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

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Number 3 Financial Stability Report Despite the decline in profitability, banks operating in Kosovo have employed prudent and ample risk management policies, thus ensuring that Kosovo's banking system continues to be highly sustainable. The liquidity position of the banking system continues to be satisfactory, despite the slight downward trend of the main liquidity indicators. The rate of commercial bank reserves held with the Central Bank remains higher than the minimum required, indicating the high ability of the banking system to timely meet its short-term liabilities. Moreover, the liquidity position of Kosovo’s banking system is further strengthened by the dominant proportion of basic liquid assets into the overall assets structure. The credit risk, despite the slight increase as a result of the deterioration in the loan portfolio quality, continued to be well managed by banks, which maintained values of loan loss provisions at a higher level than the absolute value of non-performing loans. The capitalization ratio of the banking system, which is a reflection of the solvency of the system, continues to be satisfactory, significantly exceeding the minimum rate set by the CBK and international regulations. Hence, the Kosovo’s banking system continues to be characterized by low liquidity risk as well as low credit and solvency risks, thus ranking amongst the most stable banking systems in the region, taking into account also the sustained loan and deposit growth. 6.3.1 Banking system performance Figure 34. Financial stability map Problem loans Annual growth rate of capital Source: CBK (2012) NPL Liquid Assets (Broad) / Total Assets 40 30 20 10 0 CAR Liquid Assets (Broad) / Short-term liabilities ROAA ROAE 2011 2012 Figure 35. Balance of income and expenditures, in millions of euro 140 120 100 80 60 40 20 0 10.4 17.1 14.9 10.2 June 2009 June 2010 june 2011 June 2012 Income Expenditures Net profit (right axis) 18 16 14 12 10 8 6 4 2 0 In June 2012, Kosovo's banking system reported a net profit of 10.2 million euros, down 31.2 percent compared to June 2011 (Figure 35). The decrease in profitability resulted mainly from the more rapid growth of expenditures as opposed to revenue growth. In June 2012, total revenues amounted to euro 124.2 million, marking an annual increase of 8.2 percent (Figure 36). Interest income from loans continues to dominate the structure of total Source: CBK (2012) Figure 36. Annual growth rate of income and expenditures 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% 30.0% 10.0% 1.2% -6.5% 11.2% 16.0% 14.9% Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar 2009 2010 2011 2012 Source: CBK (2012) Income Expenditures 8.2% 44 |

Financial Stability Report Number 3 revenues, accounting for 78.0 percent of total banking income (Figure 37). The slowdown of credit growth was reflected in the slower interest income growth. Loan interest income, which represents the main revenue source for banks in Kosovo, amounted to euro 96.9 million in June 2012, marking an annual increase of 7.8 percent (9.9 percent in June 2011) (Figure 38). With the exception of the revenues generated from securities, all interest income categories have recorded slower growth compared to the previous year. In June 2012, income from investments in securities increased by 60.8 percent (21.5 percent in June 2011), mainly driven by the continued growth of commercial bank assets invested in securities. Non-interest income represents another revenue source, which in June 2012 recorded a value of euro 23.1 million (euro 21.1 million in June 2011). This revenue source consists primarily of revenues from Figure 37. Structure of income by category, in percent 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 75.8% 79.3% 78.3% 78.0% fees and commissions on banking products, which amounted to euro 21.5 million (euro 19.4 million in June 2011). Banking system expenditures amounted to euro 111.6 million, marking an annual increase of 14.9 percent compared to the 16.0 percent annual growth in Figure 39. Expenditure growth by category, in percent June 2011. All of the banking 100.0 system expense items experienced 80.0 80.8 slowdown of growth, except for 60.0 48.6 interest expenses which recorded 40.0 39.3 31.8 an annual increase of 11.1 percent 20.0 19.3 15.7 8.9 8.3 11.1 in June 2012 (an annual decrease 0.0 -3.6 -11.6 of 3.6 percent in June 2011) -20.0 -23.8 (Figure 39). Within interest -40.0 expenses, expenses on deposits recorded an annual growth of 13.0 Non-interest expenditures June 2009 June 2010 June 2011 June 2012 Interest expenditures General and administrative expenditures percent, thus contributing to the increase of total interest expenses Sourcei: CBK (2012) by 11.6pp (Figure 40). 15.1% 16.8% 16.9% 17.3% June 2009 June 2010 June 2011 June 2012 Loans Bank placements Securities Fees and commissions Other operating income Source: CBK (2012) Figura 38. Annual growth rate of income by category 80% 60% 40% 20% 0% -20% -40% -60% -80% -100% 18.7% 13.0% -62.4% 12.3% 5.9% 9.9% 7.8% -43.4% 64.9% 11.6% Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar 2009 2010 2011 2012 Loans Placements Fees and commissions Source: CBK (2012) 11.2% -40.3% | 45

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