financial stability report - Banka Qendrore e Republikës së Kosovës

Number 3
Financial Stability Report
growth is reflected in the level of provisions based on CBK regulations for loans
provisioning by classification. The assumption of NPL’s growth is applied also to off-balance
sheet items, including unused commitments, guarantees, available letters of credit, and
commercial letters of credit.
Despite the fact that in the analyzed scenario we considere the depreciation of the euro
against the U.S. dollar in order to assess the exchange rate risk, it should be noted that the
impact of this risk on the balance sheet of the banking system remains quite negligible.
Most of the loan portfolio is in euro currency, the lending in foreign currencies is almost
non-existent, which implies that the the exchange rate risk is minor.
The scenario on intereset rate risk implies a reduction of interest rates by 2pp (for assets
and for liabilities on the balance sheet). The reduction on interest rates may affect the Net
Interest Margin (NIM) either positively or negatively, depending on the composition of the
maturity of loans and deposits. Kosovo’s banking system has low exposure to this risk, since
the majority of loans and deposits in the banking system have fixed interest rate. Thus, the
banking system is less sensitive to the short term interest rate fluctuations..
Along with the abovementioned scenario, as an additional scenario on credit risk analysis,
the failure of the largest borrowers in each of the banks, as well as the maximum level of
NPLs which banks can withstand without the need for recapitalization, was also
considered. The sustainability of the banking sector in this analysis is assessed in terms of
the impact of the NPLs increase, euro depreciation and interest rates decline on the level of
the banking sector regulatory capital, risk-weighted assets, and consequently on the
Capital Adequacy Ratio.
Results
The current situation of Kosovo’s banking system with regard to capitalization of the banks
is quite favorable, with the capital adequacy ratio standing at 17.2 percent. Further, the
banking system continues to remain stable also in terms of the level of NPLs to total loans
(6.5 percent), and in terms of the coverage of NPLs by provisions for loan losses, which
cover the NPLs by 117.3 percent. Therefore, the banking system shows a high level of
sustainability against the credit risk even under the conditions of the shock introduced in
the hypothetical scenarios described above. Under the assumptions that the share of NPLs
to total loan portfolio will increase by 4.8pp, the euro will depreciate against the U.S. dollar
by 20 percent, and interest rates will decrease by 2.0pp, stress-test results suggest that the
CAR of the total banking system would remain above the level of 12 percent, whereas at the
individual bank level only two banks would have a CAR under the level of 12 percent, while
one of the banks would have a CAR at 12 percent. In order for the CAR of these two banks
to reach the minimum regulatory requirement of 12 percent, a capital injection equivalent
to 0.32 percent of GDP would be needed.
Under this scenario, the share of NPL to total banking loans would reach 11.3 percent,
while at the individual banks’ level, the NPL ratio would vary from 4.8 percent to 13.4
percent. Under the above mentioned shock assumptions, such as the increase of NPL ratio,
the depreciation of the euro against the U.S. dollar and the decline of interest rate would
make the total loss of the banking system amount to euro 56.1 million. Nevertheless, not all
of this amount may be considered as an eventual loss, given the fact that a considerable
part of this loss would be absorbed by the expected profit for the considered period.
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