Financial Stability Report No1 20 December 2010 - Banka Qendrore ...

Financial Stability ReportNumber 1operate in Kosovo shows the high level of capitalization, which increases the ability of thesector to withstand potential shocks.CapitalIn June 2010, the capital of banking sector reached the value of euro 259.3 million,representing an annual increase of 12.8 percent compared to same period of last year. Ascan be observed from Figure 41, during past three years the capital of banking sectorincreased continuously, but its growthrate followed a declining trend.Figure 41. Total capital of the banking sectorRegulatory capital in the banking 300.045.0%42.7%40.0%sector of Kosovo is mainly financed 250.035.0%through shareholders capital and 200.030.0%retained profit of the banks. In25.0%150.020.0%addition, in recent years banks100.015.5%15.0%12.8%started to use other ways of financing10.0%50.05.0%from abroad, such as subordinated0.00.0%debt, which is part of Tier 2 capital. ItJune 2008 June 2009 June 2010may be noted that banks still do notCapitalAnnual growth rateuse hybrid financial instruments,which can bear higher level of risk.Source: CBK (2010)The proportion of shareholders capitalto total capital reflects the quality of regulatory capital. The higher the participation ofshareholders capital to total regulatory capital, the better the quality of capital. Quality ofcapital, besides having significant importance for the banking sector ability to withstandpotential shocks, it also represents a very important factor in credit ranking of the banks,thus representing better opportunity and lower costs of external financing for commercialbanks. In June 2010, the share of shareholders capital to total regulatory capital recorded aslight decline, standing at 85 percent (88 percent in June 2009). The decline occurred due tothe increase in the share of Tier II capital to total capital from 12 percent in June 2009 to15 percent in June 2010. The increase of Tier II capital mainly resulted from the increase ofsubordinated debt.Figure 42. Structure of Tier 1 capital, in millions ofTier 1 capitaleuroIn June 2010, Tier I capital amountedat euro 220.5 million, whichrepresents an annual increae of 8.6percent. The structure of Tier 1capital continues to be dominated byshareholders capital that represents73 percent of total, while the secondlargest component is retained profitthat represents 26 percent of Tier Icapital (Figure 42). Intangible assetsand goodwill increased their sharefrom 0.4 percent in 2009 to 1.0250.00200.00150.00100.0050.000.00June 2007 June 2008 June 2009 June 2010Intangible assets and goodwillProfit for the current year and retained profit , reserve fundsCapital ( shareholders capital, preferred shares)Source: CBK (2010)| 47