financial stability report - Banka Qendrore e RepublikÃ«s sÃ« KosovÃ«s

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Number 3 Financial Stability Report was noticed in the Foreign Direct Investments (FDI), which fell down by 53.3 percent, adversely affecting the financial account balance. Unlike in 2011, the prices during the first half of 2012 grew more slowly. Inflation rate was 1.5 percent compared to 9.6 percent in the previous year. The close link between the real and financial sector in Kosovo's economy is reflected in the fact that the financial sector, alongside with the real sector, recorded slower growth during the first half of 2012. Real sector problems posed augmented risks to the financial sector, which among other things, was reflected in the slowdown of lending activity. Nevertheless, Kosovo’s financial sector continued to be highly stable. Financial sector assets, which continue to have a structure similar to the previous periods, grew at a slower pace. Total financial sector assets recorded an annual growth rate of 4.8 percent compared to 13.2 percent in June 2011, and reached a total value of 4.8 billion euros. Banking system assets continue to represent the largest share of these assets, accounting for 74.6 percent of the total financial sector assets in June 2012. The degree of market concentration in the banking system remains high; however, the increasing competitive pressures from smaller banks have led to a downward trend. Moreover, in November 2012, the Central Bank of the Republic of Kosovo approved the operating license for a branch of a Turkish bank, thus contributing even further to the banking competition in the country. In line with the slowdown of the banking system total assets growth, lending activity growth decelerated. In June 2012, the value of banking system loans increased by 9.3 percent, as opposed to 15.7 percent growth in June 2011. As a result, the total value of loans issued by the banking system amounted to 1.77 billion euros, representing 36.2 percent of the GDP. Loans to enterprises continue to dominate, accounting for 76 percent of the total loan portfolio in June 2012. Consequently, the slower growth of enterprise loans has been the major contributor of the growth slowdown of the overall loan portfolio. The main reasons for the slowdown in lending to enterprises, according to the survey conducted with banks in Kosovo by the CBK, are the tightened credit standards and procedures employed by banks as a result of the negative perceptions for the real sector developments, and the high sensitivity of certain industries to these changes in the real sector. The structure of enterprise loans continues to be dominated by loans to the trade sector, while agriculture remains the lowest recipient of bank lending. In terms of loan maturity composition, loans with a maturity term of over two years continue to prevail, having also increased their participation compared to the previous year. Banking system loans, which represent the major share of the system’s assets, have been concentrated within the Kosovo’s economy, which in the one hand increases the risk of exposure to a single economy, but on the other hand reduces the potential risk from exposure to foreign markets. Nevertheless, the diversification of assets and loans in various sectors and sub-sectors within the economy minimizes the risk from ‘over’ exposure to the local economy; the commencement of Government treasury bills market in January 2012 has further contributed in this regard. Whereas, as regards the risk of exposure to external markets, it is mainly limited to investments in securities and placements with banks abroad, whose share in the total assets has declined over the observed period. Deposits collected within the country continue to be main funding source for the banking activities in Kosovo. However, deposits have suffered a growth slowdown in the observed period. In June 2012, the value of deposits in the banking system amounted to 2.1 billion euro, recording an increase of 7.7 percent compared to 11.8 percent in the previous year. 14 |
Financial Stability Report Number 3 The largest share of deposits entails household deposits with 72.1 percent participation, followed by private enterprise deposits with 19.6 percent. The growth slowdown of total deposits, which is suggested to have been impacted by the global economic slowdown, is a result of nearly halved public enterprise deposits, as well as the decelerated growth in other deposit categories such as household deposits, private enterprises and non-resident deposits. The slower growth of domestic financial sources has led banks to use external funding sources, which are easily accessible also due to the good reputation of the Kosovo’s financial system as a persistently stable sector. However, the share of external funding sources in the total funding composition continues to be low, representing a considerable advantage for the stability of the financial sector in cases of foreign financial markets turbulences and declined customer confidence. Interest rates in Kosovo’s banking system remain high, although they have sustained their declining trend. The average loan interest rate fell in the first half of 2012, down to 13.7 percent from 14.3 percent in June 2011, while the average deposit interest rate remained unchanged at 3.4 percent. Consequently, the interest margin decreased to 10.2 percent from 10.9 percent in June 2011. The profitability of the banking system declined, with net profit falling by 28.5 percent, while Return on Equity (ROE) falling to 8.1 percent from 12.9 recorded in June 2011. The deterioration of profitability indicators came mainly as a result of the slowdown in revenue growth that followed from the credit activity slowdown, and as a result of increased spending on provisions for loan losses, in particular. Despite the deteriorating external macroeconomic environment and declining profitability, Kosovo's banking system has been successful in managing the three main risks that it is exposed to: liquidity, credit and solvency risks. Regardless of the slight decline of the leading liquidity indicators, Kosovo's banking system remains highly liquid, mainly due to the structure of liabilities that is dominated by more-stable funding sources such as deposits, as well as due to the prudent management of liquid assets. In June 2012, the loanto-deposit ratio increased to 83.2 percent, yet remaining close to the 80 percent recommended by the CBK. Moreover, other indicators such as: the steady upwards growing trend of deposits, which reflects the unremitting citizens’ confidence in the banking system, the low level of deposit concentration, the consistent maintenance of liquidity reserves at a higher level than the minimum required, the satisfactory level of current liquidity indicators, as well as the opportunities that local banks enjoy in terms of accessing shortterm funds from banks abroad, all suggest that Kosovo's banking system continues to have low exposure to the liquidity risk. Credit risk continues to be low likewise, besides recording a slight increase during the observed period. In June 2012, the non-performing loans to total loans ratio increased to 6.5 percent from 5.9 percent in June 2011. However, it should be noted that this increase is mainly due to the slowdown in the growth rate of loans rather than as a result of any significant acceleration in the growth of non-performing loans, the value of which has recorded similar growth trend to previous years. In spite of the increase, the nonperforming loan ratio in Kosovo’s banking system remains the lowest in the region. In addition, the potentially added credit risks from the deterioration in the loan portfolio quality are further diminished by the high loan loss provisions’ coverage rate that has been maintained by the banking system in continuity. In June 2012, the loan loss provisions coverage rate stood at 117.3 percent, close to the 117.2 percent recorded in 2011. The value of large credit exposures increased compared to the previous period; nevertheless, the credit risk concentration has been diversified by the increased number of large borrowers. | 15
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financial stability report - Banka Qendrore e RepublikÃ«s sÃ« KosovÃ«s

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