BANKING SECTORS IN THE WESTERN BALKANS

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1 BANKING SECTORS IN THE WESTERN BALKANS IMF Macroeconomic Policy Seminar for Members of Parliament Vienna, Austria June Ruud Vermeulen IMF Resident Representative for Kosovo European Department February 18

2 Context Income convergence and credit deepening stalled. GDP per Capita (PPP, percent of Euro Area) Bank Credit to the Private Sector (Percent of GDP) NMS WB NMS MNE WB UVK Sources: IMF WEO, IFS, and World Bank WDI. European Department 2

3 Context Foreign banks financed a credit boom Foreign Bank Funding to Peak (Percent of GDP) MNE SRB BIH WB ALB MKD Leveraging Episodes (Increase in foreign bank funding, percent of GDP) NMS (1 8) WB (2 8) Latam ( ) Crisis Asia ( ) Sources: BIS, IFS, and IMF staff estimates. European Department 3

4 but this went into reverse when the crisis hit. Context 5 4 Foreign Bank Funding From Peak (Percent of GDP) MNE Deleveraging Episodes (Drop in foreign bank funding, percent of GDP) Latam ( ) 3 SRB WB BIH Crisis Asia (1997 5) NMS (8 14) MKD ALB WB (8 14) 5 15 Sources: BIS, IFS, and IMF staff estimates. European Department 4

5 This led to a sharp drop in credit growth... Context Decline in Real Credit Growth (-11 vs 7-8, drop in pps SA smoothed 1 ) MNE ALB MKD BIH UVK SRB / Smoothed growth rates measure the growth against previous 12 months average. Sources: HAVER, IMF IFS, and IMF staff calculations Change in Credit from Trough to 16 (percentage points of GDP) UVK SRB MKD BIH MNE ALB Note: Change from 12 for countries with no trough. Sources: MFS and IMF staff estimates. European Department 5

6 Credith depth Context and a widening of credit gaps. GDP per Capita and Credit Depth in 16 (Bank credit to the private sector, percent of GDP 1 ) 25 Others WBs 15 BIH MNE 5 MKD UVK ALB SRB Log of GDP per Capita in PPP Terms 1 The sample includes all countries for which data are available. Estimated Credit Gaps in 16 (Actual minus fundamentals-consistent level of private credit in percent of GDP) IMF (15b) 1/ HP 2/ NMS MNE SRB BIH KOS WBS ALB MKD 1/ The fundamentals-consistent of private sector credit is estimated based on its key demand and supply determinants over (see IMF, 15b). 2/ Actual minus HP filter. Sources: Staff estimates using WEO, IFS, BIS, World Bank WDI and other data; World Bank FinStats. European Department 6

7 Context What are the prospects for credit deepening? Weak funding Impaired balance sheets Non-bank structural factors European Department 7

8 Parent bank funding has not come back Weak Funding External Bank Claims on Western Balkans 1 (Percent of GDP, all sectors) 3 25 Banks' Long-Term Strategies in CESEE (Percent of respondents) H Does not include Kosovo. 16 uses GDP projections. Sources: BIS, IMF IFS, and IMF staff estimates. Reduce Selectively operations reduce operations Maintain the level of operations Source: EIB CESEE Bank Lending Survey. Selectively expand operations Expand operations European Department 8

9 Weak Funding and the region has not attracted many new entrants. Major Bank Ownership Transactions (9 17) within EU with USA with TUR New Foreign Entrants Other ALB 1 1 BIH MKD 3 2 MNE 1 1 SRB UVK 3 Sources: Bankscope, Fitch, and country authorities. European Department 9

10 Weak Funding Deposits alone cannot fund meaningful deepening Change from Peak to Trough (Percent of GDP) Resident deposits Foreign bank funding WB NMS Asia Latam Simulated Change in Credit Depth (Percent of GDP) Scenario 1 Scenario 2 ALB BIH MNE MKD SRB UVK Note: Regional weighted average for deposits; aggregate for foreign funding. Residential deposits not available for Latin America and Asia. Deposit data in real terms for Latin America and Asia. Sources: BIS, IFS, MFS, World Bank, CBK, CBM; and IMF staff estimates. Sources: MFS, IFS, and IMF staff estimates. Scenario 1: 26 credit projected by applying 16 average annual deposit growth to 16 credit level. Scenario 2: Scenario 1 less potential deleveraging. For each country, half of the post-crisis decline in foreign funding to banks is subtracted from 26 credit level. European Department

11 ROE ROE Impaired Balance Sheets The crisis hit bank balance sheets NPLs and ROE before and during crisis (6-14, percent) 4 3 pre-crisis max/min UVK post-crisis max/min NPLs and ROE post-crisis (-17, percent) 4 3 post-crisis max/min latest - ALB MNE SRB BIH MKD UVK MKD BIH SRB ALB - UVK MKD UVK MNE BIH MKD ALB SRB BIH SRB ALB MNE NPL ratio -3 MNE NPL ratio Sources: Country authorities, FSI, and IMF staff estimates. European Department 11

12 Impaired Balance Sheets which remain a drag on credit growth European Department 12

13 Impaired Balance Sheets that economic growth alone will not resolve. GDP Growth Needed to Bring NPL Ratios to 7 Levels 1/ (Percent) NPL Ratio 7 16 Actual (16) Needed (3 yr) 2/ Albania Bosnia-Herzegovina Kosovo Macedonia Montenegro Serbia / Assuming no new NPL formation on top of the existing stock. 2/ GDP growth needed to bring the existing NPL stock back to 7 levels in a period of three (five) years. Source: IMF staff estimates. European Department 13

14 Non-Bank Structural Factors Non-bank structural factors have also stymied lending. Gaps in land titling and cadastre systems Absent/incomplete credit registries Understaffed courts/large case backlogs Weak insolvency regimes European Department 14

15 Policy action is needed: Repair balance sheets: - AQRs - supervised action plans - distressed asset market development - enhanced supervision Expand funding bases: - manage potential further external deleveraging - develop local capital markets Address non-bank obstacles to credit: - Land and property titling - Court procedures and backlogs - Insolvency frameworks Policy Recommendations European Department 15

16 Policy Recommendations Balance sheet repair requires multipronged approach Loan classification and provisioning ALB SRB BIH MNE UVK MKD Write-offs Sale/Transfer of NPLs Bankruptcy Law Private bailiffs law Taxation Cadastral information Policy measure completed Policy measure ongoing Policy measure recommended Source: Regional Economic Outlook, CESEE, November 17 European Department 16

17 8Q4 9Q2 9Q4 Q2 Q4 11Q2 11Q4 12Q2 12Q4 13Q2 13Q4 14Q2 14Q4 15Q2 15Q4 16Q2 16Q4 17Q2 17Q4 18Q2 18Q4 8Q4 9Q2 9Q4 Q2 Q4 11Q2 11Q4 12Q2 12Q4 13Q2 13Q4 14Q2 14Q4 15Q2 15Q4 16Q2 16Q4 17Q2 17Q4 18Q2 18Q4 Policies focused on reducing NPLs. Albania: NPLs (Percent of total loans) Serbia: NPLs (Percent of total loans) 3 25 Mandatory write-offs started to be implemented NPLs Strategy launched 25 NPL Strategy launched Tax deductability clarifications 15 Mostly write-offs Increased supervision inspections Two large one off bankruptcies New insolvency law New bailiffs law. Amendments to the civil procedures and civil code. 15 Mostly write-offs Special Diagnostic Studies (AQRs) New law for real estate appraisers 5 5 Sources: Bank of Albania; and IMF staff estimates. Sources: National Bank of Serbia; and IMF staff estimates. European Department 17

18 Thank you European Department 18