sheets of insurance firms increased, as well as gross (life and non-life) insurance premiums, liquidity and solvency of insurance firms was satisfactory, and the positive gross financial result was recorded. Gross insurance premium amounted to EUR 64.8 million at 2011 year-end. It showed the year-onyear growth of 4.2%. Non-life insurance premium was still dominant in its structure (86%), recording a declining trend in its share as a result of a decline in non-life insurance gross premiums (3.6%) and simultaneous increase in life insurance premiums (8.1%). Even besides the increase in life insurance premiums, insurance companies faced the problem of aggravated collection in the observed period due to the financial crisis effects, which resulted in the reversal of a number of insurance policies, an increase in requests for insurance surrenders and a decline in the number of active insurance policies. Increased competition in the insurance market influenced a decline in the market concentration at the year-end. Three insurance companies with the highest insurance premiums accounted for 72.4%, which is the year-on-year decline of 5.3 percentage points. Total equity capital of insurance companies amounted to EUR 45 million at 2011 year-end, showing the year-on-year decrease of 1.5%. The share of foreign capital slightly decreased, around 0.07% as compared to end The solvency margin of insurance companies amounted to EUR 19.2 million and guarantee reserves amounted to EUR 29.3 million at the year-end. At the level of insurance sector in Montenegro, guarantee reserve to solvency margin ratio amounted to 152.8%, indicating that solvency of insurance companies was satisfactory. The liquidity ratio amounted to 2.8 and shows that liquid funds of insurance companies were 2.8 times higher as compared to their short-term liabilities. After several years of recoding loss in operations, the insurance sector recorded a profit of EUR 1.8 million at end Due to a still underdeveloped insurance market and the legal obligation of insurance companies to follow a more conservative policy in their placements, insurance companies do not bear significant risk to the financial stability. 9 Preliminary data

39 Implementation of the CBCG Policy in the Reporting Year Capital market As of 10 January 2011, there is a single stock exchange operating in Montenegro, after the Nex Montenegro stock exchange merged with the Montenegro stock exchange at the 2010 year-end. Their merge is supposed to result in more efficient and simpler operations in the capital market and an increase in its liquidity. The single market uses two indexes, the MONEX20 and MONEXPIF, which are the successors of all indices in the Montenegrin stock exchanges. After significant negative trends in 2010, there was an insignificant recovery of the market in 2011 as regards total turnover, while the stock exchange indices recorded significant declines. The turnover at the Montenegrin stock exchanges amounted to EUR 58.9 million in 2011, and it was performed through 13.4 thousand transactions. In relation to 2010, turnover increased by 7.5% or EUR 4.1 million, whereas the number of transactions was 32.5% lower. The average monthly turnover amounted to EUR 4.9 million, being insignificantly higher than in 2010 when it amounted to EUR 4.6 million. The largest portion of turnover was through secondary trade, whereas primary trade accounted for 10.7% of turnover. In trade structure, the highest turnover in 2011 was from trade with company shares (88.5%), joint investment funds shares (7.5%), while various types of bonds accounted for 4.0%. The past year was characterised by the month-on-month declines the Montenegrin stock exchange indices, with the exception of December 2011when they recorded an insignificant monthly growth. Although negative trends are evident, the existence of the single stock exchange is positive and it should enable more efficient and simpler operations in the capital market and increase its liquidity. However, the ultimate recovery will depend on the volume of investments by big investment funds and individual portfolio investors. Although the influence of the capital market on the financial system is not of a decisive nature, a portion of loans granted for the purchase of shares in the capital market should not be neglected. In addition, an increase in credit risk of the banking sector of investment funds and individual investors significantly contributed to an increase in credit risk of the banking sector in the previous period. However, no threats to financial stability should be expected from this market. Table 2.10 Growth/decline rates of indices by years, in % Year MONEX 20 MONEX PIF Source: Montenegro stock exchange

40 40 Central Bank of Montenegro Annual Report Payment system As for payment system, the Central Bank of Montenegro focused its main activities in 2011 on the implementation of the main objective defined in the Central Bank Policy maintenance and improvement of a stable and efficient national payment system. To that end, the activities were focused on: Qualitative and efficient provision of the national payment system services through increased availability of the payment system; Payment system oversight; Improving regulatory framework governing national payment services towards its compliance with EU regulations; Following international standards, principles and best practice in contemporary payment systems and payment operations in general and their subsequent implementation Payment system regulation and oversight After the analysis of the regulatory framework of the national payment system, activities were started on drafting new Payment System Law aimed at providing harmonisation of the national legislation with three relevant EU directives, the Directive 2007/64/EC on payment services in the internal market, Directive 2009/110/EC on the taking up, pursuit and prudential supervision of the business of electronic money institutions, and Directive 98/26/EC as regards systemically important payment systems. It is planned that the draft Payment System Law will be prepared by the end of September Within the Twinning Project carried out together with the Bulgarian and Dutch central banks, the prerequisites were made for the implementation of the EC Regulation 1781/2006 aimed at the prevention of money laundering and terrorism financing, so the Decision on Mandatory Elements of the Payer` Transfer Order (OGM 15/11) was passed. Moreover, the Decision on Manner and Procedure for Performing Payment System Oversight (OGM 15/11) was passed, and with the creation of adequate organizational and staffing assumptions, activities on the payment system oversight were intensified in Payment system oversight process Payment system oversight is a new function of the CBCG aimed at promoting and providing the safety and efficiency of payment systems, being the important assumption for maintaining stability of the entire financial system. The oversight regulated by the Central Bank of Montenegro Law 10, the Law on National Payment Operations 11, the Decision on the manner of overseeing payment systems 12, and performed by assessing 10 OGM nos. 40/10 and 46/10 11 OGM, 61/08 12 OGM, 24/09

41 Implementation of the CBCG Policy in the Reporting Year 41 the compliance of payment system operations with the defined principles for payment system functioning based on Core Principles for Systemically Important Payment Systems 13. The CBCG is the owner and operator of the interbank transfer payment system which includes realtime gross settlement (RTGS) system and deferred-time net settlement (DNS) system. Simultaneously, the DNS system fully observed eight of the ten core principles, and it broadly observed one core principle, while it partly observed one core principle. In 2011, the activities were carried out on drafting the methodology for performing on-site and offsite payment system oversight Indicators of RTGS and DNS systems availability The payment system for executing interbank transfers, owned and operated by the Central Bank of Montenegro, had a high level of security and efficiency. The availability of the interbank payment system in 2011, i.e. the relationship between total and effectively accomplished working hours for executing interbank transfers was high, 99.95% Enforced collection A significant portion of the Central Bank activities involving payment system was also aimed at efficient performance and further improvement of enforced collection activities which the Central Bank performs in accordance with the provisions of the Law on Enforcement and Securing of Claims. 14 Based on data on the Central Registry of Accounts which is maintained by the Central Bank in accordance with the Law on National Payment Operations,, of legal and natural persons performing registered activity as at 31 December 2011, some 15,186 or 26.43% had frozen accounts amounting to EUR million. In comparison to the previous year, the number of frozen legal persons rose by 7.60% and the amount of frozen funds increased by 48.7%. In 2011, some 30,617 bases for enforced collection were entered in the database of enforced collection, which represents the year-on-year decline of 13.01% (Annex 1, Tables 9 and 10) Realisation of payment system Payment system operations grew by 3% over the one-year period, while number of transfers fell by 7%. 13 Core Principles for Systematically Important Payment Systems, BIS January OGM 36/11

42 42 Central Bank of Montenegro Annual Report 2011 In 2011, total of 23,642,971 payment transfers were executed (7% less than in 2010), the value being EUR 21.1 billion (3% more than in 2010). Some 7,780,970 of interbank transfers were realised through the Central Bank s payment system (the year-on-year decrease of 12%) to the amount of EUR 9.1 billion, which represents the year-on-year growth of 5%. Some 15,862,001 transfers were realised in the internal payment system 15, which bearers are commercial banks, (the y-o-y decline of 4%) to the amount of EUR 12.0 billion, which represents a growth of 2% (Table 2.11). Table 2.11 Volume and value of payments in 2011 DESCRIPTION Number of payments % Value % 1 Interbank payment systems 7,780, % 9,069,817, % 1.1 RTGS 3,999, % 8,519,229, % 1.2 DNS 3,781, % 550,587, % 2 Internal payment systems 15,862, % 12,009,464, % 2.1 non-cash 10,805, % 8,952,110, % 2.2 cash 5,056, % 3,057,354, % 3 Total 23,642,971 21,079,281,758 Graph 2.1 Volume of payments in the period 2010/2011 (Index and structure) Some 2.0 million orders were executed on monthly basis, on average, of which 0.6 million were interbank and 1.3 million were internal orders. The average value of monthly payments amounted to EUR 1.7 billion, of which EUR 756 million referred to interbank payments, and EUR 1.0 billion referred to internal payments. 15 Data on internal payment operations were aggregated on the basis of reports received pursuant to the Decision on Bank Reporting to the Central Bank of Montenegro.

43 Implementation of the CBCG Policy in the Reporting Year 43 Graph 2.2 Comparative view of the movement of number of total executed orders I-XII/10 I-XII/11, in thousand Graph 2.3 Value of payments in the period 2010/2011 (Index and structure) Graph 2.4 Comparative view of the movement of number of value of total executed payments I-XII/10 I-XII/11, in million EUR

44 44 Central Bank of Montenegro Annual Report International reserves management The priority in the international reserves management in 2011 was given to safe placements of international reserves with continuous ensuring of liquidity in current international payments. In addition, the most important risks related to the international reserves portfolio were subject to ongoing follow-up. Management of available international reserves held in accounts abroad was performed pursuant to the CBCG Law, and following the principles defined by acts and documents passed by the CBCG Council: CBCG Policy for 2011, Working Programme of the CBCG in 2011, Decision on International Reserves Management, Guidelines for International Reserves Management and periodical conclusions adopted by the CBCG Council. Complying with obligations stemming from the new Central Bank of Montenegro Law, new secondary legislation was passed in March 2011 Decision on International Reserves Management and Guidelines for International Reserves Management. Simultaneously with passing the Decision and Guidelines, the Investment Committee was established in March, being the permanent professional-advisory body to the CBCG Governor which develops the investment strategy for international reserves management within the framework of passed guidelines and proposes a framework for international reserves management. During the first year of its establishing, the Committee held four meetings. During the reporting year, the CBCG invested almost the entire amount of its liquid portfolio in shortterm time deposits and the so-called Tier-1 investment, i.e. overnight deposits with several central banks in the Euro area and the BIS. The US Dollar portfolio was placed with the Federal Reserve Bank of New York, pursuant to the Automatic Investment Arrangement which the CBCG concluded with this institution. The bearers of credit risk with regard to these investments are central banks with which the funds were placed. After the market analysis and contacts with numerous banks, the cooperation with highly rated commercial banks was renewed. Following the principle of safety, this step was made rather cautiously both regarding the amount and the number of banks. However, the new crisis wave as of mid-august 2011 made the CBCG return to investment policy solely involving with central banks, with the exception of one commercial bank. Despite the situation in the market and reduced rating 16, this bank is still one of the most stable ones in Europe. A portion of the international reserves available for investing was placed into the investment portfolio, but the structure changed in relation to the one in The change in the portfolio structure and an increased share of investment portfolio in the CBCG s total portfolio of 20 percentage points in relation to end ensured a more optimal allocation of total funds from the aspect of both risks and revenues. It now consists of German and Dutch government bonds with the maturity from 16 The rating was not changed due to deteriorated performance of the bank, but due to a change in the S&P methodology which included the systemic risk growth in Europe into its assessment.

45 Implementation of the CBCG Policy in the Reporting Year 45 one to three years, whereby the principle of maximum safety of funds and their absolute liquidity in case of emergency have not been jeopardized. Graph 2.5 Funds structure by portfolios as at 31 December 2011 The structure of funds by types of portfolios as at end-2011 is presented in Graph 2.5. After the underwent changes in 2011, the investment portfolio made up 27% and liquid portfolio accounted for 59% of the total portfolio of the Central Bank. The remaining 14% referred to total funds in the IMF. Observed by the currency structure, the main share was in euros (86%), while the US dollar portfolio share was low (0.2%). The remaining funds refer to SDR and they accounted for 13.7% of the international reserves. Graph 2.6 International reserves in 2011, as at end-month, in million EUR As at 31 December 2011, the CBCG kept EUR million in foreign bank accounts, which represents a decrease of 30.1% in relation to the previous year (Graph 2.6). The reasons for the decline should be sought in a decline in deposits by the Ministry of Finance of EUR 46.1 million during Looking from the aspect of the ECB s interest rate, the reporting year was extremely unsettling. In early 2011, this rate amounted to 1% and it had been on this level since May However, there were announcements of the ECB would increase the rate during this period, which happened in April when the reference rate increased to 1.25%. Regardless of presumptions that the rate will be increased, the reaction of the money market reacted but mildly. This was primarily due to significant liquidity in the banking sector. As a result, market rates increased, but remained below the level of the official ECB rate, which had never happened in the period before the 2008 crisis. In July 2011, the reference rate increased again by 25 percentage points, but the effect of this increase to market rates was even more confusing. The very volatility of the market rates in that month was the highest since the beginning of the year. Such additionally deteriorated situation and a new strike of the financial crisis in August 2011 strongly affected the interest rates. Reduced confidence in financial markets, as a result of the escalated debt crisis in Greece, and problems with public finance in Italy and Spain, resulted in the observed market rates falling below the ECB rate.

46 46 Central Bank of Montenegro Annual Report 2011 Graph 2.7 The spread between Euribor 3m Eonia swap 3m Source: Bloomberg Graph 2.8 Seven-day EURIBOR, EONIA and ECB rates in 2010 and 2011 Graph 2.7 clearly shows that, since H2 2011, the spread between 3-month Euribor and 3-month Eonia swap was constantly increasing, pointing to the increased risks at the European markets. 17 The escalation of the new crisis led the ECB to change its policy again in early November and decrease the interest rate by 25 percentage points (to the level of 1.25%). This decrease was subject of speculations in the market, but the very moment surprised many market participants. The rate decreased in the week when the change in ECB management occurred. From then to the year-end, market rates have been recording negative trend. Such trend was supported by additional decrease of the rate by 25 percentage points (to the level of 1%) by the ECB in December. The Fed s reference interest rate was decreased at end-2008 to range from 0% to 0.25%. Its level neither changed during the reporting year. To be more precise, after this rate was decreased to the present level, Fed thought that it was not of importance as a monetary policy instrument in existing situation at financial markets. Graph 2.8 shows quite a different trend in the movement of rates in 2011 as compared to All rates were at relatively higher levels in 2011, but they were not solely trending upward. H was characterized by an uptrend, while rates decrease was evident in H2. It should be noted that the Euribor was higher than the Eonia almost throughout the entire reporting period. This is the ratio that was totally disturbed during the crisis and the overnight rate was often continuously over the interest rate in long-term periods. The movement of these rates, as well as overall situation in the money and capital markets affected the result of the CBCG in The CBCG s annual rate of return to total portfolio was 0.94%. 17 Spread Euribor 3m - Eonia swap 3m shows the difference between borrowings with three months period and reinvesting of cash overnight three months period. Higher value of spread between these two rates shows that, as market sees it, the risk grows.

47 Implementation of the CBCG Policy in the Reporting Year 47 Table below shows the CBCG s annual rate of return from foreign accounts (liquid portfolio) in the past five years: Table 2.12 Annual return rate on the CBCG s liquid portfolio Time deposits Average return rate on assets in EUR 3.86% 3.79% 0.62% 0.34% 0.82% Average return rate on assets in USD 4.83% 1.72% 0.14% 0.17% 0.06% Table 2.13 shows the CBCG s annual rate of return on the investment portfolio in the past three years. Table 2.13 Annual return rate on the investment portfolio Securities 3.36% 1.79% 1.66% It is important to note that the ratio of these two portfolios in total CBCG s portfolio, i.e. the optimization of this ratio, is directly linked to liquidity needs. The process of international reserves management is governed by certain principles, which have a clearly specified order of importance for central banks. The above-mentioned principles and their order of importance for the CBCG are liquidity, safety and profitability. The Decision on foreign reserves management puts special focus on risks that must be subject to ongoing analysis. These risks that are thoroughly and regularly monitored are the following: market, credit, liquidity and operational risks. Market risks monitoring comprises their identification, measurement and monitoring. These analyses (ex post and ex ante) cover absolute and relative risk measures such as VaR 18, Tracking Error 19, Sharpe ratio 20 and the like. Besides these analyses, there are also daily portfolio performance measurements in relation to the selected benchmark. These data enable the making of timely decisions regarding the portfolio and its structure. Credit risk monitoring and control are obligatory elements of the risk management. This primarily refers to the risk of a counterparty bank default to a deponent. Long-term and short-term ratings, both in domestic and foreign currencies, are monitored, as well as the banks financial strength and outlook and Credit Watch indicators, which along with these parameters are used during the examination of potential new counterparties. Counterparty central banks are selected pursuant to the Guidelines, and the current rating structure is presented in Graph VaR analyses show the probability where the maximum probable loss shall not be higher than that calculated. Such obtained results also show volatile trends in the market and signal to risk and portfolio managers when the previously taken positions should be abandoned. 19 The calculation of standard deviation of difference of benchmark and portfolio yields gives the Tracking Error that serves as a measure of active yield volatility, i.e. measuring how close the portfolio is to the selected benchmark. 20 This ratio shows the risk premium per unit of taken risk.

48 48 Central Bank of Montenegro Annual Report 2011 Graph 2.9 Allocation of LT rating Liquidity risk is monitored permanently, and the very investment policy largely focuses on the assessment of this risk. So far, there have been no cases of shortfall in funds required for payments. These results are largely due to the selected instruments and cooperating banks. The identification, monitoring and diminishing of operational risks are ongoing activities performed through timely amendments of and supplements to the internal and inter-sectoral operating procedures, as well as through a permanent control of their application, execution and improvement. Moreover, the reports on existing and potential operational risks are compiled on quarterly basis, containing also the proposed measures for their mitigation or eventual removal, which is monitored using the methodologically established risk matrix Vault During 2011, many activities of the Vault aimed at the implementation of the Central Bank Policy. Pursuant to the new CBCG Law and the recommendations of the National Programme for Integration in the EU, three decisions were passed regarding the Vault operations. The activity plan on operationalization of regulations complied with EU regulations was passed, referring to cash operations and prevention of counterfeits. The activities continued on further improvement and intensifying cooperation with relevant public authorities and international institutions, aimed at revealing and prevention of counterfeit money circulation in regular payment system channels. As regards the organization and preparation of the exhibition of money and money documents in Montenegro, full contribution was given to the CBCG s newly-established organizational unit Money Museum. Functioning of the Money Museum will be provided using the CBCG s internal capacities. The existing space, collection and staff were used. In 2011, an ongoing monitoring of cash flows and the assessment of needs for cash were aimed at providing adequate quantity and denomination structure of euro banknotes and coins for the CBCG clients needs and a higher efficiency in operations with cash. At the same time, the activities focused on the maintenance of optimum cash holdings sufficient for regular supply of the CBCG clients and the reduction of costs of keeping cash in the CBCG vault. Moreover, cooperation with banks was intensified with a view to increased turnover of outgoing and incoming payments of cash, and the most important risks in the area of vault operations were permanently analysed. According to available resources and conditions of using Euro, the CBCG increased the turnover of outgoing and incoming payments with banks. This turnover recorded the y-o-y increase of 85%.

49 Implementation of the CBCG Policy in the Reporting Year 49 In order to eliminate the risk of shortfalls and interruptions in cash supply and optimize cash holdings, cash requirements were continuously assessed. Projected monthly needs compared to the recorded payouts are shown in Graph Graph 2.10 Planned and recorded monthly cash needs, in thousand EUR In 2011, cash turnover with the CBCG clients was EUR million (outgoing and incoming payments amounted to EUR million and EUR 37.3 million, respectively), while international turnover amounted to EUR million (the respective amount of bought and sold cash holdings was EUR million and EUR 30.8 million). In relation to 2010, turnover with the CBCG clients was EUR 66.5 million or 75% higher (outgoing and incoming payments were 88% (EUR 55.4 million) and 42% (EUR 11.1 million) higher, respectively). International turnover was EUR 73.5 million or 97% higher (the respective value of incoming and outgoing transactions were 128% (EUR 66.7 million) and 28% (EUR 6.8 million) higher). Graph 2.11 Outgoing payments in cash, in thousand EUR The year-on-year comparison of the value of incoming and outgoing cash payments on monthly level is shown in Graphs 2.11 and The Central Bank also performed frozen foreign currency deposit (FFCD) payout in the reporting year, that is, the payout of converted FFCD bonds for the needs of the Ministry of Finance of Montenegro. There were 3,480 payments to 22 depositors of Montenegrobanka, 28 depositors of Jugobanka and 3,430 to the holders of converted FFCD bonds. Total payments amounted to EUR 6.35 million. Graph 2.12 Incoming payments in cash, in thousand EUR As of 29 December 2011, cash supply of all CBCG clients has been done through the main Vault. The former two vaults (Regional Centre Podgorica and the Main Vault) have been merged into a single CBCG Vault.

50 50 Central Bank of Montenegro Annual Report 2011 Graph 2.13 Counterfeits denomination structure in 2011 The validity check of 1,350 of suspicious banknotes and coins was performed during the reporting year banknotes and 501 coins. Based on these validity checks, 320 reports were prepared and submitted to the applicants. The number and value of examined counterfeits has shown a mild y-o-y increase, one of the reasons being the 2011 police raid when 299 pieces of EUR 50 denominated banknotes were seized. Graph 2.14 Total number of counterfeits in the period According to the number of pieces, the most of validated counterfeits in 2011 remained EUR 2 denominated coins (386 pieces). The share of counterfeits as per their denomination structure and the total number of euro counterfeits since the introduction of euro ( ) are presented in Graph 2.13 and 2.14, respectively. The cooperation with the European Commission/OLAF continued, and upon their invitation, representatives of the CBCG attended the Second conference on the protection of Euro against counterfeiting in The Hague (23-25 November) EU accession and cooperation with international financial institutions In 2011, Montenegro made progress in the field of European integration. In December 2011, Montenegro was given a conditional date for the EU accession negotiations in June Receiving the date of negotiations signifies the start of the final, however, the most difficult phase of the country s EU accession process. The Central Bank of Montenegro has been actively involved in the process of European integration in Montenegro from the very beginning. During the past year, CBCG has given a significant contribution to the preparation of annexes for national reports referring to the degree of fulfilment of obligations in the area of European integration, namely, the Progress Report, Pre-accession Economic Programme (PEP), National Programme of Integration into the EU (NPI), Report on the realisation of obligations of Stabilisation and Association Agreement (SAA) and other documents.

51 Implementation of the CBCG Policy in the Reporting Year 51 Considering that membership negotiations refer mainly to meeting the third Copenhagen Criterion, i.e. the adoption of the EU Acquis Communautaire, Montenegro is expected to transpose EU legislation and create conditions for its application before entering the EU. In that sense, the continuation of the Twinning project Strengthening the Regulatory and Supervisory Capacities of the Financial Regulators in 2011 involved intensive activities related to the drafting and adopting regulations aimed at the strengthening of regulatory framework of banking supervision and capacity of the CBCG. As a result of this programme, which officially ended in November 2011, the CBCG made significant progress in the advancement of its legal framework and harmonisation of its regulations with the EU requirements, which was also confirmed through the EC Progress Reports. In addition, the project reinforced the collaboration among the financial sector supervisory authorities through the signing of the MoU on Cooperation and Exchange of Information in the area of the prevention of money laundering and terrorism financing between the CBCG, Ministry of Finance, Administration for the Prevention of Money Laundering and Terrorist Financing, Securities and Exchange Commission and the Insurance Supervision Agency. In 2011, the Central Bank actively participated in the work and preparing of materials for the authorities established based on the Stabilisation and Association Agreement. The CBCG representatives attended meetings of the Sub-committee for Internal Market and Competition and the Sub-Committee for Economic and Financial Issues, where they gave overviews of current macroeconomic developments in Montenegro and informed the EC representatives on measures taken with a view to achieving further liberalisation of capital movements and the progress made in the harmonisation of the Montenegrin national legislation with the EU Acquis Communautaire in the area of financial services. Active involvement of the Central Bank s experts in the EU membership negotiation structures is expected to continue at all levels in the following period Cooperation with the International Monetary Fund and other international financial institutions Regarding the cooperation with the IMF, two staff missions visited Montenegro in the reporting year. The IMF employees gathered information on the current and planned economic policies in Montenegro. The CBCG took part in ballots on current topics in the Fund, provided required information, participated in conducted research or surveys, and enabled communication with other state authorities and institutions at the request of the Fund. During the Annual and Spring Meetings of the IMF and the World Bank, the CBCG delegation attended a series of meetings with representatives of these institutions and other interested parties, and participated in the regular Dutch Constituency annual meeting which was held in Cyprus. The Governor of Montenegro in the Fund informed the Fund that Montenegro, as a member of this institution, complied with its obligation regarding the acceptance of amendments to the IMF Articles of Association from 2010 on the reform of the Executive Board, while in communication with the

52 52 Central Bank of Montenegro Annual Report 2011 Montenegrin Ministry of Finance, preparations commenced for the process of assenting to the increase of Montenegro s quota in the Fund. In cooperation with the World Bank, a series of officials and staff visits was organised, mainly with regard to the development policy loan granted to Montenegro in 2011, as well as to financial planning, banking system supervision, and drafting the economic memorandum for Montenegro. The EBRD strategy for Montenegro, i.e. for the region in the upcoming period, was discussed with its representatives on several occasions and regular contacts were maintained with representatives of the European Fund for Southeast Europe (EFSE), as well as with representatives of the rating agencies Moody s and Standard&Poor s. The CBCG participated in the work of the Governor s Club of Central Asia, Black Sea Region and Balkan Countries. With regard to other international cooperation, CBCG officials attended the Bank for International Settlements Annual General Meeting, the ECB meeting which marked the end of Mr. Jean Claude Trichet s term of office, and paid bilateral visits to numerous central banks. Representatives of the CBCG communicated with the NATO experts, experts of the United Nations Sustainable Development Programme, representatives of the European Commission and others. At the request of public authorities, collection of data within the CBCG jurisdiction was coordinated for the purpose of preparing international visits of our officials. The CBCG also hosted one international meeting. Regional meeting of governors of five central banks of the Western Balkans: Cooperation of Central Banks in the Region and Financial Stability was held in Budva, 8-10 September Governors of the CBCG, Bank of Albania, Central Bank of Bosnia and Herzegovina, National Bank of the Republic of Macedonia and National Bank of Serbia and their associates discussed the economic situation in the region Human resources management In 2011, in line with the Central Bank Policy, intensive activities were continued regarding the motivation of employees and advancing their knowledge through professional development and education for the purposes of tasks and duties they perform. Professional training involved the participation in 138 programmes (total of 179 professional trainings) workshops, courses, seminars, conferences in the country and abroad, study visits to other central banks and international financial and other institutions. About 40 percent of the Central Bank employees attended professional training programmes. Same as in previous years, professional advancement of the CBCG employees in 2011 was organised in the central banks of: Germany, Netherlands, Great Britain, France, Italy and Poland. Numerous bilateral cooperation projects in the areas of research and statistics, IT, payment systems, financial stability, financial and banking operations, internal audit, accounting, international cooperation, legal affairs, security and protection and human resources management were realised in cooperation

53 Implementation of the CBCG Policy in the Reporting Year 53 with the Deutsche Bundesbank, Bank of Slovenia, and National Bank Serbia. The most represented programs were those organised by the Deutsche Bundesbank. Participation of the employees in the education programmes of the Center of Excellence in Finance in Ljubljana, Join Vienna Institute, IMF Institute in Washington, Financial Stability Institute in Basel and so on was also of great significance for the further advancement of employees. During 2011, for the purpose of improving knowledge and motivation of the employees, 19 scholarships were awarded mostly in the area of economics, as well as management and IT: Three scholarships for doctor s degree Ten scholarships for master s degree Three scholarships for specialist studies Three scholarships for fundamental studies For the purpose of motivation of employees and more efficient management of their performance 44 employees were rewarded for their achieved results. Highly qualified labour force represents a significant quality of CBCG, bearing in mind that employees holding university and college degrees account for almost 70% of total labour force. Tables 2.14 and 2.15 show the educational and age structure of the CBCG employees. Table 2.14 Educational structure of the CBCG employees Professional qualifications Total % Doctor s degree 2 Master s degree 29 10% University degree % College degree 13 4% Secondary education 76 25% Skilled worker 8 2% Semi-skilled and unskilled worker 6 2% Total 301 Table 2.15 Age structure of the CBCG employees Age group Total % Men Women Under 25 years to 35 years 95 31% to 45 years 60 19% to 55 years 90 30% Over 55 years 56 18% Total

54 54 Central Bank of Montenegro Annual Report Public relations and transparency The CBCG endeavours to operate in line with the highest standards of transparency. Therefore, one of the priorities is providing information to local and international public on the objectives and results of its activities in a timely manner via regular and periodical publications and press releases. Thus the Central Bank seeks to contribute to the raising of public awareness and economic knowledge and a better understanding of significance of the Central Bank s role as an independent institution responsible for maintaining monetary and financial stability and safety of the banking system. Press releases on decisions and conclusions of the CBCG Council meetings were delivered in time to all printed and electronic media, so that the public in Montenegro could be adequately informed on all relevant documents referring to the banking sector, researches, analyses of economic development, macroeconomic forecasts etc. The Bank informed the public through numerous public statements, public addresses, appearances of CBCG officials on TV and radio broadcasts, through printed media and press conferences. Numerous CBCG publications serve as a proof of a high level of public openness and transparency in operations: the Central Bank Annual Report, Financial Stability Report, Price Stability Report, Chief Economist Quarterly Report, CBCG Bulletin, Recommendations to the Government for Economic Policy, working papers and thematically selected books. The most important Central Bank publications are also available in bilingual printed issues. All regular and periodical publications published on the CBCG website are delivered to interested government institutions, banks and other financial institutions, educational institutions, libraries and institutes, international organisations and interested journalists and scientific workers. In 2011, the media mostly dealt with topics from the CBCG domain which referred to the results of the banking sector s operations, the impact of the global crisis on the financial and banking sectors, relations between the CBCG and commercial banks, etc. The CBCG website is regularly updated for the purpose of increasing transparency in operations. The CBCG website ( available in Montenegrin and English languages, gives an insight into primary and secondary legislation regulating the CBCG operations. In addition, all relevant regulations, decisions, CBCG publications, as well as other important information from the CBCG domain are published CBCG as a socially responsible institution The Central Bank of Montenegro, in line with the adopted Policy, sought to operate on the principles of socially responsible institution. The bank attained this objective through its relationship with employees, cooperation with the CBCG trade union, granting funds for charity (EUR 87,000), support to sports and recreational activities of various organisations and associations, as well as through other numerous activities. In 2011, funds allocated for these purposes amounted to EUR 130, and were allocated as follows:

55 Implementation of the CBCG Policy in the Reporting Year 55 Charity for natural persons of EUR 33,831.03, Charity for legal persons of EUR 53,249.00, and Support to the CBCG trade union s activities in the amount of EUR 43, The Central Bank of Montenegro thus endeavoured to contribute to the mitigation of problems of socially deprived part of the population. Charity activities for natural persons involved one-off solidarity aid in cases of threatened material and social status of individuals, severe illnesses, necessary rehabilitation, and the like. As in previous years, in cooperation with commercial banks, the Central Bank carried out the action Week of Saving during which deposit savings booklets were given to children born in Montenegro between 31 October-6 November The amount of EUR 30,000 was allocated for these purposes (EUR 200 for each of the 150 children). Preparations for the opening of the Money Museum in Cetinje continued in The Museum shall have the function of promoting our cultural and historical heritage. One of the activities through which the CBCG encourages the development of science is awarding the best graduation, master s and doctor s theses in the area of banking. The amount of EUR 9,000 was allocated for these purposes in One graduation thesis was awarded with EUR 2,000, one doctor s thesis with EUR 4,000, while the amount of EUR 3,000 was given to two authors of master s theses. Presentation of awards for 2011 is planned for April CBCG`s financial performance in Profit and loss account of the CBCG as at 31 December 2011 CBCG revenues Total CBCG revenues in 2011 amounted to EUR million or 72% more in relation to totally planned revenues in 2011 and 24.77% more than total recorded revenues in Graph 2.15 Structure of total revenues, January - December 2011 Such a significant increase in revenues in relation to the plan for 2011 and recorded revenues in 2010 was largely a result of funds withdrawn from the Bank for International Settlements (BIS) following the decision of the BIS Governor as regards the settlement of claims among successors to the National Bank of Yugoslavia (NBY). The implementation of the decision resulted in the revenue of EUR 4.2 million (172 stocks).

56 56 Central Bank of Montenegro Annual Report 2011 To wit, after several years of negotiations and considering the possibility of maintaining the membership status in the BIS, the CBCG took over from the BIS the funds stemming from the CBCG s right to 5.88% of shares (172 stocks) succeeded from the National Bank of Yugoslavia (NBY). As regards requests to succeed membership on the basis of former membership, the BIS Board of Directors informed the CBCG that it did not fulfil conditions for membership of the BIS, pursuant to their membership requirement policy, succession principles in the international law which they acknowledge, and the practice of other international organizations in similar situations. Total revenues of the CBCG are split into two categories: financial and business income and other income. The most important item of the financial income, interest income (lending interest, interest on securities held for sale and deposit interest) amounting to EUR 3.89 million and it was 36.39% higher in relation to the 2011 plan and % higher than in The largest portion of these revenues came from income from interest on securities, EUR 1.41 million or 0.94% more than the planned amount, showing the y-o-y increase of 71.92%, due to the changed strategy of investments of international reserves in H to the benefit of the investment portfolio. Income from interest on invested funds in the form of deposits amounted to EUR 2.47 million or 70.5% more than in 2010, as the result of increased interest rates in the international financial market in the reporting year. Revenues from the sale of financial assets at end-2011 amounted to EUR 0.09 million, being 57.29% lower in relation to 2010 (EUR 0.21 million). This type of revenues is not planned under the Financial plan and it refers to revenues arising from changes in the fair value of financial assets available for sale at the moment of their sale. Income from positive FX differences (foreign account, IMF accounts and cash in vault) amounted to EUR 1.11 million, which is the y-o-y decline of 43.40%. Expenditure from negative FX differences amounted to EUR 1.2 million, thus the negative net effect of the FX differences in the period January December 2011 amounted to EUR 0.13 million. Total operating income and other income 21 amounted to EUR million and were 69.30% higher than planned, as well as 62.27% higher than in Income from fees for payment system services amounted to EUR 3.67 million or 4.13% less than in 2010, and 4.79% below the 2011 plan. A decline in these revenues was a result of lower volume of executed payment transactions in the economic system of Montenegro, due to a lower volume of operations and effects of the recession factors on the economy and households due to the crisis. Income from fees for cash services amounted to a mere EUR 0.16 million or 0.29% less than in 2010, while and 8.68% below the 2011 plan. Income from fees for enforced collection amounted to EUR 0.54 million or 10.48% less than in the period January December 2010 and 7.43% below the plan. The reason for this decline was a lower number of executed enforced collection orders than in Income from fees for payment system services, fees for cash services, fees for enforced collection, fees for the fiscal agent operations, service fee of the Regulatory Credit Registry, income from commission fees, lease operations, sales and other income.

57 Implementation of the CBCG Policy in the Reporting Year 57 Income from fees for the fiscal agent operations amounted to EUR 0.67 million or 39.08% more in relation to 2010 and 36.66% more in relation to the plan due to the increased nominal value of issued T-bills. Fees for banking supervision, licences and approvals amounted to EUR 1.03 million or 4.14% less than in 2010 or 1.23% more in relation to the 2011 plan. Income from service fees for the Regulatory Credit Registry amounted to EUR 0.31 million or % more in relation to 2010, i.e % more in relation to the plan. Income from commission fees (fee from transfers via the CBCG foreign accounts, conversion fees, fee for tender documentation) amounted to EUR 0.24 million or 61.33% more than in 2010, i.e % more in relation to the plan. This growth was due to increased revenues from fees for transfers via the CBCG foreign accounts by 62.16% in relation to 2010, and by 60% in relation to the 2011 plan. Income from lease amounted to EUR 0.22 million or 3.26% more in relation to plan as well as in relation to This is the CBCG income recorded from the operating lease of business premises and equipment (investment property). Income from sales (precious metals, blank bills of exchange and fixed assets and intangible assets) amounted to EUR 0.39 million or 7.4% more than planned, and 23.99% more than in the period January December 2010, due to increased income from the sale of blank bills of exchange. Other income amounted to EUR 4.51 million. This income refers to income from collected written-off receivables, interest on housing loans at fair value, cancelled reservations for court disputes, from the BIS funds, as well as income from accessing the CBCG s statistical database. CBCG Expenses In 2011, total expenses amounted to EUR million or 24.59% more than planned for 2011, while they decreased by 3.56% in relation to Total CBCG expenses are divided in two key groups: financial expenses and operating expenses. Graph 2.16 Structure of total expenses, January-December 2011 Total financial expenses in 2011 amounted to EUR 3.06 million and they were % higher in relation to plan and by 14.28% in relation to This increase of financial expenses was largely a result of increased total interest expenses in the amount of EUR 1.31 million, showing an increase in relation to plan (77.04%) and 2010 (73.9%).

58 58 Central Bank of Montenegro Annual Report 2011 Interest expenses for bank reserve requirement amounted to EUR 0.42 million or 0.37% more than in the previous year. Expenses for interest to other financial institutions refer to interests to the Deposit Protection Fund (DPF) of EUR 0.16 million or % more than realization in Expenses for interest to the public sector amounted to EUR 0.73 million, which represents the year-on-year increase of %, and by % in relation to plan. Expenses for interest to the public sector refer to expenses for interest to the Ministry of Finance. These expenses increased due to increased interest rates in 2011, although there was a notable decline in provisions for these expenses in August, September, October, November and December (due to withdrawn funds from deposits due to the issue of Eurobonds). Losses from the sale of securities held for sale amounted to EUR 0.52 million and they were % higher in relation to Business expenses include expenses for fees and commissions, cost of employees, administrative expenses, operating and other business expenses. In 2011, total business expenses amounted to EUR 8.93 million or 0.48% more than planned. Numerous rationalisation measures aimed at these expenses were introduced in 2011, so these expenses were 8.46% lower than in Within business expenses, rationalisation (austerity) was implemented to cover all budget costs items including business trips, professional training of employees, stationary, energy, fuel consumption, spare parts, telephone costs, maintenance of property, and the like. Also, the number of employees hired under service contract was reduced to minimum. The amount of salaries and remuneration to members of the CBCG Council, and salaries of employees were reduced with a view to showing that the Central Bank behaves as socially responsible institution in the time of economic crisis. To that end, at its meeting held on 5 October 2011, the CBCG Council passed the Decision on Decreasing Remuneration to CBCG Council Members by 33% and, on 27 October 2011, the Governor passed the Decision on Decreasing Salaries to all CBCG employees by 7%. Moreover, the application of provisions from the Collective Agreement referring to right to wage increase on the basis of acquired academic title was postponed, thus there will neither be expenses on this basis in Fee expenses were recorded in the amount of EUR 0.11 million and they were 17.67% lower than planned yet 59.01% higher in relation to The costs of employees (gross salaries, other personal income, fees for increased employee expenses, other employee expenses) amounted to EUR 5.95 million, being 7.50% higher than planned and 5.57% lower than in This increase was mostly a result of higher gross salaries through the application of the CBCG Collective Agreement (starting from 1 April 2011) and an increase in expenses for other personal income (solidarity aid, severance pay in accordance with the agreement on consensual termination of employment, and debiting of costs for advanced benefits for housing loans to employees which left the bank during the reporting year). Expenses for gross salaries include: net salaries, starting salary base, taxes, surtaxes, contributions paid by employee, contributions paid by employer, travel expenses, expenses for bonuses and winter bonus. In the period January - December 2011, gross salaries amounted to EUR 5.29 million or 6.83% more than the planned costs, and showed the annual increase of 5.64%.

59 Implementation of the CBCG Policy in the Reporting Year 59 In 2011, net salaries amounted to EUR 2.75 million or 10.75% and 10.79% more than in 2010 and the 2011 plan, respectively, due to the application of provisions of the new Collective Agreement. Administrative expenses amounted to EUR 0.81 million in 2011 or 19.09% less than planned and 28.93% less than in Administrative expenses include: stationery, energy, utilities, intangible services and fees to other natural persons. In 2011, operating expenses amounted to EUR 1.67 million or 14.53% less in relation to plan and 8.84% less than in These expenses include expenses for maintenance of fixed assets and equipment, literature, telecommunication services, fees for contracts on business cooperation and depreciation. In 2011, other operating expenses amounted to EUR 0.39 million or 45.71% more in relation to plan and by 6.14% lower in relation to These expenses include expenses for humanitarian activities, representation, conferences and seminars, provision expenses and subsequently recognized expenses. This increase was a result of expenses for humanitarian activities which are particularly addressed by the CBCG as a socially responsible institution, while other expenses in this group were below the planned ones. Net profit Net profit amounted to EUR 4.82 million in It is determined in accordance with the International Financial Reporting Standards (IFRS) Balance sheet of the CBCG as at 31 December 2011 At end-2011, the balance sheet amounted to EUR million and it decreased by 22.34% in relation to In total assets structure, 23.93% referred to cash and demand deposits, 27.62% to time deposits with foreign banks, while the remaining 48.45% referred to cash, securities, funds with the IMF, tangible and intangible assets, and the like. Graph 2.17 Structure of balance sheet assets as at 31 December 2011 The structure of total liabilities as at 31 December 2011 as compared to 31 December 2010 shows a decline in liabilities as a result of decline in accounts of banks and financial institutions.

60 60 Central Bank of Montenegro Annual Report 2011 Graph 2.18 Structure of balance sheet liabilities as at 31 December Report on changes in capital as at 31 December 2011 Total capital of the CBCG amounted to EUR million at end-2011, which represents a 28.48% increase in relation to The Central Bank of Montenegro Law (OGM 40/10 and 46/10), prescribes the minimum amount of initial capital of EUR 50 million. This capital is provided from the initial capital and general reserves of the CBCG as at the day of entering into force of this Law, while any shortfall is to be provided from the Montenegrin Budget. The founding capital of the CBCG determined by the previous Central Bank of Montenegro Law (OGRM 52/00, 53/00, 47/01, 4/05) amounted to EUR 2.56 million, while general reserves amounted to EUR million on the day of entering into force of the new Central Bank of Montenegro Law on 30 July The lacking amount of the CBCG initial capital which had to be provided from the Montenegrin Budget amounted to EUR million as at 31 December The Protocol on the manner of providing the shortfall in initial capital of the Central Bank of Montenegro was signed in April 2011, defining that the lacking amount is to be provided in a manner that one portion of the CBCG profit which would, pursuant to provisions of Article 69 of the Central Bank of Montenegro Law make the annual revenue of the budget of Montenegro, is to be directed into the initial capital of the Central Bank until reaching the statutory amount. After recording the Decision on Distribution of Profit from 2010 into CBCG books and the application of the Protocol provisions, it was determined that the initial capital of the CBCG amounted to EUR 35 million as of 13 April 2011, thus the lacking amount of the CBCG initial capital amounted to EUR 15 million. As at 31 December 2011, core capital of the CBCG amounted to EUR 35 million, showing annual increase of 3.43%. General reserves and special reserves amounted to EUR 0.33 million and EUR 0.17 million, as at 31 December 2011, respectively. Revaluation reserves for property, plant and equipment amounted to EUR million at end-2011 or 66.92% more than in Revaluation reserves for

61 Implementation of the CBCG Policy in the Reporting Year 61 financial assets available for sale at 31 December 2011 amounted to EUR 0.37 million. This increase was due to positive trend in the securities` revaluation value calculated at the end of each month and representing their market value. As at 31 December 2011, the category undistributed profit amounted to EUR 4.92 million and was mostly the result of increase in income from funds withdrawn from the BIS.

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63 3MACROECONOMIC FORECASTS FOR 2012