BANKING SECTOR IN SERBIA First Quarter Report 2019 · Banking Sector in Serbia – First Quarter...

NATIONAL BANK OF SERBIA

BANK SUPERVISION DEPARTMENT

BANKING SECTOR IN SERBIA

First Quarter Report 2019

2019

Contents:

1 1 BASIC INFORMATION ON SERBIAN BANKING SECTOR .............. 3

1.1 Selected parameters of the Serbian banking sector ................................ 3 1.2 Concentration and competition .............................................................. 4

2 PROFITABILITY ......................................................................................... 6

2.1 Profitability indicators ........................................................................... 6 2.2 Structure of the results ........................................................................... 7

2.3 Operating income ................................................................................... 8 2.4 Оperating expenses ................................................................................ 9

3 BANKING SECTOR ASSETS .................................................................. 10

3.1 Level and structure ............................................................................... 10 3.2 Classified assets ................................................................................... 11

3.3 Loans .................................................................................................... 13 3.4 Non-performing loans .......................................................................... 15

4 BANKING SECTOR LIABILITIES .......................................................... 22

4.1 Structure of the sources of funding ...................................................... 22 4.2 Deposits ............................................................................................... 23 4.3 Total borrowing of banks ..................................................................... 25

4.4 External liabilities ................................................................................ 26 4.5 Subordinated liabilities ........................................................................ 26

5 OFF-BALANCE SHEET ITEMS............................................................... 27

6 BANK LIQUIDITY .................................................................................... 29

7 CAPITAL ADEQUACY ............................................................................ 30

8 FOREIGN EXCHANGE RISK .................................................................. 33

9 NBS REGULATORY ACTIVITY ............................................................. 33

Banking Sector in Serbia – First Quarter Report 2019 National Bank of Serbia

3

1 1 BASIC INFORMATION ON SERBIAN BANKING SECTOR

1.1 Selected parameters of the Serbian banking sector1

At end-March 2019, the Serbian banking sector numbered 27 banks, which is

unchanged relative to end-December 2018. The organisational network consisted of

1,598 business units and employed a total of 22,999 persons.

Q1 2019 saw an increase in the Serbian banking sector employment, with the

number of business units unchanged. At end-Q1 2018, banking sector employment

went up by 169 persons compared to end-December 2018, as a consequence of a

simultaneous increase in employment by a total of 245 in 18 banks and a decrease in

employment by a total of 76 in nine banks. Within the business network, the number of

business units decreased by six in three banks and increased also by six in two banks.

At end-March 2019, total net balance sheet assets of the Serbian banking sector

equalled RSD 3,792.8 bn (rising by 0.5% relative to December 2018) and the total

balance sheet capital RSD 681.9 bn (up by 0.8% relative to December 2018).

1 All data in the Report are based on the reports that banks are required to submit to the NBS. These

reports have not been audited by external auditors or verified by NBS on-site supervisors.

Amount Share Amount ShareNumber of

business units1)Share

Number of

employ eesShare

Banks in domestic

ownership 7 935 24.7% 166 24.4% 546 34.2% 6,598 28.7%

State-owned 5 670 17.7% 98 14.4% 437 27.3% 5,241 22.8%

Priv ately -owned 2 266 7.0% 68 10.0% 109 6.8% 1,357 5.9%

Banks in foreign

ownership 20 2,857 75.3% 516 75.6% 1,052 65.8% 16,401 71.3%

Italy 2 1,003 26.5% 176 25.8% 233 14.6% 4,310 18.7%

Austria 2 501 13.2% 85 12.4% 184 11.5% 2,727 11.9%

France 2 417 11.0% 58 8.5% 179 11.2% 2,275 9.9%

Hungary 2 218 5.7% 44 6.5% 159 9.9% 2,100 9.1%

Other 12 719 19.0% 153 22.5% 297 18.6% 4,989 21.7%

Total banking sector 27 3,793 100.0% 682 100.0% 1,598 100.0% 22,999 100.0%

Table 1.1 Selected parameters of the Serbian banking sector

(RSD bn, %)

Number

of

banks

Source: NBS.

Assets Capital Network Employ ment

1) Business units include all business network f orms: headquarters, branches, branch of f ices, teller units and other

business units.


4

In the quarter observed, the market share of banks in majority ownership of

domestic entities (private entities and the Republic of Serbia) increased slightly (from

24.5% to 24.7%), as well as their share in total banking sector capital (24.1% to

24.4%). Consequently, the share of banks in majority ownership of foreign entities

decreased only slightly (from 75.5% to 75.3%) as regards the balance sheet total, i.e.

from 75.9% to 75.6% as regards capital. The nominal fall was recorded in the balance

sheet total of banks in majority ownership of domestic private entities.

Banks from Italy, Austria, France and Hungary (eight banks in total) accounted for

the dominant share in total banking sector balance sheet assets – 56.4%.

1.2 Concentration and competition

The Serbian banking sector features an acceptable level of competition and low

concentration of activities. The Herfindahl Hirschman index2 values indicate the

absence of concentration in all observed categories.

For a long time now, the highest values of the index were observed in deposits

(chiefly household deposits) and income from fees and commissions, while the lowest

figures were noted for total income and interest income, as well as for total balance

sheet assets.

At the same time, if the five biggest banks are observed in terms of balance sheet

assets, gross loans and deposits, it is evident that they account for more than half of the

Serbian banking sector in these segments given their share in the net balance sheet

assets (53.0%), gross loans (52.8%) and deposits (54.1%).

2 The Herfindahl Hirschman Index (HHI) is calculated as the sum of square values of individual bank

shares in the category observed (assets, loans, deposits, etc.). HHI up to 1,000 indicates that there is no

market concentration; 1,000–1800 indicates moderate concentration; above 1,800 indicates high

concentration.

Top 5 banks Top 10 banks HHI1)

Assets 53.0 78.1 775

Lending (total) 52.8 77.4 785

Household loans 53.1 80.1 813

Corporate loans 53.4 81.3 819

Deposits (total) 54.1 79.3 804

Household deposits 58.6 82.0 960

Income (total) 52.4 77.2 752

Interest 51.2 76.8 746

Fees and commissions 58.1 81.1 920

Source: NBS.

Table 1.2.1 Concentration and competition indicators (Share %)

1) Herf indahl Hirschman Index of concentration.


5

At end-Q1 2019 in terms of the amount of the balance sheet total five largest banks

preserved their position on the list.

In terms of balance sheet assets, Banca Intesa A.D. Beograd remained the leading

bank in Serbia; its market share edged up (by 0.1 pp) from the previous quarter, but

decreased from the same period last year (by 1.3 pp). In addition to Banca Intesa A.D.

Beograd, the following banks had market shares above 10% as at 31 March 2019:

Unicredit Bank Srbija A.D. – Belgrade (11.3%) and Komercijalna banka a.d. –

Belgrade (10.6%).

(RSD bn, %)

Amount Share Ranking Amount Share Ranking Amount Share Ranking

Banca Intesa A.D.- Beograd 559 16.5 1 571 15.1 1 575 15.2 1

Unicredit Bank Srbija A.D.-

Beograd390 11.5 2 437 11.6 2 428 11.3 2

Komercijalna banka A.D.-

Beograd367 10.8 3 401 10.6 3 403 10.6 3

Societe Generale banka Srbija

A.D.- Beograd290 8.6 4 316 8.4 4 312 8.2 4

Raif f eisen Banka A.D.- Beograd 272 8.0 5 292 7.7 5 291 7.7 5

Banka Poštanska štedionica A.D.-

Beograd146 4.3 9 220 5.8 6 229 6.0 6

Erste Bank A.D.- Nov i Sad 161 4.8 8 203 5.4 8 210 5.5 7

Agroindustrijsko komercijalna

banka AIK banka akcionarsko

društv o, Beograd

201 5.9 6 207 5.5 7 209 5.5 8

Eurobank A.D.- Beograd 163 4.8 7 170 4.5 9 172 4.5 9

Vojv ođanska banka A.D.- Nov i Sad 118 3.5 10 134 3.5 10 134 3.5 10

Source: NBS.

Table 1.2.2 Top ten banks according to the total assets criterion

31. 03. 2018 31. 12. 2018 31. 03. 2019

Δ Г Δ Т


6

2 PROFITABILITY

2.1 Profitability indicators

The banking sector’s net profit before tax in Q1 2019 equalled RSD 16.6 bn, down

by 5.9% from last year.

The structure of the net profit is as follows: twenty-two banks operated with a total

profit of RSD 16.8 bn, while five banks accounting for 1.9% of the market share

posted a negative financial result totalling RSD 0.2 bn. The profit generating items of

the banking sector were somewhat more concentrated than the balance sheet total: six

banks with the highest net profit together made up 77.4% of the total sector’s profit.

Preserved profitability of the banking sector at end-March 2019 resulted in the

following profitability indicators: ROA equalled 1.75% (2.08% at end-March 2018),

and ROE 9.72% (10.50% at end-March 2018).

14.33

18.13 17.5816.55

-5

0

5

10

15

20

31. 3. 2016 31. 3. 2017 31. 3. 2018 31. 3. 2019

Profit Loss Net result

Source: NBS.

Chart 2.1.1 Pre tax result(in RSD bln)

1.88 2.25 2.081.75

9.18

11.4110.50

9.72

0.0

2.0

4.0

6.0

8.0

10.0

12.0

31. 3. 2016 31. 3. 2017 31. 3. 2018 31. 3. 2019

ROA ROE

Source: NBS.

Chart 2.1.2 Banking sector profitability indicators(in %)


7

2.2 Structure of the results3

In an environment of lending expansion in 2018 (supported by economic growth

and positive labour market trends despite the decreasing average interest rate trend),

including the customary reliance of domestic banks on traditional credit-deposit

business models, the main driver behind the rising net profit was net interest and fee

income.

Net interest income at end-Q1 2019 stood at RSD 32.1 bn, up by 3.8% from the

same period in 2018. This increase stems from higher interest income (by RSD 1.9 bn)

and, at the same time, the rise in interest expenses (by RSD 0.7 bn). At end-March

2019, the structure of interest income at banking sector level was as follows: 78.4% of

interest income came from loans, 17.0% from securities and 2.0% from deposits. On

the expense side, deposit interest expenses had the highest share (72.4%), followed by

those associated with loans (15.9%) and securities (6.9%).

Net fee and commission income stood at RSD 9.7 bn, increasing by 5.5% from 31

March 2018 due to the RSD 0.5 bn rise in the fee and commission income, while

expenses on this account declined slightly (0.5%). The most significant types of fee

and commission income are those in respect of payment transactions (a 32.0% share in

total fee and commission income), payment cards (20.7%) and deposits (15.0%),

whereas on the expense side, payment card expenses had the highest share (47.2%),

followed by payment transaction expenses (13.0%).

The net result of the impairment of financial assets not carried at fair value through

income statement was negative at end-Q1 2019 at RSD 1.3 bn, compared to RSD 0.7

bn of net loan losses in the same period of 2018. Banks recorded net expenses under

indirect write-off of financial assets measured at amortised cost in the amount of RSD

2.7 bn (RSD 1.2 bn net income on this account in the same period of 2018). The write-

off of uncollectible receivables generated net revenues of RSD 1.2 bn, while in 2018

minimum net expenses were recorded on this account.

3 Note: data for 31 March 2018 are changed compared to the previous report because one bank re-

submitted its reports.

(in RSD mn)

Result Net interest Net f ees Net Credit losses Exchange rate ef f ect

31. 03. 2019 16,555 32,053 9,675 -1,255 1,644

31. 03. 2018 17,585 30,885 9,168 -701 1,427

-6% 4% 6% 79% 15%

Source: NBS.

* In regards with prev iously submitted report, data as at end of March 2018 were changed due to reports repetition by one bank.

Table 2.2 Changes in key elements of bank profitability

Change:


8

At end-Q1 2019, net gains from securities declined negligibly from the year

before, reaching RSD 1.3 bn.

The net effect of the dinar exchange rate fluctuations on the Serbian banking

sector’s result at end-Q1 2019 was positive, producing net exchange rate gains and

gains from the agreed currency clause of RSD 1.6 bn. Net exchange rate gains on FX

receivables and liabilities equalled RSD 3.5 bn, while net exchange rate losses

associated with the agreed FX currency clause came at RSD 1.9 bn.

2.3 Operating income

At end-Q1 2019, the banking sector’s total operating income stood at RSD 45.5 bn,

up by 4.8% compared to the total operating income from the same period in 2018.

The y-o-y increase in operating income is attributable primarily to interest income.

0

2

4

6

8

10

12

14

16

18

20

22

Net result Маrch

2018

Net

interest

Net fees Net

securities

FX effect Other

operating

income

Net credit

losses

Other

income

Operating

expenses

Net result

March

2019

Source: NBS.

Chart 2.2 The structure of result(in RSD bn)

71.1% 70.4%

21.1%21.2%

3.3%3.6%

0

5

10

15

20

25

30

35

40

45

50

31. 3. 2018 31. 3. 2019

Net interest Net fees Income from securities FX effect Other income

Chart 2.3 Operating income structure(in RSD bn, in %)

Source: NBS.


9

2.4 Оperating expenses

At end-Q1 2019, operating expenses of the Serbian banking sector equalled RSD

28.9 bn, rising by 9.9% у-o-y. Operating expenses were recorded in all categories,

mostly in depreciation expenses (by 63.9%) which account for 10.1% of operating

expenses. This increase is the result of the implementation of IFRS 16 – Leases. “Other

expenses” were higher by 8.9% compared to expenses in 2018 (52.8% of operating

expenses). Expenses relating to salaries, compensations and other personal expenses

increased by 1.9% (making up 37.1% of total operating expenses).

Salaries, salaries

compensations

and other

personal expenses; 10,7

bn; 37%

Depreciation costs; 2,9 bn;

10%

Other expenses; 15,3

bn; 53%

Source: NBS.

Chart 2.4 Structure of operating expenses31 March 2019


10

3 BANKING SECTOR ASSETS

3.1 Level and structure

Total net balance sheet assets of the Serbian banking sector at end-March 2019

equalled RSD 3,792.8 bn, indicating an increase of RSD 18.7 bn or 0.5% relative to

December 2018.

Loans and receivables (to banks and other clients) held a dominant share of 62.1% in

banking sector net assets (as a result of banks’ orientation towards traditional banking

activities), dropping by 0.7 pp q-o-q. Also, item Securities held a significant share (17.4%),

as did the item Cash and balances with the central bank (15.7%). Banks’ investments in

securities were mostly those in government securities issued by the Republic of Serbia,

which made this segment of banking sector investment highly secure.

3,0

43

3,2

08

3,3

87 3

,79

3

3,2

42

3,3

69 3

,77

4

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2016 2017 2018 2019

September December

Source: NBS.

Chart 3.1.1 Total banking sector assets(in RSD bn)

Cash and balances with the central bank;

596,7 bn; 16%

Loans and receivables from banks and OFO;

175,9 bn; 5%

Loans and receivables from customers; 2181,4 bn; 58%

Receivables under derivatives and

securities; 662.7 bln; 17%

Property, plant and equipment; 71,5 bn;

2%

Investment property; 13,6 bn; 0%

Other; 91, bn; 2%

Chart 3.1.2 Banking sector assets structure

31 March 2019

Source: NBS.


11

3.2 Classified assets

At end-March 2019, total classified assets (on- and off-balance sheet) equalled

RSD 3,453.7 bn, up by RSD 33.0 bn (1.0%) q-o-q. Balance sheet assets subject to

classification rose by RSD 10.2 bn and off-balance sheet items subject to classification

by RSD 22.8 bn. Within balance sheet assets subject to classification, the most

significant changes were recorded for long-term loans and deposits with banks, which

rose by RSD 21.8 bn and went down by RSD 17.8 bn, respectively. When it comes to

off-balance sheet items, the largest absolute increase was recorded in Contingent

liabilities – by RSD 14.8 bn. Long-term loans in balance sheet assets and contingent

liabilities in off-balance sheet assets, with RSD 1,871.6 bn and RSD 563.3 bn at end-

March 2019 respectively, remained the most important items subject to classification

(share of 74.6% and 59.7% in total classified balance/off-balance sheet items).

(in RSD mn)

31. 3. 2019 31. 12. 2018 31. 3. 2018 31. 12. 2018 31. 3. 2018

Cash and balances with the central bank 596,715 -107 145,605 0.0% 32.3%

Loans and receiv ables 2,357,313 -11,766 231,899 -0.5% 10.9%

from banks and OFO 175,940 -32,105 -10,735 -15.4% -5.8%

from customers 2,181,373 20,338 242,634 0.9% 12.5%

Receiv ables under deriv ativ es and securities1) 662,745 -2,722 -12,215 -0.4% -1.8%

Property , plant and equipment 71,550 20,030 19,543 38.9% 37.6%

Inv estment property 13,611 -36 -1,398 -0.3% -9.3%

Other 90,869 13,306 22,745 17.2% 33.4%

Total balance sheet 3,792,802 18,704 406,179 0.5% 12.0%

Source: NBS.

1) Until 2018 the f ollowing f inancial assets hav e been included: recognised at f air v alue through income statement and held f or

trading, av ailable f or sale, held to maturity and initially recognised at f air v alue through income statement

Table 3.1 Change in key asset items of the banking sector

Amount

Change relativ e to prior periods

Nominal Relativ e

53% 54%56% 57%

23%26%

28% 27%9%

10%

9% 9%

3%

3%

2% 2%

12%7%

5% 5%2,942

3,057

3,421 3,454

0

500

1,000

1,500

2,000

2,500

3,000

3,500

31. 12. 2016 31. 12. 2017 31.12.2018 31.3.2019

А Б В Г Д

Chart 3.2 Total classified assets(in RSD bn, in % )

Sourceational Bank of Serbia.Source: NBS.


12

The most significant change in balance sheet assets subject to classification

relative to a quarter earlier was a decrease in balance sheet items from category B by

RSD 19.3 bn, primarily in short term loans. Categories D and E recorded an increase

by RSD 7.8 bn and RSD 9.8 bn, respectively (rise in long-term loans). Consequently,

the share of the two worst categories rose by 0.7 pp, hence bad assets accounted for

8.9% of total classified balance sheet assets.

An increase in total classified off-balance sheet items by RSD 22.8 bn resulted

from an increase in categories A and B by RSD 22.6 bn, mostly under Contingent

liabilities, and from the decrease in category D (by RSD 7.1 bn), hence the share of bad

assets fell from 3.8% to 3.1% in total classified off-balance sheet items.

At its meeting on 24 December 2018 the NBS Executive Board adopted, inter alia,

the Decision Amending the Decision on the Classification of Bank Balance Sheet

Assets and Off-balance Sheet Items which, among other things, repealed the banks’

obligation to calculate reserve for estimated losses which may be incurred on account

of balance sheet assets and off-balance sheet items.

Assigned receivables amounted to RSD 1.9 bn in Q1 2019, which is significantly

lower than the RSD 4.2 bn in Q4 2018, but almost unchanged in y-o-y terms (in Q1

2018 assigned receivables amounted to RSD 1.8 bn). All RSD 1.9 bn worth of

receivables in Q1 2019 were assigned to non-banking sector entities.

(in RSD mn)

31. 3. 2019 31. 12. 2018 31. 3. 2018 31. 12. 2018 31. 3. 2018

Balance sheet assets subject to classification 2,510,423 10,154 240,805 0.4% 10.6%

Short-term loans 329,603 -16,348 30,919 -4.7% 10.4%

Long-term loans 1,871,628 21,841 233,911 1.2% 14.3%

Receiv ables due 76,197 -954 -48,639 -1.2% -39.0%

Deposits with banks 94,465 -17,785 -7,937 -15.8% -7.8%

Off-balance sheet items subject to classification 943,274 22,834 125,572 2.5% 15.4%

Pay able guarantees 112,367 -1,463 11,068 -1.3% 10.9%

Perf ormance guarantees 221,869 4,243 38,474 1.9% 21.0%

Contingent liabilities 563,308 14,755 73,769 2.7% 15.1%

Source: NBS.

Table 3.2 Change in key balance sheet and off-balance sheet asset items of the banking sector

Amount


Nominal Relativ e


13

3.3 Loans4

In Q1 2019, gross loans of the Serbian banking sector recorded a nominal quarterly

increase of RSD 4.5 bn or 0.2%, reaching RSD 2,271.7 bn. In gross terms, credit

activity rose the most in the household segment – by RSD 17.1 bn or 1.9% q-o-q, and

in the corporate segment by RSD 5.4 bn or 0.5% q-o-q. As before, the increase in loans

to households is largely attributable to the rise in dinar cash loans and housing loans

with an FX clause.

Cash loans have the largest share in total household loans (45.7% followed by

housing loans with 42.4%) with the growth rate of 2.5% in Q1 2019. Gross lending

declined in nominal terms in the sector of finance and insurance, public non-financial

sector, and foreign and other other legal entities sectors. The corporate and household

sectors remained the most prevalent, with shares of 45.0% and 40.5% respectively.

4 In accordance with the Guidelines on the Obligation and Method of Collection, Processing and

Submission of Data on the Stock and Structure of Bank Loans, Receivables and Liabilities, loans include

the following loans in dinars and foreign currency: recalls, transaction account loans, overnight loans,

consumer, liquidity and current assets loans, export, investment, housing and cash loans, loans for the

payment of imports of goods and services from abroad, loans for the purchase of real estate in the country

to a natural person, and other loans.

(in RSD mn, in %)

31. 3. 2019 31. 12. 2018 31. 3. 2018 31. 12. 2018 31. 3. 2018

Finance and insurance 23,958 -3,448 7,066 -12.6% 41.8%

Public enterprises 94,717 -3,266 13,337 -3.3% 16.4%

Companies 1,023,201 5,394 79,776 0.5% 8.5%

Public sector 28,027 3,375 2,452 13.7% 9.6%

Households 919,328 17,129 101,254 1.9% 12.4%

Foreign persons and f oreign banks 44,927 -13,779 11,957 -23.5% 36.3%

Other sectors 137,539 -870 -773 -0.6% -0.6%

Total loans 2,271,696 4,534 215,070 0.2% 10.5%

Relativ e

Source: NBS.

Table 3.3 Change in the level of net loans

Amount


Nominal


14

The currency structure of the Serbian banking sector’s loan portfolio is still

dominated by foreign currency. At end-Q1 2019, FX and FX-indexed loans accounted

for 68.3%. The prevalent currency of loan indexation in Serbia was the euro, with EUR

loans making up 65.1% of total loans (95.3% of total gross FX and FX-indexed loans),

followed by CHF loans and USD loans at 2.7% and 0.4% (4.0% and 0.6% of total

gross FX and FX-indexed loans, respectively). Compared to December 2018, gross

EUR and CHF loans continued to fall in nominal terms.

At end-Q1 2019, dinar loans made up 31.7% of total gross loans. Observed by

sector, households accounted for the bulk of dinar loans (56.1%), while the share of the

public non-financial sector was the smallest (6.9%), with the exception of foreign

entities (1.4%). By loan category, dinar loans accounted for the major portion of cash

and consumer loans (99.2% and 59.6% respectively) and the smallest share of housing

and investment loans (0.3% and 8.8% respectively). Despite the prolonged upward

trend of dinar cash loans, the share of cash loans in total banking sector loans equalled

18.5% at end-March 2019 compared to 18.1% in December 2018.

Observed by the remaining maturity, the structure of gross loans did not change

significantly – the share of long-term gross loans increased (from 76.4% to 77.7%),

while a decline was recorded in the share of short-term loans (from 19.2% to 18.7%)

and overnight loans (from 1.7% to 0.9%). The share of matured loans is unchanged

(2.7%).

EUR1479.4

bn

64%

CHF; 62.2 bn;

3%

USD; 9.8 bn;

0%

RSD; 719.5

bn; 31%

Other; 56.5 bn;

2%

Due; 61, bn; 3%

Up to 3 m; 129.3

bn; 6%

3 to 6 m; 85.9 bn;

4%

6 to 12 m; 231,

bn; 10%

1 to 2 y239.6 bn

10%

2 tо 5 y ; 616.5

bn; 27%

5 tо 6 y ; 139.2

bn; 6%

6 tо 7y ; 148.1

bn; 6%

7 tо 8 y ; 129.7

bn; 6%

Ov er 8 y ear;

491.4

bn; 22%

Chart 3.3 Banking sector gross loan portfolio structure(in RSD bn)

31 March 2019

Source: NBS.


15

Since the start of implementation of IFRS 9 – Financial instruments on 1 January

2018 the NBS has been monitoring the effects of this standard in the area of

classification, valuation and calculation method for impairment of financial

instruments. According to the data for Q1 2019 in the structure of gross loans, the

dominant part is held by loans classified in Stage 1 (88.2%), while significantly lower

share was recorded for loans classified in Stages 2 and 3 (6.7% and 4.9% respectively).

3.4 Non-performing loans

Monitoring the level and trend of non-performing loans (NPLs) is vital for

identifying potential problems in the collection of receivables and monitoring of credit

risk, as these loans and the indicators associated with them may signal deterioration in

the quality of the loan portfolio of the banking sector. Further analysis of NPLs in

relation to allowances for their impairment, regulatory provisions and capital provides

insight into the banking sector’s capacity to absorb losses arising from NPLs.

According to the methodology applied by the NBS, an NPL means the total

outstanding debt under an individual loan (including the amount of arrears):

- where the payment of the principal or interest is delayed 90 days or longer since

the initial maturity;

- where 90 days of interest payments (or higher) have been added to the loan

balance, capitalised, refinanced or delayed by agreement;

Stage 1 2003.3 bn

88%

Stage 2 151.7 bn

7%

Stage 3 112.1 bn

5%Stage 3 at the

moment of

recognition

3.6 bn

0%

Source: NBS.

Chart 3.3.1 Gross loans structure per level of impairment(31 March 2019 )


16

- where payments are less than 90 days overdue, but the bank has assessed that the

borrower’s repayment ability has deteriorated and doubts that the payments will be

made in full.

Gross NPLs

In Q1 2019, the banking sector’s total gross NPLs decreased by RSD 5.3 bn to

RSD 125.4 bn at end-March. During this quarter, gross NPLs5 saw a decline by RSD

1.4 bn on account of assignment and by RSD 10.7 bn on account of collection, while

write-offs accounted for an additional reduction of RSD 3.9 bn. The banking sector’s

new gross NPLs in Q1 2019 amounted to RSD 11.9 bn.

The fall in gross NPLs by 4.0%, along with a rise in total loans by 0.2%, pushed

the share of NPLs in total gross loans further down by 0.2 pp q-o-q, to 5.5%, which is

their new historic low since the introduction of the uniform definition of a non-

performing loan and mandatory reporting in 2008.

Despite a decline of RSD 5.3 bn, the major part of gross NPLs is still in the

corporate segment (RSD 51.8 bn at end-March 2019). In addition, the NPLs of

Companies in bankruptcy and other legal persons in bankruptcy stood at RSD 20.5 bn.

In the household sector, gross NPLs stood at RSD 40.6 bn, or 32.4% of total gross

NPLs.

5 Calculated based on the NPL 3 report which banks submit to the NBS.

50%

53%

44% 45%

20%

22%

30% 32%

30%

25%

26% 23%

345.8

204.9

130.6 125.4

17.0

9.8

5.7 5.5

0

5

10

15

20

0

50

100

150

200

250

300

350

400

450

31.12.2016 31.12.2017 31.12.2018 31. 3. 2019

Corporates Households Other Tota l Gross NPL %

Chart 3.4.1 Gross non performing loans (NPL)(in RSD bn)

Source: NBS.


17

NPL coverage

Despite a high write-off amount, at end-Q1 2019 the coverage of total gross NPLs

with allowances for impairment stayed relatively high at 61.3%.

Decision Amending the Decision on the Classification of Bank Balance Sheet

Assets and Off-balance Sheet Items, among other things, repealed the banks' obligation

to calculate reserve for estimated losses which may be incurred on account of balance

sheet assets and off-balance sheet items.

Total NPLs were covered by allowances for NPL impairment (80.7% coverage).

0

5

10

15

20

25

30

35

40

31.12.2016 31.12.2017 31. 12. 2018 31. 3. 2019

Households

Corporate sectors(Public enterprises + Companies)

Total NPL

Other sectors

Source: NBS.

.

Chart 3.4.2 NPL ratio for main sectors(in %)

67.8

58.1 60.2 61.3

72.9

66.8

78.780.7

50

55

60

65

70

75

80

85

90

31.12.2016 31.12.2017 31.12.2018 31. 3. 2019

IFRS provision (NPL)** / NPL

IFRS provision* / NPL

* Prov ision f or total loans; ** Prov ision f or non-perf orming loans;

Chart 3.4.3 NPL coverage(in %)

Source: NBS.


18

Corporate NPLs

At end-Q1 2019, gross corporate NPLs equalled RSD 51.8 bn, down by RSD 1.6

bn or 3.0% q-o-q, mainly due to: assignment (RSD 0.2 bn), collection (RSD 3.1 bn)

and write-offs (RSD 1.8 bn).6

By sector, the biggest share in total corporate NPLs continued to be held by

manufacturing (34.1%, with a 5.2% gross NPL ratio), followed by real estate (21.2%,

with an 11.2% gross NPL ratio), trade (18.3%, with a 2.9% gross NPL ratio) and

construction (16.9%, with an 8.6% gross NPL ratio). During this quarter, the NPL ratio

markedly declined in all sectors (except in the real estate). The sharpest reduction was

registered in construction (1.8 pp).

6 Calculated based on the NPL 3 report which banks submit to the NBS.

(in RSD mn)

31. 3. 2019 31. 12. 2018 31. 3. 2018 31. 12. 2018 31. 3. 2018

Agriculture 1,533 -355 -640 -18.8% -29.4%

Manuf acturing 17,669 -1,833 -27,719 -9.4% -61.1%

Construction 8,763 -1,010 -3,079 -10.3% -26.0%

Trade 9,487 -99 -10,196 -1.0% -51.8%

Transport, hotels/restaurants, communications 3,061 -108 -1,683 -3.4% -35.5%

Real estate 10,976 1,831 -1,646 20.0% -13.0%

Source: NBS.

Table 3.4.1 Changes in gross NPLs by main economic sectors

Amount


Nominal Relativ e

(in %)

31. 3. 2019 31. 12. 2018 31. 3. 2018

Agriculture 2.0% -0.3 -1.1

Manuf acturing 5.2% -0.5 -9.2

Construction 8.6% -1.8 -5.3

Trade 2.9% -0.1 -3.4

Transport, hotels/restaurants, communications 4.0% -0.1 -2.8

Real estate 11.2% 1.8 -3.0

Source: NBS.

Table 3.4.2 Corporate NPL ratio by sector

Change relativ e to prior periods (pp)


19

Natural persons’ NPLs7

Measuring 4.4% at end-Q1 2019, the share of gross NPLs of natural persons is

still below the average of the total portfolio and 0.02 pp lower than a quarter earlier.

At end-Q1 2019, natural persons’ NPLs equalled RSD 45.6 bn, having risen by

1.6% q-o-q. Cash loans recorded the most significant increase in NPLs (by 9.3%) at the

rate of total cash loans growth of 3.2%, or RSD 13.9 bn. Their share in total gross

loans to natural persons amounted to 43.5% at end-March 2019. At the same time, the

share of cash loans in total NPLs to natural persons increased to 39.5% at end-March

2019 (36.8% in the previous quarter). On the other hand, the gross NPL ratio of cash

loans recorded relatively low values (4.0% at end-March 2019 while on 31 December

2018 it equalled 3.8%).

7 Households, entrepreneurs, private households with employed persons and registered farmers

Agriculture1,5 bn

3%

Processing industry

17.7 bn…

Electricity0.3 bn

1%

Construction8.8 bn

17%

Commerce9.5 bn

18%

Hotel, restaurants and

communication

3.0 bn…

Real estate and education

11.0 bn

21%

8.6%

1.5%

2.0%

5.2%

2.9%

11.2%

4.0%

Gross NPL

Chart 3.4.4 Private corporates NPL structure31 March 2019

Source: NBS.

(in RSD mn)

31. 3. 2019 31. 12. 2018 31. 3. 2018 31. 12. 2018 31. 3. 2018

Housing loans 16,691 -805 -4,912 -4.6% -22.7%

Cash loans 18,041 1,531 3,389 9.3% 23.1%

Credit cards 2,005 337 14 20.2% 0.7%

Current account ov erdraf ts 1,864 79 -65 4.4% -3.4%

Consumer loans 498 -47 -29 -8.6% -5.5%

Other 6,537 -370 -2,804 -5.4% -30.0%

Total 45,637 725 -4,407 1.6% -8.8%

Source: NBS.

Relativ e

Table 3.4.3 Changes in gross non-performing household loans by category

Amount


Nominal


20

The category of housing construction loans accounted for 37.7% of total loans and

36.6% of total gross NPLs.

The highest gross NPL ratio in the natural persons’ segment at end-March 2019

(8.0%) was recorded in the category of current account overdrafts (which accounted

for 2.3% of total loans to natural persons and for 4.1% of total NPLs of natural

persons). The next were credit cards, with the ratio of 6.1% (making up 3.2% of total

loans to natural persons and 4.4% of the NPLs of natural persons), housing loans with

4.3% and cash loans with 4.0%.

(in %)

31. 3. 2019 31. 12. 2018 31. 3. 2018

Housing construction 4.3% -0.3 -1.7

Cash loans 4.0% 0.2 0.1

Credit cards 6.1% 1.2 0.1

Current account ov erdraf ts 8.0% 0.1 -0.1

Consumer loans 3.7% 0.3 0.1

Source: NBS.

Table 3.4.4 Gross NPL ratio for households by category

Change relativ e to prior periods (pp)

Cash18.0 bn

40%

Credit cards2.0 bn

4%

Ov erdraf t1.9 bn

4%Consumer

0.5 bn

1%

Housing16.7 bn

37%

Other lending*6.5 bn

14%

5.2%

4.0%

8.0%

4.3%

6.1%

Gross NPLindicator

3.7%

Other lending = agriculture, other activ ities, v ehicle purchase loans and other loans

Chart 3.4.5 Natural persons NPL structure31 March 2019

Source: NBS.


21

When observing NPLs to natural persons in relation to allowances for their

impairment, housing loans are a category with the lowest allowances for impairment

(42.5% relative to gross NPLs), due to generally better collateral coverage. In current

account overdrafts, cash loans and credit cards, allowances for impairment are much

higher (76.8%, 64.2% and 62.3%, respectively).

Concentration risk

At end-2018 the NBS adopted regulatory measures aimed at preventing new NPLs

and preserving financial stability as a response to unsecured non-purpose loans with

unreasonably long maturities. These measures cover cash, consumer and other

household loans (with the exception of housing loans and current account overdrafts)

with the repayment term of eight years or longer. In accordance with the Decision on

Managing Concentration Risk Arising from Bank Exposure to Specific Products,

concentration risk indicator was introduced as an additional regulatory and supervisory

instrument of the NBS.

Concentration risk indicator is the ratio of cash, consumer and other household

loans with contracted maturity longer than eight years (except for housing loans and

current account overdrafts) and capital increased by dinar liabilities whose remaining

maturity is over five years. At end-Q1 2019 concentration risk indicator of the Serbian

banking sector is 23.05%, significantly below the prescribed 50% for banks in the

observed year and down by 2.1 pp from end-January 2019 (first reporting date). The

banking sector exposure on account of loans extended to households was reduced by

6.3% (from RSD 156.1 bn to RSD 146.4 bn) in the same period (March-January).


22

4 BANKING SECTOR LIABILITIES

4.1 Structure of the sources of funding

Deposits8 were the primary source of bank funding in Serbia, making up 71.4% of

total liabilities. At end-Q1 2018, own sources of funding made up 18.0% and

borrowing 5.8% of total liabilities.

Total liabilities of the banking sector rose by RSD 13.5 bn (or 0.4%) q-o-q.

Increased liabilities are attributable mainly to the rise in Other liabilities, specifically

financial leasing liabilities. The most significant deposit category recorded a net

reduction as a result of the fall in deposits and other financial liabilities towards banks

by RSD 26.6 bn and the increase in deposits and other financial liabilities towards

other clients by RSD 9.6 bn (0.4%).

8 Including transaction and other deposits as part of items: Deposits and other liabilities to banks, other

financial organisations and the central bank and Deposits to other clients.

(in RSD mn)

Amount

31. 3. 2019 31. 12. 2018 31. 3. 2018 31. 12. 2018 31. 3. 2018

Deposits and other liabilities 2,992,534 -16,976 370,489 -0.6% 14.1%

to banks, OFO and the central bank 453,289 -26,470 61,306 -5.5% 15.6%

to other customers 2,539,245 9,494 309,183 0.4% 13.9%

Liabilities under securities1)588 28 16 4.9% 2.9%

Subordinated liabilities 29,077 -5,872 -4,210 -16.8% -12.6%

Prov isions 12,339 871 1,870 7.6% 17.9%

Share capital and other capital 396,958 3,728 110 0.9% 0.0%

Prof it 88,163 -9,976 -17,971 -10.2% -16.9%

Loss 24,062 258 -9,257 1.1% -27.8%

Reserv es and unrealised losses 220,840 11,700 17,520 5.6% 8.6%

Other 76,365 35,459 29,096 86.7% 61.6%

Total liabilities 3,792,802 18,704 406,179 0.5% 12.0%

Source: NBS.

Table 4.1 Change in key items of banking sector liabilities


Nominal Relativ e

632

667

677

682

2,6

09

2,7

02 3,0

97

3,1

11

0

500

1,000

1,500

2,000

2,500

3,000

3,500

31. 12. 2016. 31. 12. 2017. 31. 12. 2018. 31. 3. 2019.

Capital Liab ilities

Source: NBS.

Chart 4.1 Banking sector capital and liabilities (in RSD bn)


23

In Q1 2019, the total capital of the banking sector rose by RSD 5.2 bn in nominal

terms (i.e. by 0.8%), with the share of capital in total balance sheet liabilities also

increasing (from 17.9% to 18.0%). Within capital structure, the most significant

changes were recorded for: reserves (up by RSD 11.7 bn), profit (down by RSD 10.0

bn – primarily envisaged for reserves and payment of dividends), and share capital (up

by RSD 3.7 bn – capital increase in one bank).

In terms of the currency structure, Q1 2019 saw a further decrease in dinar sources

of funding (including capital), from 43.1% to 42.7%. As regards the FX and FX-

indexed portion of liabilities, EUR-denominated liabilities remained dominant, making

up 91.7% of total FX liabilities, while the rest were mostly liabilities in USD (5.0%)

and CHF (2.5%).

4.2 Deposits

Total deposits with banks stood at RSD 2,707.7 bn at end-Q1 2019, down by RSD

24.3 bn (0.9%) q-o-q. The decrease stemmed mainly from a drop in corporate and

public non-financial sector transaction deposits (by RSD 46.0 bn and RSD 16.4 bn,

respectively).

At end-Q1 2019 dinar deposits went down by RSD 33.2 bn and FX-indexed

deposits by RSD 3.5 bn, while FX deposits rose by RSD 12.4 bn. The share of FX and

FX-indexed deposits in total deposits went up from 67.5% to 68.4%. The EUR was the

dominant currency, making up 90.9% of total FX and FX-indexed deposits. The rest of

FX and FX-indexed deposits were mainly in USD (5.6%) and CHF (2.6%).

In terms of initial (agreed) maturity, demand deposits remained dominant (63.2%),

followed by deposits maturing in up to one year (24.5%), while 12.3% of all deposits

were agreed for over one year term.

Short-term deposits (observed by the remaining maturity) made up the bulk of bank

deposits in Serbia. Demand deposits made up over a half of all deposits (63.6%), followed

by deposits with the remaining maturity of up to one year with 29.2%, while deposits with

the remaining maturity of over one year accounted for 7.2% of total deposits.

(in RSD mn)

31. 3. 2019 31. 12. 2018 31. 3. 2018 31. 12. 2018 31. 3. 2018

Finance and insurance sector 71,508 -7,288 9,203 -9.2% 14.8%

Public enterprises 170,270 -19,359 40,011 -10.2% 30.7%

Companies 654,958 -28,688 115,606 -4.2% 21.4%

Public sector 69,983 30,426 29,615 76.9% 73.4%

Households 1,364,133 35,044 118,503 2.6% 9.5%

Foreign entities and f oreign banks 239,684 -7,414 24,575 -3.0% 11.4%

Other sectors 137,204 -27,027 -4,430 -16.5% -3.1%

Total deposits 2,707,740 -24,305 333,084 -0.9% 14.0%

Source: NBS.

Nominal Relativ e

Table 4.2 Changes in deposits levels

Amount



24

At end-Q1 2019, total household deposits in foreign currency amounted to RSD

1,155.3 bn (rising by 2.4% q-o-q) and were made up mainly of savings (62.0%) and

transaction deposits (35.6%).

Compared to the end of the previous quarter, household savings deposits9

increased by RSD 9.2 bn (1.2%) to RSD 775.3 bn at end-Q1 2019. This increase

resulted from higher savings in foreign currency (by RSD 5.1 bn) due to the dinar

appreciating by 0.2%, and the rise in dinar savings (by RSD 4.1 bn). At end-March

2019, FX savings were dominant in total household savings deposits, making up

92.4%, while dinar savings accounted for 7.6%.

9 Accounts 402 and 502 in the Chart of Accounts, sector 6 (domestic and foreign natural persons –

residents)

Sectoral structure Currency structure Maturity structure

Chart 4.2 Banking sector deposits structure31 March 2019

Up to 3 m2071.64

bn

77%

3 to 6 m143.65 bn

5%6 to 12 m298.6 bn

11%

Ov er 1 y ear

193.85 bn

7%

Households1364.13 bn

50%

Corp. (public and

priv ate)

825.23 bn

31%

Foreign entities

239.68 bn

9%

Other depositors

278.7 bn

10%

Source: NBS.

RSD854.88 bn

32%

EUR1683.67 bn

62%

Other currencies

169.19 bn

6%


25

4.3 Total borrowing of banks

At end-Q1 2019, the total credit borrowing of the banking sector amounted to RSD

278.9 bn, an increase by RSD 7.0 bn or 0.7% relative to the previous quarter (2.6%).

The largest individual item in total credit borrowing were loans taken (primarily

from parent banks, related banks in the same group and international financial

institutions), making up 78.4% (unchanged from the end of the previous quarter) and

rising by RSD 5.5 bn nominally q-o-q. The next largest item were liabilities under

overnight loans which accounted for 18.5% (end of the previous quarter: 17.7%), after

an increase of RSD 3.6 bn in Q1. Other financial liabilities made up 2.9% (end of the

previous quarter: 3.9%), falling by RSD 2.4 bn q-o-q.

In this segment, the biggest creditors of banks were foreign persons with 74.3%

(primarily foreign banks) and the general government sector with 16.9% (primarily

government bodies and organisations).

The dominant currency of borrowing was the euro, accounting for RSD 248.5 bn

(end of the previous quarter: RSD 249.4 bn) or 89.1% of total credit borrowing.

Liabilities in dinars stood at RSD 24.9 bn (end of the previous quarter: RSD 18.3 bn)

or 8.9% of total credit borrowing, while banks owed RSD 2.2 bn in CHF and USD

each (end of the previous quarter: RSD 2.4 bn and RSD 1.5 bn, respectively), or 0.8%

of total credit borrowing.

(in RSD mn)

31. 3. 2019 31. 12. 2018 31. 3. 2018 31. 12. 2018 31. 3. 2018

REPO 343 343 343 0.0% 0.0%

Ov ernight loans 51,628 3,620 16,664 7.5% 47.7%

Loans receiv ed 218,735 5,478 27,909 2.6% 14.6%

Other f inancial liabilities 8,215 -2,425 -7,878 -22.8% -49.0%

Total borrowing 278,921 7,016 37,037 2.6% 15.3%

Source: NBS.

Nominal Relativ e

Table 4.3 Changes in the level of bank borrowing

Amount



26

4.4 External liabilities

At end-Q1 2019, banks’ total external liabilities under credit operations stood at

RSD 207.2 bn, down by RSD 4.1 bn (1.9%) q-o-q. An increase was recorded only for

borrowings – by RSD 3.7 bn. This segment remained highly concentrated, given that

of the 12 banks which borrowed externally, three banks accounted for over half of the

total debt. Also, overnight foreign loans were recorded for only four banks, one bank

having over 84%.

Long-term loans held a dominant 79.4% share in the maturity structure of external

borrowing (at the end of the previous quarter: 76.7%), i.e. 43.1% of all borrowings

were extended with the maturity of over five years.

External borrowing was primarily euro-denominated – 97.4%, unchanged from the

quarter before (97.6%), followed by CHF and RSD borrowing which accounted for

1.1% each (also unchanged).

4.5 Subordinated liabilities

At end-Q1 2019, total subordinated liabilities of Serbian banks stood at RSD 34.9

bn, which is an increase by 10.7% q-o-q, whereby the prior downward trend was

discontinued.

In terms of creditors, total subordinated liabilities were structured in the following

manner: liabilities to foreign banks accounted for 80.2%, liabilities to foreign legal

persons – 18.1% and liabilities to corporates –1.7%.

The currency structure was as follows: the share of subordinated liabilities in euros

increased to 87.1%, liabilities in Swiss francs amounted to 11.2%, liabilities in dinars

made up 1.4%, and in rubles – 0.3%.

Subordinated liabilities were highly concentrated – of the 11 banks with

subordinated debt, one bank accounted for over 44% of all subordinated liabilities, and

the top four banks made up over 79% of total subordinated liabilities.

(in RSD mn)

31. 3. 2019 31. 12. 2018 31. 3. 2018 31. 12. 2018 31. 3. 2018

Ov ernight loans 20,245 -7,149 12,343 -26.1% 156.2%

Loans receiv ed 184,988 3,730 31,510 2.1% 20.5%

Other f inancial liabilities 1,940 -652 -5,041 -25.2% -72.2%

Total borrowing 207,174 -4,072 38,812 -1.9% 23.1%

Source: NBS.

Nominal Relativ e

Table 4.4 Changes in bank external borrowing

Amount



27

Given the regulatory restrictions on inclusion of subordinated liabilities in Tier 2

and/or regulatory capital, banks included 70.1% of the stated subordinated debt in their

Tier 2 capital.

5 OFF-BALANCE SHEET ITEMS

At end-Q1 2019, total off-balance sheet items of the banking sector stood at RSD

6,727.7 bn, rising (by 0.2%) q-o-q, mostly on account of an increase in Other off-

balance sheet assets (by RSD 19.4 bn). Under this item (accounting for the dominant

73.7% of total off-balance sheet), the strongest growth of RSD 35.9 bn was recorded in

Other off-balance sheet assets, while the sharpest drop (RSD 48.0 bn) was recorded in

guarantees received and other sureties for settling the obligations of bank debtors.

Other important off-balance sheet items are Derivatives with an 8.9% share and issued

guarantees and other sureties with 5.1%. In Q1 2019 the former fell by 3.2%, while the

latter rose by 0.5%.

As of 1 January 2018, the amendments and supplements to the Chart of Accounts

introduced two new accounts for disclosing written-off financial assets, which were

carried over to off-balance sheet records (in dinars and foreign currency) for the

purpose of reporting in accordance with the Decision on the Accounting Write-off of

Bank Balance Sheet Assets. At end-Q1 2019, the banking sector disclosed RSD 208.7

bn on these accounts, up by RSD 0.6 bn or 0.3% q-o-q.

Risk-free items still accounted for the bulk (86.0%) of off-balance sheet items:

material collateral received, guarantees and other sureties accepted for the settlement

of borrowers’ liabilities, custody operations and other off-balance sheet assets.

6% 8% 8% 8%7% 8% 9% 9%

82% 79%74% 74%

5% 5%9% 9%

7,129 7,0546,711 6,728

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

31. 12. 2016 31. 12. 2017 31. 12. 2018 31. 3. 2019

Other Off-balance sheet assets Derivatives Contigent liabilities

Chart 5.1 Off-balance sheet items(in RSD bn in %)

Source: NBS.


28

At end-Q1 2019, the classified part of off-balance sheet items (i.e. which is

considered risk-bearing) amounted to RSD 943.3 bn (an increase by RSD 22.8 bn or

2.5%).

At end-Q1 2019, contingent liabilities10 equalled RSD 552.5 bn (falling by RSD

6.0 bn or 1.1% q-o-q) and made up 8.2% of total off-balance sheet items (8.3% at end

of the previous quarter).

(in RSD mn)

31. 3. 2019 31. 12. 2018 31. 3. 2018 31. 12. 2018 31. 3. 2018

Issued guarantees and other sureties 345,282 1,873 50,598 0.5% 17.2%

Receiv ables f rom deriv ativ es 598,327 -19,551 24,334 -3.2% 4.2%

Contingent liabilities and other irrev ocable commitments207,235 -7,891 108 -3.7% 0.1%

Securities receiv ed as collateral 212,011 5,713 28,789 2.8% 15.7%

Sureties f or liabilities 119,103 9,821 22,279 9.0% 23.0%

Written of f f inancial assets 208,692 569 15,735 0.3% 8.2%

Other of f -balance sheet assets 4,960,164 19,362 -1,363,982 0.4% -21.6%

Other 76,865 6,608 19,170 9.4% 33.2%

Total off-balance assets 6,727,680 16,505 -1,202,969 0.2% -15.2%

Source: NBS.

Nominal Relativ e

Table 5.1 Changes in off-balance sheet items in the Serbian banking sector

Amount


10 Issued guarantees and other sureties, irrevocable commitments regarding undisbursed loans and

placements, and other irrevocable commitments.


29

6 BANK LIQUIDITY

Based on reference values of liquidity indicators, Serbia’s banking sector has been

characterised by considerable excess liquidity for a long time now. At end-Q1 2019,

the average monthly liquidity ratio was 2.18, twice higher than the regulatory floor of

1.0. The narrow liquidity ratio at banking sector level measured 1.85 (regulatory floor

– 0.7). The share of liquid assets in total banking sector balance sheet assets is stable,

reaching 36.7% at end-Q1 2019.

Banks’ investments in NBS repo securities decreased relative to December 2018,

from RSD 16.5 bn to RSD 15.0 bn at end-Q1 2019. The number of banks which

invested in repo securities dwindled (five banks). As for government securities, their

portfolio also decreased to RSD 637.4 bn at end-March 2019, by 0.4% from end-

December.

To further strengthen the resilience of the banking sector,11 the liquidity coverage

ratio was introduced. This indicator is the ratio of the liquidity buffer (made up by

high-quality liquid assets) and net outflow of a bank’s liquid assets that would occur in

the 30 days after the calculation of this ratio in the assumed stress conditions.

As of 1 January 2018, banks are required to maintain this ratio at a level not lower

than 100% (prescribed floors are the same as in the European Union). As at 31 March

2019, the liquidity coverage ratio at the level of the banking sector measured 209.76%.

11 The Decision on Liquidity Risk Management was adopted in December 2016 as part of the

implementation of the Strategy for Introduction of Basel III Standards in Serbia.

2.05 2.00 2.04

2.18

1.70 1.66 1.70

1.85

0.92 0.93 0.90 0.91

0.37 0.37 0.37 0.37

0.00

0.50

1.00

1.50

2.00

2.50

31. 12. 2016 31. 12. 2017 31. 12. 2018 31. 3. 2019

Liquidity indicator Narrow liquidi ty indicator

Loan to deposit ratio LTD Liqu id assets to total assets

Chart 6.1 Banking sector liquidity indicators

Source: NBS.


30

7 CAPITAL ADEQUACY

The Serbian banking sector is well-capitalised, both from the aspect of compliance

with the prescribed capital adequacy ratio12, and in terms of the structure of regulatory

capital. At end-March 2019, the capital adequacy ratio of the Serbian banking sector

averaged 23.68% (22.26% in December 2018), which is well above the NBS

regulatory minimum (8%).

At end-March 2019, the Tier 1 capital ratio of the Serbian banking sector averaged

22.61% (vs. 21.13% in December 2018), and Common Equity Tier 1 capital ratio –

22.55% (vs. 21.07% in December 2018).

As capital grew faster than risk-weighted assets in Q1 2019 (9.7% vs. 3.2%,

respectively), capital adequacy ratio went slightly up (by 1.42 pp). The increase in risk-

weighted assets by RSD 76.4 bn stemmed from the rise in credit risk-weighted assets

by RSD 76.9 bn. The increase in credit risk-weighted assets was prevalent in the part

of exposure to natural persons. Market-risk weighted assets declined (by RSD 4.4 bn),

primarily with regard to foreign exchange risk exposure (by RSD 6.5 bn).

12 For the purposes of harmonisation with the relevant EU legislation in the field of banking, and to

strengthen banking sector resilience, the NBS adopted new regulations in line with the requirements of

Basel III standards, coming into effect as of 30 June 2017. The minimum prescribed capital adequacy ratio

was reduced from 12% to 8%. In parallel, capital buffers were introduced (capital conservation buffer,

countercyclical capital buffer, systemic risk buffer, capital buffer for a systemically important bank).

380 463

510 563

38

21

27

26

-8

21.8322.61 22.26 23.68

0

5

10

15

20

25

-150

-50

50

150

250

350

450

550

650

31. 12. 2016 31. 12. 2017 31. 12. 2018 31. 3. 2019

Deductibles Tier 2 Tier 1 CAR

Chart 7.1 Regulatory capital and CAR*(in RSD bn, CAR in %)

* CAR = Regulatory capital adequacy ratio

Source: NBS.


31

In the structure of risk-weighted assets, the dominant share referred to credit risk

(85.3%), taking into account banks’ traditional business models relying on lending to

corporates and households. Next was operational risk with a share of 13.1%, while the

shares of market risks and credit valuation adjustment risk were negligibly low – at

1.5% and 0.1%, respectively.

In Q1 2019, a 9.7% increase in regulatory capital (in absolute amount: RSD 52.3

bn) was recorded, while the whole of 2018 recorded 10.9% growth. Regulatory capital

of the banking sector equalled RSD 589.4 bn at end–Q1 2019.

At the same time, Tier 1 capital of the banking sector13 stood at RSD 563.0 bn, up

by 10.4% (RSD 53.0 bn) from December 2018. Tier 2 capital of the banking sector fell

relative to the end of the previous quarter, by RSD 0.8 bn (2.8%) and stood at RSD

26.4 bn on account of a RSD 0.7 bn reduction in subordinated liabilities included in

Tier 2 capital.

Regulatory capital consists of: Tier 1 capital, which made up 95.5% and Tier 2

capital, which made up 4.5%. Tier 1 capital, which is the highest quality segment,

consists of Common Equity Tier 1 capital (99.7%) and Additional Tier 1 capital

(0.3%).

The package of regulations which the NBS adopted at end-2018 also prescribed an

obligation to maintain a certain level of capital depending on the riskiness of a

household loan14 in terms of loan purpose, availability of collateral, repayment

capacity bearing in mind total indebtedness and whether the payment term is justified

depending on loan purpose or lack of any specific purpose. The Amendments to the

13 According to Basel III regulations, among other things, Tier 1 and Tier 2 capital are not reduced by the

appropriate part of deductibles from regulatory capital, rather each of them has its own deductibles. 14 Consumer, cash or other loan (other than a housing loan or a current account overdraft).

85.3%

1.5%

13.1%0.1%

Credit r isk Market risk

Operational risk Credit r isk adjustments

Chart 7.2 RWA by risk type (in %)31 March 2019

Source: NBS.


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Decision on Capital Adequacy of Banks prescribed new deductibles from Common

Equity Tier 1 capital (relating to consumer, cash and other loans) in the event that the

60% debt-to-income ratio has been exceeded, a loan with maturity of eight years or

longer has been approved (for 2019, or seven years for 2020 and six years for 2021) or

a consumer loan for the purchase of motor vehicles whose contracted maturity is eight

years or longer. As of 31 March 2019 as the first reporting date banks disclosed an

amount of RSD 3.4 bn as a deductible from Common Equity Tier 1 capital on this

account.

In accordance with the Amendments to the Decision on Reporting Requirements

for Banks, adopted in December 2016 and implemented as of 30 June 2017, the

leverage ratio is calculated as the ratio of Tier 1 capital and a bank’s total exposure

amount. As at 31 March 2019, the leverage ratio at banking sector level measured

13.83%15, sustaining the stable upward trend of this ratio since its introduction.

15 According to Basel III standards, the leverage ratio floor is 3%.


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8 FOREIGN EXCHANGE RISK

At end-Q1 2019, Serbia’s banking sector posted a short open FX position worth

RSD 10.6 bn (excluding the position in gold). Fifteen banks ended March 2019 with a

net short open FX position, while the remaining twelve banks showed a net long open

FX position.

On 31 March 2019, banks in Serbia operated at net short open positions in major

currencies, (euros – RSD 9.32 bn, US dollars – RSD 0.98 bn and Swiss francs – RSD

0.25 bn.

At end-March 2019, the foreign exchange risk ratio for the banking sector equalled

1.81%, indicating relatively low foreign exchange risk compared to the regulatory cap

(20% of banks’ capital).

9 NBS REGULATORY ACTIVITY

Exercising its regulatory competences in the area of bank supervision, the NBS

issued the following regulations in Q1 2019:

In February 2019 the NBS Executive Board adopted by-laws aimed at adjusting

the reporting system with the adopted set of regulations for addressing the issue of

unsecured long-term non-purpose household loans.

8.4410.50

21.99

6.89

1.342.08

1.02

9.32

2.74

2.90

4.52

1.81

0

1

2

3

4

5

6

0

5

10

15

20

31. 12. 2016 31. 12. 2017 31. 12. 2018 31. 03. 2019

Long EUR Short EUR FX ratio

Chart 8.1 Quarterly breakdown of the sector's long and short FX position (in EUR) and foreign exchange risk ratio(in RSD bn)

Source: NBS.


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The reason for adopting the Decision Amending the Decision on Capital

Adequacy of Banks was to adjust the Report on Capital prescribed by the decision

governing reporting on a bank’s capital adequacy (KAP Form) in order to enable

reporting to the NBS on the new introduced deductibles from Common Equity Tier 1

items – starting from the first reporting date (31 March 2019).

The Decision on Reporting Requirements for Banks introduced a new Report

on debt-to-income ratio (DTI Form) with a view to verifying whether receivables in D

category have been classified properly on account of exceeding the debt-to-income

ratio prescribed by the Decision оn the Classification of Bank Balance Sheet Assets

and Off-Balance Sheet Items (60%), but also to obtain detailed data for the needs of

future calibration of this percentage which is a threshold for applying the appropriate

deductible from Common Equity Tier 1 prescribed by the current Decision on Capital

Adequacy of Banks.

Both regulations were published in the RS Official Gazette, No 8/2019, and

applied as of 31 March 2019.

The following regulations passed by the NBS Governor were also published in RS

Official Gazette No 13/2019 of 28 February 2019.

- Decision Amending the Decision on the Chart of Accounts and Contents of

Accounts in the Chart of Accounts for Banks, and

- Decision Amending the Decision on Collection, Processing and Submission of

Data on the Balance and Structure of Accounts in the Chart of Accounts.

The decisions were adopted in order to ensure the collection of data required for

monitoring the application and effects of new regulations for banks adopted in

December 2018 aimed at promoting the practice of sustainable household lending, all

with a view to improving certain solutions based on the needs identified in practice and

improving the quality of reports for monetary and financial statistics.

BANKING SECTOR IN SERBIA First Quarter Report 2019 · Banking Sector in Serbia – First Quarter...

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