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

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Number 3 Financial Stability Report Box 3. Decomposition of the ex-post intermediation costs in Kosovo’s banking system Interest rates are subject to numerous influencing factors. Market conditions, operational efficiency, institutional circumstances and banking regulation are some of the key factors that interect with one another, and hence jointly impact interest rate levels. In this analysis, the methodology by Hansen and Rocha (1986), as modified and applied in the Kosovo context by Morina and Toçi (2007), has been used to calculate the ex-post <strong>financial</strong> intermediation rate, and the ex-post intermediation cost has been broken down to four cost components with the purpose of analyzing their share in the overall intermediation cost structure for the period 2005-2011. Table 7. Breakdown of intermediation cost Description 2005 2006 2007 2008 2009 2010 2011 Average Ex-post intermediation rate 15.2 14.6 14.3 14.0 14.1 13.3 12.7 14.0 Lending rate 13.2 12.5 11.5 11.9 12.4 11.6 11.0 12.0 Fees and comissions 2.0 2.2 2.8 2.2 1.8 1.7 1.7 2.0 Ex-post costs 11.2 12.3 12.3 13.3 13.0 13.1 13.2 12.6 Financing costs 1.8 2.2 2.3 3.0 3.0 2.8 2.8 2.6 Operational costs 5.0 4.7 4.9 4.8 3.9 3.6 3.7 4.4 Risk costs 3.9 4.7 4.4 4.7 5.7 6.3 6.4 5.2 Regulatory cost 0.5 0.7 0.7 0.8 0.4 0.4 0.4 0.6 Taxes 0.3 0.6 0.5 0.6 0.1 0.2 0.2 0.4 Reserves 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 Memorandum items/ difference Residual 4.0 2.4 2.0 0.7 1.2 0.2 -0.5 1.4 Profit 1.4 1.7 2.3 1.4 1.2 1.3 1.4 1.5 Source: CBK (2012) The application of this approach enables the calculation of the ex-post intermediation rate that relates only to the banks’ lending operations, and is based on accountancy principles where the income from lending operations balances with the expenditures related to lending activities plus the generated profit. The intermediation rate, which is the actual cost borne by the borrower, is decomposed into the loan interest rate payments and the fees and commissions payments, which at the same time reflect banks’ income from lending operations. On the other hand, costs incurred by banks are broken down to four main categories: financing costs, operational costs, risk costs and regulatory costs. The difference between the calculated intermediation rate from the bank’s lending income perspective and that of the cost Figure 32. Ex-post financing, operational and risk costs 7% 6% 5% 4% 3% 2% 1% 0% 2005 2006 2007 2008 2009 2010 2011 Risk costs Operational costs Financing costs Source: CBK (2012) 42 |
Financial Stability Report Number 3 components represents the residual, which captures the income from other banking operations and the possible errors in calculation arising from the assumptions made. Table 7 shows the ex-post intermediation rate to have had a slight declining trend. In 2011, the expost lending rate appears to have been 10.97 percent, whereas the rate payed for fees and commissions 1.7 percent, thus giving the overall ex-post intermediation rate of 12.67 percent, which is by 2.5pp lower than that in 2005 and by 0.6pp lower than in the previous year. The structure of the ex-post intermediation cost appears to have changed during the period 2005-2011, with the share of operational costs, which had a dominating position until 2008, gradually decreasing to eventually be exceeded by the risk costs (Figure 32). Consequently, risk factors appear to have the highest share in the intermediation cost in 2011, amounting to 6.38pp. The reason for the increased share of these costs might be the increase of expenditures for loan-loss provisions, which have grown faster than the loan volume (Figure 33). Figure 33. Loan loss provisions to gross loans ratio 8% 7% 6% 5% 4% 3% 2% 1% 0% 2005 2006 2007 2008 2009 2010 2011 Source: CBK (2012) This could partially be a consequence of the <strong>financial</strong> and real sector crisis at the global level and its subsequent implications in Kosovo’s economy, where the nonperforming loans rate increased to 5.9 percent and 5.8 percent in 2010 and 2011, compared to the 3.3 and 4.3 percent in 2008 and 2009, respectively. The operational costs, which in 2011 stood at 3.7 percent, listed second in terms of their share in the total ex-post intermediation cost. Compared to 2005, when the share was 5 percent, these costs decreased, thereby reflecting the gradual enhancement of operational efficiency of the banking system in Kosovo. The financing costs, which represent the interest rate on deposits, had a growing tendency until 2008 afterwhich they started declining. However, the share of these costs, which keep standing third in the intermediation cost structure, had a higher contribution to the total costs in 2011 than in 2005. The regulatory costs, which consist of tax costs and regulatory reserves of the banking system, appear to have had a declining trend, thus decreasing their share in the total cost to 0.38pp in 2011 from 0.5pp recorded in 2005. While the costs of regulatory reserves have been steady over the observed period, the change in the regulatory costs seems to be as a result of the decrease on tax costs, which also coincides with the halved tax rate on corporate income that entered into force in the beginning of 2009. 6.3. Banking System Performance and Risks Kosovo’s banking system performance continues to be positive, despite the global unfavorable economic environment. Nevertheless, the developments in the global economy had an impact on the slowdown of Kosovo’s economic growth, thus reflecting in the decline of the leading profitability indicators, as well as in the slight increase of banking system risks over the period June 2011 - June 2012 (Figure 34). Banking system profitability decreased compared to the previous period, mainly due to the slowdown in revenue growth. | 43
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financial stability report - Banka Qendrore e RepublikÃ«s sÃ« KosovÃ«s

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