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BANK SUPERVISION DEPARTMENT BANKING SECTOR IN SERBIA Third Quarter Report 2016 November 2016 Contents: 1. BASIC INFORMATION ...........................................................................……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 result .................................................................................. 8 2.3. Оperating income ........................................................................................ 9 2.4. Оperating expenses .................................................................................... 10 3.BANKING SECTOR ASSETS .........................................................................12 3.1. Level and structure .................................................................................... 12 3.2. Classified assets ......................................................................................... 14 3.3. Loans ......................................................................................................... 15 3.4. Non-performing loans ............................................................................... 16 4. BANKING SECTOR LIABILITIES ...............................................................23 4.1. Structure of the sources of funding ........................................................... 23 4.2. Deposits ..................................................................................................... 25 4.3. Total borrowing of banks .......................................................................... 27 4.4. External liabilities ...................................................................................... 28 4.5. Subordinated liabilities .............................................................................. 29 5. OFF-BALANCE SHEET ITEMS ....................................................................30 6. BANK LIQUIDITY .........................................................................................32 7. CAPITAL ADEQUACY ..................................................................................32 8. FOREIGN EXCHANGE RISK ........................................................................35 9. NBS REGULATORY ACTIVITY ..................................................................36 2 Banking Sector in Serbia – Third Quarter Report 2016 1. BASIC INFORMATION 1.1. Selected parameters of the Serbian banking sector1 At end-September 2016, the Serbian banking sector numbered 30 banks consisting of 1,717 organisational units (unchanged from a quarter earlier) and employed a total of 24,021 persons (107 persons fewer than at the end of the previous quarter). Table 1.1. Selected parameters of the Serbian banking sector (RSD bln, %) Assets Number of banks Amount Capital Share Amount Network Share Number of business units 1) Employ ment Share Number of employ ees Share Banks in domestic ownership 8 759 23.9% 142 21.9% 504 29.3% 6,056 25.2% State-owned 6 575 18.1% 87 13.4% 426 24.8% 5,259 21.9% Priv ately -owned 2 184 5.8% 55 8.5% 78 4.5% 797 3.3% Banks in foreign ownership 22 2,413 76.1% 507 78.1% 1,213 70.7% 17,965 74.8% Italy 2 845 26.6% 187 28.8% 246 14.3% 4,279 17.8% Austria 3 480 15.1% 101 15.6% 210 12.2% 3,239 13.5% Greece 4 395 12.5% 93 14.3% 282 16.4% 4,223 17.6% France 3 321 10.1% 52 8.0% 210 12.2% 2,557 10.6% 10 30 372 3,172 11.7% 100.0% 74 649 11.4% 100.0% 265 1,717 15.4% 100.0% 3,667 24,021 15.3% 100.0% Other Total banking sector 1) Business units include all business network f orms: headquarters, branches, branch of f ices, teller units and other business units. Source: NBS The downward trend in banking employment in Serbia extended into the third quarter of 2016. Employment fell by a total of 107 persons, as 11 banks hired 115 new people, while 16 banks downsized their employment by 222. Given that five banks scaled down their networks by closing down 13 organisational units, while three banks expanded their networks by opening 13 units, the overall effect in terms of the number of organisational units was neutral. At end-September 2016, total net balance sheet assets of the Serbian banking sector equalled RSD 3,172.0 bln (rising by 1.7% relative to Q2 2016) and total capital RSD 649.2 bln (up by 1.7% from end-Q2). Compared with the previous quarter, the market share of banks in majority ownership of domestic entities (private entities and the Republic of Serbia) decreased a bit (from 24.2% to 23.9%). In contrast, the market share of majority foreign-owned banks edged up slightly (from 75.8% to 76.1%) and was accompanied with a 2.0% increase in the balance sheet total. No changes were recorded in Q3 in terms of ownership structure2. 1 All data in the Report are based on 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. 2 On 8 July 2016, Hypo Alpe-Adria-Bank А.D. Beograd changed its name to Addiko Bank A.D. Beograd. 3 National Bank of Serbia Banks from Italy, Austria, Greece and France (12 banks) continued to account for the dominant share in total banking sector balance sheet assets – 64.4%, posting a barely perceptible increase of 0.1 pp relative to the second quarter. 1.2. Concentration and competition The Serbian banking sector still maintains an acceptable level of competition and low concentration of activities. The Herfindahl Hirschman index3 values indicate the absence of concentration in all observed categories (see Table 1.2.1.). For quite some time, the highest value of the index was observed in deposits (chiefly household deposits) and income from fees and commissions, while the lowest figure was noted for household lending. Table 1.2.1. Concentration and competition indicators (Share %) Top 5 banks Top 10 banks HHI 1) Assets 54.9 77.5 812 Lending (total) 51.6 74.7 735 Household loans 49.4 76.0 719 Corporate loans 52.6 78.0 763 54.7 78.5 835 56.4 80.3 930 54.2 77.8 841 Interest 51.3 75.8 739 Fees and commissions 57.3 80.4 877 Deposits (total) Household deposits Income (total) 1) Herf indahl Hirschman Index of concentration. Source: NBS The ten biggest banks in Serbia accounted for 77.5% of net balance sheet assets, 74.7% of total gross loans and 78.5% of total deposits of the banking sector. In terms of balance sheet assets, there was no change in the rankings of the top ten banks in Serbia compared to a quarter earlier. Banca Intesa a.d. Beograd maintained the leading position among the top ten banks, as its share rose by 0.1 pp from the previous quarter. 3 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. 4 Banking Sector in Serbia – Third Quarter Report 2016 Table 1.2.2. Top ten banks according to the total assets criterion (RSD bln, %) 30.09.2015. 30.06.2016. ΔГ 30.09.2016. Amount Share Ranking Amount Share Ranking Amount Share Ranking 480 16.0 1 519 16.6 1 529 16.7 1 394 13.1 2 410 13.1 2 410 12.9 2 308 10.2 3 311 10.0 3 317 10.0 3 232 7.7 4 241 7.7 4 254 8.0 4 219 7.3 5 227 7.3 5 231 7.3 5 178 5.9 6 178 5.7 6 175 5.5 6 Eurobank A.D.- Beograd 136 4.5 7 144 4.6 7 143 4.5 7 Banka Poštanska štedionica A.D.Beograd 123 4.1 9 132 4.2 8 138 4.4 8 Erste Bank A.D.- Nov i Sad 105 3.5 12 127 4.1 9 133 4.2 9 127.0 4.2 8 124 4.0 10 127 4.0 10 Banca Intesa A.D.- Beograd Komercijalna banka A.D.Beograd Unicredit Bank Srbija A.D.Beograd Raif f eisen Banka A.D.- Beograd Societe Generale banka Srbija A.D.- Beograd Agroindustrijska komercijalna banka AIK banka akcionarsko Vojv ođanska banka A.D.- Nov i Sad ΔТ Source: NBS 5 National Bank of Serbia 2. PROFITABILITY 2.1. Profitability indicators4 The results of the Serbian banking sector at end-Q3 2016 indicate that banks’ profitability has continued to improve. As at 30 September 2016 the banking sector’s pretax net result was RSD 32.8 bln, up by 23.1% compared to the same period last year. Chart 2.1.1. Pre tax result (in RSD bln) 40 30 32.78 26.63 20 20.95 17.04 10 0 -10 -20 9.2013 9.2014 Profit 9.2015 Loss 9.2016 Net result Source: National Bank of Serbia. The improvement in bank profitability however went hand in hand with the heterogeneous structure of results as 22 banks operated with profits of RSD 37.3 bln, while 8 banks reported a negative result in the amount of RSD 4.5 bln. The profit and loss generating items of the banking sector were highly concentrated. Five banks with the highest net profits together made up 75% of the total sector’s profit, while three banks with the highest net losses accounted for over 76% of the total losses. The market share of banks which posted loss at end-Q3 stood at 15%, increasing by a negligible 0.1 pp compared to the previous quarter. Except for one, all other banks which operated with a loss accounted for less than 0.7% in the banking sector’s balance sheet total. 4 In line with the amendments to accounting regulations (Chart of Accounts and forms of financial statements), the methodology for calculating some profitability indicators has been changed, starting from 31 December 2014. 6 Banking Sector in Serbia – Third Quarter Report 2016 Table 2.1. Banks posting highest profit and loss (in RSD mln) 30.09.2016. Banks posting highest net profit Banca Intesa A.D.- Beograd 7,434 Unicredit Bank Srbija A.D.- Beograd 7,016 Raif f eisen Banka A.D.- Beograd 5,293 Agroindustrijska komercijalna banka AIK banka akcionarsko društv o, Beograd 5,247 Societe Generale banka Srbija A.D.- Beograd 3,094 Banks posting highest net loss Komercijalna banka A.D.- Beograd 1,780 Telenor banka A.D. - Beograd 937 Marf in Bank A.D.- Beograd 775 MIRABANK AKCIONARSKO DRUSTVO BEOGRAD 320 VTB Banka a.d. Beograd 250 Source: NBS The increase in banking sector’s profitability at end-Q3 2016 was accompanied by a yo-y improvement in profitability indicators, primarily the return on assets ratio and the return on equity ratio. ROA equalled 1.41% (rising by 0.22 pp y-o-y), and ROE 6.89% (rising by 1.24 pp y-o-y). Chart 2.1.2. Banking sector profitability indicators (in %) 8.0 6.89 5.65 6.0 4.63 3.81 4.0 2.0 0.79 0.97 1.19 1.41 0.0 9.2013 9.2014 ROA 9.2015 ROE 9.2016 Source: National Bank of Serbia. 7 National Bank of Serbia 2.2. Structure of the result The key impetus to the improvement of the banking sector’s net profit was a decrease in net credit losses. In Q3 2016, net credit losses came at RSD 15.6 bln, which is slightly more than half of what was recorded in the same period of 2015 (RSD 28.6 bln), and resulted from the fact that net expenses on account of indirect write-offs of on-balance sheet positions dropped by 45.5% у-o-y (from RSD 28.4 bln to RSD 15.5 bln). Net expenses originated also from direct write-offs of uncollectible receivables which rose by 53.2% from the year before (from RSD 455 mln to RSD 697 mln). On the income side, provisioning for credit-risk weighted off-balance sheet items generated net income in the third quarter of both 2015 and 2016. The net income generated in Q3 2016 is by RSD 304 mln higher than the amount generated in Q3 2015. Q3 2016 was also marked by lower net interest income, while net income from fees and commissions remained unchanged y-o-y. Net interest gains in Q3 2016 stood at RSD 93.2 bln, down by 4.6% relative to 2015, due to the fact that a drop in interest income (by RSD 15.6 bln y-o-y), triggered by a decline in interest rates in the domestic and international markets, was steeper than the decrease in interest expenses (by RSD 11.1 bln y-o-y). In terms of the composition of total interest income and expenses, only interest income from securities denominated in foreign currency increased y-o-y, while on the expense side, only expenses arising from securities went up. At end-September 2016, income and expenses from securities made up 20.2% of total interest income and 3.2% of total interest expenses. The sharpest decrease was recorded for interest income on dinar loans – by 12.7% (from RSD 96.8 bln to RSD 84.4 bln). Looking at the composition of total interest expenses, interest expenses on deposits accounted for most of the decline (by a total of RSD 10.3 bln or 39.1%). Unlike interest income and expenses which did not reach their 2015 levels, income and expenses from fees and commissions rose by 3.5% and 12.2% respectively, which, put together, pushed net income from fees and commissions slightly up, by 0.1%. In Q3 2016, securities generated net profit of RSD 1.5 bln, down by RSD 1.4 bln y-o-y. The decline can be put down to lower revaluation gains on derivatives held for trading which lost almost half of the value they had in Q3 2015 (the largest change was recorded in one bank). 8 Banking Sector in Serbia – Third Quarter Report 2016 Chart 2.2. Structure of net result (in RSD bln) 35 30 25 20 15 10 5 0 Net result September 2015 Net interest Net fees Other income net Operating expenses Credit losses Exchange rate effect Net result September 2016 Source: National Bank of Serbia. Total operating expenses of the banking sector equalled RSD 82.0 bln, up by 0.2% relative to the year before. Sector-wide, salary expenses rose by 1.6%, while depreciation and other expenses edged down by 3.5% and 0.3%, respectively. At end-Q3 2016, the net exchange rate effect on the banking sector’s result was positive, given that net income on this account amounted to RSD 6.5 bln, though dropping by 1.8% compared to net income realized in 2015. Net exchange rate losses in respect of foreign currency receivables and liabilities came at RSD 8.0 bln (compared to net losses of RSD 6.1 bln in 2015), while net exchange rate gains from receivables and liabilities indexed to a currency clause amounted to RSD 14.5 bln (compared to net gains of RSD 0.5 bln in the same period a year earlier). Table 2.2. Changes in key elements of bank profitability (in RSD mln) Result Net interest Net f ees Credit losses Exchange rate ef f ect 30.09.2016. 32,782 93,162 25,903 15,629 6,501 30.09.2015. 26,629 97,672 25,887 28,642 6,620 23% -5% 0% -45% -2% Change: Source: NBS 9 National Bank of Serbia 2.3. Оperating income At end-Q3 2016, the banking sector’s total operating income came at RSD 130.4 bln, down by 4.9% relative to the same period last year. The major drivers of this decrease were net interest income and net income from securities. Chart 2.3. Operating income structure (in RSD bln, in %) 150 140 4.8% 130 120 7.2% 6.1% 21.3% 20.4% 73.5% 71.8% 9.2013 9.2014 18.9% 110 100 5.0% 19.9% 90 80 70 60 50 40 71.2% 71.4% 9.2015 9.2016 30 20 10 0 -10 -20 Net interest Net fees Income from securities Other income Exchange rate effect Source: National Bank of Serbia 2.4. Оperating expenses In Q3 2016, operating expenses5 of the Serbian banking sector equalled RSD 82.0 bln, rising by 0.2% у-o-y. Higher operating expenses are attributable to a 1.6% increase in Salaries, salary compensations and other personal expenses (constituting 37.8% of total operating expenses). Depreciation costs (6.6% of operating expenses) dropped bу 3.5% and 5 Operating expenses include: salaries, salary compensations and other personal expenses, depreciation costs and other expenses (costs of material, production services, intangible costs…), in accordance with the amended methodology. 10 Banking Sector in Serbia – Third Quarter Report 2016 Other expenses (constituting 55.6% of operating expenses at end-September 2016) by 0.3% compared to the same period the year before. Chart 2.4. Structure of operating expenses 30 September 2016 Other expenses; 45.6. bln; 56% Salaries, salaries compensations and other personal expenses; 31.0. bln; 38% Depreciation costs; 5.4. bln; 6% Source: National Bank of Serbia 11 National Bank of Serbia 3.BANKING SECTOR ASSETS 3.1. Level and structure Total net balance sheet assets of the Serbian banking sector at end-September 2016 equalled RSD 3,172.0 bln, indicating a q-o-q increase of RSD 51.6 bln or 1.7%. Chart 3.1.1. Total banking sector assets (in RSD bln) 3,048 3,008 2,969 2,956 2,846 2,500 2,905 3,000 3,172 3,500 2,000 1,500 1,000 500 0 2013 2014 September 2015 2016 December Source: National Bank of Serbia Loans and receivables held a dominant share in the banking sector assets (62.4%), rising moderately from end-Q2 2016 (by 0.9 pp), owing to an increase in household and corporate lending. Still, the dominant share of this category confirms banks’ orientation towards traditional banking activities. Other prominent items were financial assets available for sale (16.4%) and cash and assets with the central bank (13.3%), which dropped by 0.1 pp and 0.9 pp, respectively in the period observed. 12 Banking Sector in Serbia – Third Quarter Report 2016 Chart 3.1.2. Banking sector assets structure 30 September 2016 Other assets, 181 bln, 6% Cash and assets held with the central bank, 422 bln, 13% Property, plant and equipment and Investment property, 71 bln, 2% Loans and receivables from banks and other financial organisations, 248 bln, 8% Financial assets available for sale, 520 bln, 16% Loans and receivables from clients, 1,731 bln, 55% Source: National Bank of Serbia. Table 3.1. Change in key asset items of the banking sector (in RSD mln) Change relative to prio r perio ds A mo unt 30.09.2016 No minal 30.06.2016 Relative 31.12.2015 30.06.2016 31.12.2015 421,781 -21,378 -99,725 -4.8% 1,978,451 60,656 141,766 3.2% 7.7% 247,761 17,350 69,919 7.5% 39.3% 1,730,690 43,306 71,847 2.6% 4.3% 643,075 10,796 83,428 1.7% 14.9% at fair value thro ugh the inco me statement and held fo r trading 20,310 1,763 3,782 9.5% 22.9% initially reco gnised at fair value thro ugh the inco me statement 3,894 452 -78 13.1% -2.0% 519,738 4,150 78,397 0.8% 17.8% 99,133 4,431 1,327 4.7% 1.4% P ro perty, plant and equipment 52,901 1,580 938 3.1% 1.8% Investment pro perty 17,827 59 88 0.3% 0.5% Cash and balances with the central bank Lo ans and receivables fro m banks and OFO fro m custo mers Financial assets available fo r sale held to maturity Other B a nk ing s e c t o r ba la nc e s he e t t o t a l -19.1% 57,995 -129 -2,289 -0.2% -3.8% 3 ,17 2 ,0 3 1 5 1,5 8 4 12 4 ,2 0 6 1.7 % 4 .1% So urce: NB S 13 National Bank of Serbia 3.2. Classified assets At end-September 2016, total classified assets (on- and off-balance sheet) equalled RSD 2,922.3 bln, up by RSD 28.4 bln or 1.0% from a quarter earlier. Balance sheet assets subject to classification rose by RSD 16.8 bln and off-balance sheet items subject to classification by RSD 11.6 bln. The rise in classified balance sheet items was driven primarily by a rise in short-term and long-term loans (by RSD 27.1 bln and RSD 20.0 bln, respectively), while bank deposits recorded the sharpest decline (by RSD 20.9 bln.). Under off-balance sheet items, only Payment guarantees and Other sureties did not go up, while Performance guarantees recorded the sharpest increase of RSD 5.6 bln, making up 21% of total off-balance sheet items. The most significant off-balance sheet item subject to classification are Contingent liabilities, constituting 59.4% of off-balance sheet items. The most significant change in the structure of classified balance sheet assets compared to the quarter before is a RSD 32.7 bln increase in balance sheet assets classified in category B (mostly short-term and long-term loans), while balance sheet assets classified in category E shrunk by RSD 11.0 bln (long-term loans and liabilities which fell due). Consequently, the overall structure improved, as the share of the two worst categories dropped by 0.5 pp, so bad assets accounted for 21.1% of total classified balance sheet assets. An increase in total classified off-balance items by RSD 11.6 bln resulted from an increase in B category (by a total of RSD 25.0 bln), mostly under Contingent liabilities. The share of bad assets in total classified off-balance sheet items shrunk from 5.6% to 5.0%. The share of assigned receivables increased by 10% from a quarter earlier, but the absolute amount of receivables assigned in Q3 accounted for only 25% of the record amount of receivables assigned in the first quarter. In Q3 2016, all assignments went to persons outside the banking sector. As a result of the above movements, the calculated balance sheet regulatory provisions dropped by RSD 9.6 bln or 2.1% in Q3 and came at RSD 454.1 bln. Calculated off-balance sheet regulatory provisions declined by RSD 1.0 bln or 6.3% to RSD 14.6 bln. Chart 3.2 Total classified assets ( in RSD bin , in % ) 3,000 2,500 2,783 2,793 16% 16% 4% 7% 4% 8% 20% 22% 53% 50% 2,922 2,894 14% 15% 3% 9% 3% 9% 21% 23% 52% 51% 2,000 1,500 1,000 500 0 12.2014 12.2015 А Source: National Bank of Serbia. 14 B 06.2016 C D 09.2016 E Banking Sector in Serbia – Third Quarter Report 2016 Accordingly, the total required reserve for estimated losses arising from credit risk (which for each borrower represents a positive difference between the amount of regulatory provisions and the sum of allowances for impairment of balance sheet assets and provisions for losses on off-balance sheet items) decreased by RSD 6.0 bln or 3.1% in the same period, amounting to RSD 185.4 bln. 3.3. Loans In Q3 2016, gross loans of the Serbian banking sector recorded a nominal increase of RSD 42.6 bln or 2.2%, reaching RSD 1,977.1 bln. In net terms (after reduction for allowances for impairment) this growth is even sharper, because of the reduction in allowances for impairment by RSD 5.0 bln. In gross terms, credit activity rose the most in the household segment (up by RSD 21.5 bln or 3.0% q-o-q) and in the corporate segment (by RSD 19.2 bln or 2.3%), while the highestt nominal decrease was recorded in the finance and insurance sector (by RSD 4.8 bln or 18.8%), as far as domestic banks are concerned. Table 3.3. Change in the level of net loans (in RSD mln, in %) Change relative to prio r perio ds A mo unt 30.09.2016 No minal 30.06.2016 Relative 31.12.2015 30.06.2016 31.12.2015 Finance and insurance 20,535 -4,768 7,461 -18.8% P ublic secto r 29,024 -1,422 -2,720 -4.7% -8.6% P ublic enterprises 131,491 -1,508 -22,516 -1.1% -14.6% Ho useho lds 727,314 21,502 56,731 3.0% 8.5% Co mpanies 849,316 19,213 27,306 2.3% 3.3% 28,746 9,989 12,014 53.3% 71.8% Fo reign perso ns and fo reign banks Other secto rs Total loans 57.1% 190,672 -422 13,585 -0.2% 7.7% 1,977,098 42,584 91,861 2.2% 4.9% So urce: NB S. The currency structure of the banking sector’s loan portfolio is still dominated by foreign currency. At end-September 2016, FX and FX-indexed loans accounted for 70.1%. The prevalent currency of loan indexation in Serbia was the euro, with EUR loans making up 62.7% (89.5% of total gross FX and FX-indexed loans), followed by CHF loans and USD loans at 5.2% and 1.7% (7.4% and 2.4% of total gross FX and FX-indexed loans, respectively). Compared to the previous quarter, CHF loans continued to fall both in nominal and relative terms. At end-September 2016, the dinar portfolio accounted for 29.9% of total gross loans, rising from a quarter earlier (28.6%) owing to an increase in cash loans (by RSD 19.2 bln) and current assets and liquidity loans (RSD 13.6 bln). Among FX loans, overnight loans recorded the sharpest increase (by RSD 8.5 bln). 15 National Bank of Serbia Chart 3.3. Banking sector gross loan portfolio structure (in RSD bln) (30 September 2016) RSD; 591 bln; 30% Other; 10 bln; 0% Up to 3 m; 95 bln; 5% Due; 204 bln; 10% 3 to 6 m; 71 bln; 4% 6 to 12 m; 215 bln; 11% USD; 34 bln; 2% EUR 1,240 bln 63% CHF; 102 bln; 5% Over 1 year 1,392 bln 70% Source: National Bank of Serbia The structure of gross loans by remaining maturity remained broadly the same: shortterm loans made up 17.5%, long-term loans 70.4%, matured loans 10.3% аnd overnight loans 1.8%. 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 and the related allowances for loan 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 principal and interest is 90 days or more past due its original maturity date; - where at least 90 days of interest payments have been added to the loan balance, capitalized, refinanced or delayed by agreement; - 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. 16 Banking Sector in Serbia – Third Quarter Report 2016 Gross NPLs In Q3 2016, the banking sector’s gross NPLs decreased by RSD 7.8 bln to RSD 396.5 bln at end-September, A reduction was recorded across all of the sectors observed. Of this reduction in gross NPLs6, RSD 17.8 bln was due to collection and RSD 5.7 bln to assignment of receivables. Chart 3.4.1. Gross non performing loans (NPL) (in RSD bln) 600 25 21.6 21.5 20.2 500 19.5 20 421.3 424.6 404.3 396.5 34% 34% 18% 19% 48% 47% 6.2016 9.2016 400 25% 32% 15 300 16% 17% 10 200 59% 5 51% 100 0 0 12.2014 12.2015 Corporates Households Other Total Gross NPL % Source: National Bank of Serbia. Observed by sector, corporates continued to account for the largest share of gross NPLs (RSD 170.6 bln at end-September 2016), though the share and nominal amount of corporate NPLs contracted further – from 43.7% at end-June to 43.0% at end-September 2016. Next in line were non-financial legal persons in bankruptcy (their NPLs stood at RSD 113.7 bln, compared to RSD 115.6 bln at end-June 2016), making up 28.7%, same as in the quarter before. Despite the re-distribution across sectors and/or change of status and bankruptcy, primarily of corporate legal persons, a decrease in gross NPLs of non-financial legal persons in bankruptcy resulted from write-offs, resolution and assignment. In the household sector, gross NPLs stood at RSD 73.2 bln, or 18.5% of total household loans. 6 Calculated based on the NPL 3 report which banks submit to the NBS. 17 National Bank of Serbia Chart 3.4.2. NPL ratio for main sectors (in %) 50 45 Other sectors 40 35 Corporate sectors ( Pubilc enterprizes + Private companies) 30 25 20 Total NPL 15 Households 10 5 0 12.2014 12.2015 6.2016 9.2016 Source: National Bank of Serbia. . As gross NPLs decreased and total loans went up by RSD 33.3 bln, the share of NPLs in total gross loans edged down to 19.5%, posting a q-o-q decrease of 0.7 pp. NPL coverage At end-Q3 2016, the coverage of total gross NPLs by loan loss reserves equalled 114.5%, while allowances for impairment ensured the coverage of 65.4%. Chart 3.4.3. NPL coverage (in %) 180 160 140 118.4 118.2 118.6 118.2 120 100 114.5 80 114.7 114.5 66.8 69.5 69.5 62.3 65.1 65.4 114.2 59.0 60 40 54.9 20 0 12.2014 IFRS provision* / NPL 12.2015 IFRS provision (NPL) ** / NPL 6.2016 9.2016 Total calculated reserve*** / NPL Calculated reserve**** / NPL * Total loan provision; ** Provision for non-performing loans; *** Total calculated reserve for potential losses (on- and off-balance shee). **** Calculated reserve for potential losses on balance-sheet lending (loan loss reserve); Source: National Bank of Serbia. 18 Banking Sector in Serbia – Third Quarter Report 2016 The data indicate that the coverage of total gross NPLs by loan loss reserves is constantly high, while the coverage by allowances for impairment shows a continuous rising trend. Chart 3.4.4. NPL coverage* across countries of origin of banks in Serbia (in %) 130 125 120 115 110 105 100 95 90 12.2014 12.2015 Serbia Austria 6.2016 Greece 9.2016 France Italy *provisions for balance sheet exposure Source: National Bank of Serbia. Corporate NPLs Amounting to RSD 170.6 bln at end-Q3 2016, gross corporate NPLs recorded a RSD 6.1 bln or 3.4% decrease relative to the quarter before. The main reasons behind the decrease are assignments to other legal persons and sectoral re-allocations. Table 3.4.1. Changes in gross NPLs by main economic sectors (in RSD mln) Change relative to prio r perio ds No minal A mo unt 30.09.2016 30.06.2016 Relative 31.12.2015 30.06.2016 31.12.2015 M anufacturing 64,458 -609 -4,629 -0.9% -6.7% Trade 43,427 -1,263 -14,635 -2.8% -25.2% Co nstructio n 25,294 -1,547 -2,476 -5.8% -8.9% Educatio n and real estate 23,034 -958 -2,766 -4.0% -10.7% 4,141 -1,843 -2,116 -30.8% -33.8% 9,930 187 -977 1.9% -9.0% A griculture Transpo rt, ho tels/restaurants, co mmunicatio ns So urce: NB S 19 National Bank of Serbia By sector, the biggest share in total corporate NPLs continued to be held by manufacturing (37.8%, with a 21.6% NPL gross ratio), followed by trade (25.4%, with a 15.9% gross NPL ratio) and construction (14.8%, with a 32.5% gross NPL ratio). In Q3, the ratio markedly declined in all sectors except in transport. The sharpest decrease was recorded in agriculture, real estate and construction (by 2.9 pp, 2.3 pp and 2.2 pp, respectively). Manufacturing and trade stand out by a relatively higher degree of collection, but also by the volume of new NPLs. They also recorded the greatest decreases in NPLs on account of a change in sectoral affiliation i.e. initiation of bankruptcy proceedings. Table 3.4.2. Corporate NPL ratio by sector (in %) Change relative to prio r perio ds (pp) 30.09.2016 30.06.2016 31.12.2015 Co nstructio n 32.5% -2.2 -5.7 Real estate and educatio n 28.3% -2.3 -5.0 M anufacturing 21.6% -1.0 -2.0 Trade 15.9% -0.9 -5.6 A griculture 6.0% -2.9 -3.1 Transpo rt 17.2% 1.1 -3.4 So urce: NB S Chart 3.4.5. Private corporates NPL structure (30 September 2016) Agriculture 4 bln 2% Real estate and education 23 bln 14% Gross NPL indicator 6.0% 28.3% 17.2% Hotel, restaurants and communication 10 bln 6% 21.6% Processing industry 65 bln 38% 15.9% 32.5% Commerce 43 bln 25% Source: National Bank of Serbia. 20 Construction 25 bln 15% Electricity 0.3. bln 0% Banking Sector in Serbia – Third Quarter Report 2016 Natural persons’ NPLs7 Measuring 10.7% at end-Q3 2016, the share of gross NPLs of natural persons was below the average of the total portfolio and 0.4 pp lower than a quarter earlier. At end-Q3 2016, natural persons’ NPLs equalled RSD 87.5 bln, dropping negligibly (by 0.7%) from end-Q2 2016. All types of loans, except cash loans and current account overdrafts, recorded a decrease. Table 3.4.3. Changes in gross non-performing household loans by category (in RSD mln) Change relative to prio r perio ds A mo unt No minal 30.09.2016 30.06.2016 Relative 31.12.2015 30.06.2016 31.12.2015 Ho using lo ans 32,577 -293 -354 -0.9% Cash lo ans 23,062 77 470 0.3% 2.1% Credit cards 4,748 -74 -495 -1.5% -9.4% Current acco unt o verdrafts 4,399 59 141 1.4% 3.3% Co nsumer lo ans 3,586 -56 -125 -1.5% -3.4% -1.1% Other 19,133 -291 -305 -1.5% -1.6% To tal 87,505 -578 -668 -0.7% -0.8% So urce: NB S The category of housing construction loans accounted for a dominant share both in lending to natural persons (43.3%) and in gross NPLs of natural persons (37.2%). Cash loans came next with a 32.7% share in total loans of natural persons and a 26.4% share in total NPLs of natural persons. Table 3.4.4. Gross NPL ratio for households by category (in %) Change relative to prio r perio ds (pp) 30.09.2016 30.06.2016 31.12.2015 Ho using co nstructio n 9.2% -0.2 -0.4 Cash lo ans 8.6% -0.6 -1.5 Credit cards 13.2% -0.1 -1.1 Current acco unt o verdrafts 16.9% 0.3 -0.3 Co nsumer lo ans 20.0% -0.5 -2.8 So urce: NB S Observing natural persons’ loans at end-September 2016, the highest gross NPL ratio (20.0%) was recorded for consumer loans (which made up 2.2% of total natural persons’ loans and 4.1% of total natural persons’ NPLs), followed by current account overdrafts with the ratio of 16.9% (3.2% of loans, 5.0% of NPLs), credit card loans with 13.2% (4.4% of loans, 5.4% of NPLs), cash loans with 8.6%, and housing loans with 9.2%. Gross NPL ratio declined across all major categories, except in current account overdrafts. 7 Households, entrepreneurs, private households with employed persons and registered farmers. 21 National Bank of Serbia Chart 3.4.6. Natural persons NPL structure (30 September 2016) Consumer 4 bln 5% Overdraft 4 bln 4% Credit cards 5 bln 6% Housing 33 bln 37% 20.0% 16.9% 13.2% Gross NPL 9.2% 8.6% 16.4% Cash 23 bln 26% Other lending* 19 bln 22% Other lending = agriculture, other activities, vehicle purchase loans and other loans Source: National Bank of Serbia. 22 Banking Sector in Serbia – Third Quarter Report 2016 4. BANKING SECTOR LIABILITIES 4.1. Structure of the sources of funding Deposits8, were the primary source of bank funding in Serbia, making up 68.1% of total liabilities. At end-Q3 2016, own sources of funding made up 20.5% and borrowing 7.9% of total liabilities. Table 4.1. Change in key items of banking sector liabilities (in RSD mln) Change relative to prio r perio ds No minal A mo unt 30.09.2016 Depo sits and o ther liabilities to banks, OFO and the central bank to o ther custo mers Securities issued and o ther bo rro wings Subo rdinated liabilities P ro visio ns Share capital and o ther capital P ro fit Lo ss Reserves and unrealised lo sses Other T o t a l ba nk ing s e c t o r lia bilit ie s 30.06.2016 Relative 31.12.2015 30.06.2016 31.12.2015 2,423,930 65,824 107,722 2.8% 4.7% 290,979 -6,002 -34,515 -2.0% -10.6% 2,132,952 71,826 142,237 3.5% 7.1% 124 1 1 0.4% 0.4% 50,009 -11,131 -15,097 -18.2% -23.2% -4.9% 11,497 119 -592 1.0% 399,853 619 -2,664 0.2% -0.7% 81,900 12,937 21,305 18.8% 35.2% 28,728 569 -15,734 2.0% -35.4% 196,222 -2,200 -4,213 -1.1% -2.1% 37,225 -14,014 2,010 -27.4% 5.7% 1.7% 4.1% 3,172,031 51,584 124,206 So urce: NB S Compared to end-Q2 2016, total banking sector liabilities increased by RSD 40.8 bln (1.6%), chiefly on account of a RSD 71.8 bln (3.5%) increase in item Deposits and other liabilities to other clients. Given that the total banking sector capital also went up in Q3, by RSD 10.8 bln (1.7%), its share in total banking sector liabilities remained unchanged. Capital increased as a result of the profit generated in the banking sector. The currency structure showed that dinar sources of funding (capital included) increased from 42.6% to 43.2% in Q3. As regards the FX portion of liabilities, EURdenominated liabilities remained dominant, making up 89.6% of total FX liabilities, while the rest were mostly liabilities in USD (6.3%) and CHF (3.3%). 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. 23 National Bank of Serbia Chart 4.1. Banking sector capital and liabilities (in RSD bln) 3,000 2,482 2,429 2,355 2,000 2,523 2,500 1,500 619 638 649 500 614 1,000 12.2014 12.2015 6.2016 9.2016 0 Capital Liabilities Source: National Bank of Sebia. 4.2. Deposits Total deposits with banks stood at RSD 2,161.7 bln at end-Q3 2016, up by RSD 92.4 bln or 4.5% relative to a quarter earlier. The increase stemmed mainly from a RSD 70.9 bln increase in transaction deposits, specifically: FX household and corporate deposits and dinar deposits of other clients (non-financial legal persons in bankruptcy) and corporates. At end-Q3 2016, the share of FX and FX-indexed deposits was 69.8%, with the euro accounting of a dominant 88.6% share of the portfolio. The rest of FX deposits were mainly in USD (7.3%) and CHF (3.1%). Short-term deposits9 accounted for the bulk of bank deposits in Serbia. Demand deposits made up 57.0% of total deposits, followed by deposits with the remaining maturity of up to one year with 35.8%, while deposits with the remaining maturity of over one year accounted for only 7.2% of total deposits. A quarterly increase is notable in respect of demand deposits (0.9 pp), while both short-term and long-term deposits posted a decrease (0.7 pp and 0.2 pp, respectively). In terms of initial (agreed) maturity, demand deposits were still dominant (56.7%), followed by deposits with the remaining maturity of up to one year (27.4%), while 15.9% of all deposits were agreed for over one year term. In the quarter observed, the share of long-term deposits decreased further, as demand deposits went up. 9 24 At remaining maturity. Banking Sector in Serbia – Third Quarter Report 2016 Compared to the end of the previous quarter, total household savings10 contracted by RSD 10.3 bln (1.3%), coming at RSD 802.6 bln at end-Q3. The drop did not result from withdrawal, but from the maturing of savings and their transfer to FX transaction deposit accounts which recorded a RSD 15.6 bln increase in the period observed. At endSeptember 2016, FX savings were dominant in total household savings deposits, making up 94.5%, while dinar savings accounted for 5.5%. Relative to a quarter before, dinar savings went up by RSD 0.4 bln, while FX savings contracted by RSD 10.7 bln. At end-Q3 2016, total household deposits in foreign currency equalled RSD 1,044.0 bln (rising by 0.5% from end-Q2) and consisted mainly of savings deposits (72.7%). Table 4.2. Changes in deposits levels (in RSD mln) Change relative to prio r perio ds No minal A mo unt 30.09.2016 30.06.2016 Relative 31.12.2015 30.06.2016 31.12.2015 Finance and insurance secto r 58,977 -2,660 -209 -4.3% -0.4% P ublic secto r 39,727 -5,015 8,752 -11.2% 28.3% 15.8% P ublic enterprises 138,377 5,111 18,881 3.8% Ho useho ld secto r 1,177,362 10,154 45,887 0.9% 4.1% Co mpanies 461,145 39,491 31,038 9.4% 7.2% Fo reign entities and fo reign banks 135,765 23,170 14,694 20.6% 12.1% Other secto rs 150,342 22,107 33,010 17.2% 28.1% 2 ,16 1,6 9 5 9 2 ,3 5 8 15 2 ,0 5 3 4 .5 % 7 .6 % T o t a l de po s it s So urce: NB S. Chart 4.2. Banking sector deposits structure (30 September 2016) Currency structure Sectoral structure Foreign entities 136 bln 6% Other depositors 249 bln 12% Other currencies 172 bln 8% RSD 653 bln 30% Maturity structure 3 to 6 m 157 bln 7% 6 to 12 m 188 bln 9% Over 1 year 155 bln 7% Corp. (public and private) 600 bln 28% Household s 1,177 bln 54% Source: National Bank of Serbia. 10 EUR 1,337 bln 62% Up to 3 m 1,662 bln 77% Accounts 402 and 502 in the Chart of Accounts, sector 6 (domestic and foreign natural persons – residents) 25 National Bank of Serbia 4.3. Total borrowing of banks At end-Q3 2016, total borrowing of the banking sector amounted to RSD 252.0 bln, down by RSD 27.2 bln or 9.7% relative to the previous quarter. The decline was recorded in respect of loans received and other financial liabilities (by RSD 29.3 bln and RSD 3.6 bln, respectively), while overnight loans edged up by RSD 5.7 bln. Table 4.3. Changes in the level of bank borrowing (in RSD mln) Change relativ e to prior periods Amount 30.09.2016 Nominal 30.06.2016 Relativ e 31.12.2015 30.06.2016 31.12.2015 Ov ernight loans 46,309 5,741 7,485 14.2% 19.3% Loans receiv ed 199,142 -29,332 -52,153 -12.8% -20.8% Other f inancial liabilities Total borrowing 6,578 -3,565 131 -35.1% 2.0% 252,029 -27,156 -44,537 -9.7% -15.0% Source: NBS. Loans were the largest individual borrowing item (received predominantly from parent banks and international financial institutions), accounting for 79.0% (end-Q2 2016: 81.8%), followed by liabilities under overnight loans with 18.4% (end-Q2 2016: 14.5%). Other financial liabilities made up 2.6% (end-Q2 2016: 3.6%). Banks that are majority foreign-owned accounted for 89.8% of total credit borrowing of the banking sector, 93.2% of overnight loans, 89.0% of loans received and 90.6% of other financial liabilities. The dominant currency of borrowing was the euro, accounting for RSD 213.5 bln (endQ2 2016: RSD 228.0 bln) or 84.7% of total borrowing. Dinar liabilities stood at RSD 28.1 bln (end-Q2 2016: RSD 37.0 bln) or 11.2% of total borrowing, while banks’ debt in Swiss francs was RSD 8.9 bln (end-Q2 2016: RSD 12.0 bln), or 3.5% of total borrowing. 4.4. External liabilities The downward trend in the banking sector’s external borrowing, in place since Q3 2013, continued in the quarter observed. At end-Q3 2016, banks’ total external liabilities under credit operations stood at RSD 149.0 bln, down by RSD 15.3 bln (9.3%) q-o-q, and by 23.9% in the first nine months of 2016. Borrowing contracted mainly on account of a decrease in loans received (by RSD 19.4 bln), while overnight loans went up by RSD 5.9 bln. External credit debt remained highly concentrated, given that of the 16 banks which borrowed externally, four banks accounted for 63.9% of the total debt. Also, only three banks took overnight foreign loans, and 92.0% of that debt referred to two banks. Long-term loans held a dominant 79.6% share in the maturity structure of external borrowing (end-Q2 2016: 76.4%). 26 Banking Sector in Serbia – Third Quarter Report 2016 As regards the currency composition of external borrowing, the share of the euro again increased slightly, reaching 93.8% (despite a RSD 12.6 bln decrease), while the share of the Swiss franc continued to shrink (to 5.8% from over 10% at end-2014 and 2015 and 7.1% at end-Q2 2016). Table 4.4. Changes in bank external borrowing (in RSD mln) Change relativ e to prior periods Amount 30.09.2016 Nominal 30.06.2016 Relativ e 31.12.2015 30.06.2016 31.12.2015 Ov ernight loans 9,367 5,894 4,211 169.7% 81.7% Loans receiv ed 138,633 -19,395 -51,163 -12.3% -27.0% Other f inancial liabilities Total borrowing 1,027 -1,751 106 -63.0% 11.5% 149,027 -15,252 -46,846 -9.3% -23.9% Source: NBS. 4.5. Subordinated liabilities Total subordinated liabilities of banks in Serbia reached RSD 49.7 bln at end-Q3 2016, posting a RSD 11.3 bln (18.6%) decrease relative to the previous quarter. This was a continuation of an entrenched trend, given that 2015 saw a decrease of 10.1% and the first nine months of 2016 a further drop of 23.5%. Of total subordinated liabilities, 73.0% were liabilities toward foreign banks, 13.7% toward foreign legal persons, 12.4% to international financial institutions, and 0.9% to corporates. Subordinated liabilities contracted primarily in the euro segment, which continued to make up 92.9% of all liabilities. Liabilities in Swiss francs made up 6.2%, while the remaining 0.9% were in dinars. Subordinated liabilities were highly concentrated – of the 17 banks with subordinated debt, three banks accounted for 44.6% of all subordinated liabilities. Given the regulatory restrictions on inclusion of subordinated liabilities in supplementary and/or regulatory capital, banks were able to include only 48.7% of total subordinated debt in supplementary capital. 27 National Bank of Serbia 5. OFF-BALANCE SHEET ITEMS At end-Q3 2016, total off-balance sheet items of the banking sector stood at RSD 7,130.2 bln, rising slightly (by 0.6%) from the end of the previous quarter, mostly on account of an increase in Other off-balance sheet items (by RSD 47.9 bln) – specifically, Received guarantees and other sureties on behalf of bank creditors. The most significant items in the structure of the banking sector's off-balance sheet were Other off-balance sheet items (82.9%), followed by Derivatives (6.5%) and Issued guarantees and other sureties (3.6%). The off-balance sheet segment of the banking sector operations remained the most highly concentrated, given that at end-Q3 2016, 24.4% of total banking sector off-balance sheet items were held by a single bank and that values of the HHI index for all types of offbalance sheet items and for total off-balance sheet items exceeded 1,000. Chart 5.1. Off-balance sheet items (in RSD bln.in %) 8,000 7,000 7,134 7,086 7,130 88% 87% 88% 8% 6% 7% 7% 8% 6% 6% 6% 12.2014 12.2015 6.2016 9.2016 Derivatives Operation on behalf of third parties 6,156 6,000 5,000 4,000 85% 3,000 2,000 1,000 0 Other off-balance sheet items Contigent liabilities Source: National Bank of Serbia. Risk-free items accounted for the bulk (90.4%) 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. The off-balance sheet items which are subject to classification (considered riskbearing) amounted to RSD 687.4 bln, rising by RSD 11.6 bln or 1.7% q-o-q. 28 Banking Sector in Serbia – Third Quarter Report 2016 At end-Q3 2016, contingent liabilities11 equalled RSD 413.2 bln (down by RSD 14.6 bln or 3.4% q-o-q), making up 5.8% of total off-balance sheet items (end of the previous quarter: 6.0%). Table 5.1. Changes in off-balance sheet items in the Serbian banking sector (in RSD mln) Change relativ e to prior periods Amount 30.09.2016 Nominal 30.06.2016 Relativ e 31.12.2015 30.06.2016 31.12.2015 Issued guarantees and other sureties 258,513 4,452 -12,494 1.8% Receiv ables under deriv ativ es 466,065 -16,787 19,395 -3.5% 4.3% Contingent liabilities and other irrev ocable commitments 154,686 -19,096 -27,031 -11.0% -14.9% 161,432 10,550 13,328 7.0% 9.0% 93,657 1,161 9,013 1.3% 10.6% 7,130,232 44,730 -4,189 0.6% -0.1% Securities receiv ed as collateral Sureties f or liabilities Other of f -balance sheet assets -4.6% Source: NBS. 11 Issued guarantees and other sureties, irrevocable commitments regarding undisbursed loans and placements, and other irrevocable commitments. 29 National Bank of Serbia 6. BANK LIQUIDITY Based on the long-term historical record of all basic liquidity indicators, Serbia’s banking sector has been characterised by considerable excess liquidity. At end-Q3 2016, the average monthly liquidity ratio was 2.18, rising slightly from a quarter earlier (2.10), and being considerably above the regulatory floor of 1.0. The narrow liquidity ratio also increased q-o-q, to 1.78 (regulatory floor – 0.7). The share of liquid assets in total banking sector balance sheet assets has been broadly stable in recent years and even increased mildly, to 34.6% at end-Q3 2016. At end-Q3 2016, banks’ investments in NBS repo securities increased relative to June 2016 by RSD 36.8 bln, to RSD 65.0 bln. The number of banks which invested in repo securities also increased (from 13 to 16). As for government securities, their portfolio was worth RSD 613.6 bln at end-September, increasing by 1.8% from a quarter earlier. For quite some time, the share of securities in euros has shown an upward tendency, reaching 38.1% at end-Q3 (rising by 0.3 pp q-o-q). Chart 6.1. Banking sector liquidity indicators 3.00 2.50 2.00 2.18 2.16 2.09 2.10 1.68 1.67 1.67 1.03 0.99 0.98 0.96 0.36 0.34 0.34 0.35 12.2014 12.2015 6.2016 9.2016 1.78 1.50 1.00 0.50 0.00 Liquidity indicator Narrow liquidity indicator Loan to deposit ratio LTD Liquid assets to total assets Source: National Bank of Serbia. 30 Banking Sector in Serbia – Third Quarter Report 2016 7. CAPITAL ADEQUACY The Serbian banking sector is well-capitalised, both from the aspect of compliance with the prescribed capital adequacy ratio and the structure of regulatory capital. At endSeptember 2016, capital adequacy ratio of the Serbian banking sector averaged 21.15% (down by 0.55 pp from a quarter before), which is well above the domestic regulatory minimum (12%) and the minimum according to Basel standards (8%). Chart 7.1. Regulatory capital and CAR* (in RSD bln, CAR in %) 650 21.60 20.89 21.15 19.96 20 550 450 350 45 41 40 41 358 362 15 250 150 303 331 10 50 5 -8 -50 -8 -10 -11 12.2015 6.2016 9.2016 -150 0 12.2014 Deductibles Tier 2 Tier 1 CAR * CAR = Regulatory capital adequacy ratio Source: National Bank of Serbia. The value of the capital adequacy ratio was 0.55 pp weaker than a quarter earlier, because total capital requirements increased more than did the regulatory capital (3.1% vs. 1.0%). An increase in total lending of the banking sector led to higher capital requirements for credit risk (by 3.4%), which was the major driver behind the increase in total capital requirements. The structure of capital requirements changed slightly compared to a quarter earlier. The dominant share was taken up by capital requirements for credit risk (87%), followed by capital requirements for operational risk (11.7%), while the share of capital requirements for market risks was negligible (1.3%). 31 National Bank of Serbia Chart 7.2. Capital requirements (in %) (30 September 2016) 1.3% 11.7% 87.0% Credit risk Market risk Operational risk Source: National Bank of Serbia. In 2015 through Q3 2016, regulatory capital of the banking sector has been rising moderately. The last quarter saw a 1% increase (in absolute amount: RSD 3.8 bln). Regulatory capital consists of: Tier 1 or core capital, the highest quality segment (91%) and Tier 2 or supplementary capital (9%). At end-Q3 2016, the banking sector’s core capital (before deductions from regulatory capital) stood at RSD 362.1 bln, up by 1.2% (or RSD 4.1 bln) q-o-q. The banking sector’s core capital increased as a result of the release of RSD 7.2 bln on account of a reduction in required reserves for estimated losses arising from credit risk. The core capital, after the remaining prescribed deductions, equalled RSD 356.7 bln, which was RSD 3.9 bln more than at end-June 2016. Supplementary capital of the banking sector (before deductions from regulatory capital), comprising mostly of subordinated liabilities (60%) and revaluation reserves (34%), rose slightly from a quarter earlier – by RSD 353 mln (0.9%), reaching RSD 40.5 bln. Subordinated liabilities eligible for inclusion in supplementary capital shrunk by 2% to RSD 24.2 bln, while revaluation reserves went up by RSD 780 bln relative to the quarter before. The supplementary capital, after the remaining prescribed deductions, from capital, amounted to RSD 35.4 bln, same as at end-Q2. The leverage12 ratio of banks was satisfactory and unchanged from a quarter earlier. At end-Q3 2016, on-balance sheet capital came at 20.47% оf total bank balance sheet assets. 12 32 Balance sheet capital to balance sheet assets ratio. Banking Sector in Serbia – Third Quarter Report 2016 8. FOREIGN EXCHANGE RISK At end-Q3 2016, Serbia’s banking sector posted long FX position worth RSD 16.6 bln (excluding the position in gold). Twenty five banks ended September 2016 with a net long FX position, while the remaining five banks showed net short FX position. On 30 September 2016, banks in Serbia operated at net long positions in euros and US dollars (RSD 12.78 bln and RSD 2.92 bln, respectively), while at the same time posting a net short position in Swiss francs (RSD 1.81 bln). The foreign exchange risk ratio for the banking sector equalled 4.25%, indicating a relatively low FX risk compared to the regulatory cap (20% of banks’ capital). Chart 8.1. Quarterly breakdown of the sector's long and short FX position (in EUR) and foreign exchange risk ratio (in RSD bln) 16 6 14 5 4.44 4.25 12 3.93 4 3.55 10 8 3 13.56 12.78 6 2 10.28 9.48 4 5.49 2 1 4.22 2.22 0.56 0 0 12.2014 12.2015 Long EUR 6.2016 Short EUR 9.2016 FX ratio Source: National Bank of Serbia 33 National Bank of Serbia 9. NBS REGULATORY ACTIVITY Exercising its regulatory competences in the area of bank supervision, the NBS issued the following regulations in Q3 2016: At its session of 11 August 2016, the NBS Executive Board adopted the Decision Amending the Decision on the Classification of Bank Balance Sheet Assets and OffBalance Sheet Items (RS Official Gazette No 69/2016), wishing to encourage banks to tackle more efficiently NPLs in their portfolios. The Decision allows banks to use models for reducing and/or eliminating required reserves for estimated losses depending on the level and/or reduction of NPL ratio. The amendments among other envisage that banks which on 30 June 2016 and as at the reporting date have NPL ratio (for non-governmental and non-financial sector) 10% or more may calculate the amount of required reserves for estimated losses – which is treated as a deductible from capital and credit-risk weighted assets – in the amount equivalent to zero, while banks which as at 30 June 2016 have NPL ratio (for non-governmental and non-financial sector) above 10% and reduce that ratio on the reporting date, may calculate the amount of reduction of the required reserves for estimated losses by applying the given formula. Also, in order to create conditions conducive to credit growth, the Decision also allows to reduce the percentage applied in calculation of required reserves for estimated losses from 2% to 0% for receivables classified in category B based on contracts concluded after 30 September 2016, provided those exposures are not intended for refinancing or restructuring. At the same session, the Executive Board adopted the Decision Amending the Decision on Reporting Requirements for Banks (RS Official Gazette No 69/2016) which aims to align the regulatory reporting system with the amendments to the Decision on the Classification of Bank Balance Sheet Assets and Off-Balance Sheet Items and to enable the supervisor to verify the fulfilment of conditions for reduction and/or elimination of required reserve for estimated losses by introducing a new reporting schedule – NPL 5. The amendments also enable a more detailed analysis of the cause of a high share of NPLs in total loans by collecting additional information on the structure of NPLs by largest borrowers from non-financial and non-government sectors. 34