banking sector in serbia third quarter report 2016 · pdf filebanking sector in serbia –...

BANK SUPERVISION DEPARTMENT

BANKING SECTOR IN SERBIA

Third Quarter Report 2016

November 2016

2

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

Banking Sector in Serbia – Third Quarter Report 2016

3

Amount Share Amount ShareNumber of

business units 1)Share

Number of

employ eesShare

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%

Other 10 372 11.7% 74 11.4% 265 15.4% 3,667 15.3%

Total banking sector 30 3,172 100.0% 649 100.0% 1,717 100.0% 24,021 100.0%

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

Source: NBS

Table 1.1. Selected parameters of the Serbian banking sector

Number

of banks

(RSD bln, %)

Assets Capital Network Employ ment

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).

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.

National Bank of Serbia

4

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.

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.

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

Deposits (total) 54.7 78.5 835

Household deposits 56.4 80.3 930

Income (total) 54.2 77.8 841

Interest 51.3 75.8 739

Fees and commissions 57.3 80.4 877

Table 1.2.1. Concentration and competition indicators

(Share %)

1) Herf indahl Hirschman Index of concentration.

Source: NBS


5

(RSD bln, %)

Δ Г Δ Т

Amount Share Ranking Amount Share Ranking Amount Share Ranking

Banca Intesa A.D.- Beograd 480 16.0 1 519 16.6 1 529 16.7 1

Komercijalna banka A.D.-

Beograd394 13.1 2 410 13.1 2 410 12.9 2

Unicredit Bank Srbija A.D.-

Beograd308 10.2 3 311 10.0 3 317 10.0 3

Raif f eisen Banka A.D.- Beograd 232 7.7 4 241 7.7 4 254 8.0 4

Societe Generale banka Srbija

A.D.- Beograd219 7.3 5 227 7.3 5 231 7.3 5

Agroindustrijska komercijalna

banka AIK banka akcionarsko 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.-

Beograd123 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

Vojv ođanska banka A.D.- Nov i

Sad127.0 4.2 8 124 4.0 10 127 4.0 10

Source: NBS

Table 1.2.2. Top ten banks according to the total assets criterion

30.09.2015. 30.06.2016. 30.09.2016.


6

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 pre-

tax net result was RSD 32.8 bln, up by 23.1% compared to the same period last year.

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.

17.04

20.95

26.63

32.78

-20

-10

0

10

20

30

40

9.2013 9.2014 9.2015 9.2016

Profit Loss Net result

Source: National Bank of Serbia.

Chart 2.1.1. Pre tax result(in RSD bln)


7

The increase in banking sector’s profitability at end-Q3 2016 was accompanied by a y-

o-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).

(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

Table 2.1. Banks posting highest profit and loss

Source: NBS

0.79 0.971.19

1.41

3.81

4.63

5.65

6.89

0.0

2.0

4.0

6.0

8.0

9.2013 9.2014 9.2015 9.2016

ROA ROE


Chart 2.1.2. Banking sector profitability indicators(in %)


8

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).


9

(in RSD mln)

Result Net interest Net f ees Credit lossesExchange 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%

Source: NBS

Change:

Table 2.2. Changes in key elements of bank profitability

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).

0

5

10

15

20

25

30

35

Net resultSeptember 2015

Net interest Net fees Other income net Operatingexpenses

Credit losses Exchange rateeffect

Net resultSeptember 2016


Chart 2.2. Structure of net result(in RSD bln)


10

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.

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.

73.5% 71.8%71.2% 71.4%

21.3% 20.4%

18.9%19.9%

7.2% 6.1%

4.8%5.0%

-20

-10

0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

150

9.2013 9.2014 9.2015 9.2016

Net interest Net fees Income from securities Other income Exchange rate effect

Source: National Bank of Serbia

Chart 2.3. Operating income structure(in RSD bln, in %)


11

Other expenses (constituting 55.6% of operating expenses at end-September 2016) by 0.3%

compared to the same period the year before.

Salaries, salaries

compensations and other personal

expenses; 31.0. bln; 38%

Depreciation costs; 5.4. bln;

6%

Other expenses;

45.6. bln; 56%


Chart 2.4. Structure of operating expenses30 September 2016


12

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%.

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.

2,9

05

2,9

56

3,0

08

3,1

72

2,8

46

2,9

69

3,0

48

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2013 2014 2015 2016

September December


Chart 3.1.1. Total banking sector assets(in RSD bln)


13

Cash and assets held with the central bank,

422 bln, 13%

Loans and receivables from banks and other

financial organisations, 248 bln, 8%

Loans and receivables from clients, 1,731 bln,

55%

Financial assets available for sale, 520

bln, 16%

Property, plant and equipment and

Investment property, 71 bln, 2%

Other assets, 181 bln, 6%


Chart 3.1.2. Banking sector assets structure30 September 2016

(in RSD mln)

30.09.2016 30.06.2016 31.12.2015 30.06.2016 31.12.2015

Cash and balances with the central bank 421,781 -21,378 -99,725 -4.8% -19.1%

Loans and receivables 1,978,451 60,656 141,766 3.2% 7.7%

from banks and OFO 247,761 17,350 69,919 7.5% 39.3%

from customers 1,730,690 43,306 71,847 2.6% 4.3%

Financial assets 643,075 10,796 83,428 1.7% 14.9%

at fair value through the income statement and held for trading 20,310 1,763 3,782 9.5% 22.9%

initially recognised at fair value through the income statement 3,894 452 -78 13.1% -2.0%

available for sale 519,738 4,150 78,397 0.8% 17.8%

held to maturity 99,133 4,431 1,327 4.7% 1.4%

Property, plant and equipment 52,901 1,580 938 3.1% 1.8%

Investment property 17,827 59 88 0.3% 0.5%

Other 57,995 -129 -2,289 -0.2% -3.8%

B anking secto r balance sheet to tal 3,172,031 51,584 124,206 1.7% 4.1%

Source: NBS

Table 3.1. Change in key asset items of the banking sector

Amount Nominal

Change relative to prior periods

Relative


14

53% 50% 52% 51%

20% 22%21% 23%

7% 8%9% 9%4% 4%3% 3%

16% 16%15%

14%

2,783 2,793 2,894 2,922

0

500

1,000

1,500

2,000

2,500

3,000

12.2014 12.2015 06.2016 09.2016

А B C D E

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


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.


15

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.

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).

(in RSD mln, in %)

30.09.2016 30.06.2016 31.12.2015 30.06.2016 31.12.2015

Finance and insurance 20,535 -4,768 7,461 -18.8% 57.1%

Public sector 29,024 -1,422 -2,720 -4.7% -8.6%

Public enterprises 131,491 -1,508 -22,516 -1.1% -14.6%

Households 727,314 21,502 56,731 3.0% 8.5%

Companies 849,316 19,213 27,306 2.3% 3.3%

Foreign persons and foreign banks 28,746 9,989 12,014 53.3% 71.8%

Other sectors 190,672 -422 13,585 -0.2% 7.7%

Total loans 1,977,098 42,584 91,861 2.2% 4.9%

Source: NBS.

Table 3.3. Change in the level of net loans

Amount


Nominal Relative


16


EUR1,240 bln

63%CHF;

102 bln; 5%

USD; 34 bln; 2%

RSD; 591 bln;

30%

Other; 10 bln; 0% Due; 204

bln; 10%

Up to 3 m; 95

bln; 5%3 to 6 m; 71 bln;

4%

6 to 12 m; 215

bln; 11%

Over 1 year

1,392 bln

70%

Chart 3.3. Banking sector gross loan portfolio structure(in RSD bln)(30 September 2016)

The structure of gross loans by remaining maturity remained broadly the same: short-

term 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.


17

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.

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.

59%51%

48% 47%

16%

17%18% 19%

25%32%

34% 34%

421.3 424.6404.3 396.5

21.5 21.6

20.219.5

0

5

10

15

20

25

0

100

200

300

400

500

600

12.2014 12.2015 6.2016 9.2016

Corporates Households Other Total Gross NPL %

Chart 3.4.1. Gross non performing loans (NPL)(in RSD bln)



18

59.066.8 69.5 69.5

118.4 118.2 118.6 118.2

54.9 62.3 65.1 65.4

114.5 114.2 114.7 114.5

0

20

40

60

80

100

120

140

160

180

12.2014 12.2015 6.2016 9.2016IFRS provision* / NPL Total calculated reserve*** / NPL

IFRS provision (NPL) ** / 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);

Chart 3.4.3. NPL coverage(in %)


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%.

0

5

10

15

20

25

30

35

40

45

50

12.2014 12.2015 6.2016 9.2016

Households

Corporate sectors( Pubilc enterprizes + Private companies)

Total NPL

Other sectors

Source: National Bank of Serbia..

Chart 3.4.2. NPL ratio for main sectors(in %)


19

(in RSD mln)

30.09.2016 30.06.2016 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%

Construction 25,294 -1,547 -2,476 -5.8% -8.9%

Education and real estate 23,034 -958 -2,766 -4.0% -10.7%

Agriculture 4,141 -1,843 -2,116 -30.8% -33.8%

Transport, hotels/restaurants, communications 9,930 187 -977 1.9% -9.0%

Source: NBS

Table 3.4.1. Changes in gross NPLs by main economic sectors

Amount


Nominal Relative

90

95

100

105

110

115

120

125

130

12.2014 12.2015 6.2016 9.2016

Serbia Austria Greece France Italy

Chart 3.4.4. NPL coverage* across countries of origin of banks in Serbia(in %)

*provisions for balance sheet exposure


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.

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.


20

(in %)

30.09.2016 30.06.2016 31.12.2015

Construction 32.5% -2.2 -5.7

Real estate and education 28.3% -2.3 -5.0

M anufacturing 21.6% -1.0 -2.0

Trade 15.9% -0.9 -5.6

Agriculture 6.0% -2.9 -3.1

Transport 17.2% 1.1 -3.4

Source: NBS

Table 3.4.2. Corporate NPL ratio by sector


(pp)

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.

Chart 3.4.5. Private corporates NPL structure(30 September 2016)

Agriculture4 bln2%

Processing industry65 bln38%

Electricity0.3. bln

0%Construction

25 bln15%

Commerce43 bln25%

Hotel, restaurants and communication

10 bln6%

Real estate and education

23 bln14%

32.5%

15.9%

6.0%

21.6%

15.9%

28.3%

17.2%

Gross NPL indicator



21

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.

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.

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.

(in RSD mln)

30.09.2016 30.06.2016 31.12.2015 30.06.2016 31.12.2015

Housing loans 32,577 -293 -354 -0.9% -1.1%

Cash loans 23,062 77 470 0.3% 2.1%

Credit cards 4,748 -74 -495 -1.5% -9.4%

Current account overdrafts 4,399 59 141 1.4% 3.3%

Consumer loans 3,586 -56 -125 -1.5% -3.4%

Other 19,133 -291 -305 -1.5% -1.6%

Total 87,505 -578 -668 -0.7% -0.8%

Source: NBS

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

Amount


Nominal Relative

(in %)

30.09.2016 30.06.2016 31.12.2015

Housing construction 9.2% -0.2 -0.4

Cash loans 8.6% -0.6 -1.5

Credit cards 13.2% -0.1 -1.1

Current account overdrafts 16.9% 0.3 -0.3

Consumer loans 20.0% -0.5 -2.8

Source: NBS

Table 3.4.4. Gross NPL ratio for households by category


(pp)


22

Cash23 bln26%

Credit cards5 bln6%

Overdraft4 bln4%

Consumer4 bln5%

Housing33 bln37%

Other lending*19 bln22%

16.4%

8.6%

16.9%

9.2%

13.2%Gross NPL

20.0%

Other lending = agriculture, other activities, vehicle purchase loans and other loans

Chart 3.4.6. Natural persons NPL structure(30 September 2016)



23

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.

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, EUR-

denominated 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.

(in RSD mln)

Amount

30.09.2016 30.06.2016 31.12.2015 30.06.2016 31.12.2015

Deposits and other liabilities 2,423,930 65,824 107,722 2.8% 4.7%

to banks, OFO and the central bank 290,979 -6,002 -34,515 -2.0% -10.6%

to other customers 2,132,952 71,826 142,237 3.5% 7.1%

Securities issued and other borrowings 124 1 1 0.4% 0.4%

Subordinated liabilities 50,009 -11,131 -15,097 -18.2% -23.2%

Provisions 11,497 119 -592 1.0% -4.9%

Share capital and other capital 399,853 619 -2,664 0.2% -0.7%

Profit 81,900 12,937 21,305 18.8% 35.2%

Loss 28,728 569 -15,734 2.0% -35.4%

Reserves and unrealised losses 196,222 -2,200 -4,213 -1.1% -2.1%

Other 37,225 -14,014 2,010 -27.4% 5.7%

T o tal banking secto r liabilit ies 3,172,031 51,584 124,206 1.7% 4.1%

Source: NBS

Table 4.1. Change in key items of banking sector liabilities

Nominal


Relative


24

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 At remaining maturity.

614

619

638

649

2,3

55

2,4

29

2,4

82

2,5

23

0

500

1,000

1,500

2,000

2,500

3,000

12.2014 12.2015 6.2016 9.2016

Capital Liabilities

Source: National Bank of Sebia.

Chart 4.1. Banking sector capital and liabilities (in RSD bln)


25

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 end-

September 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%).

10

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

(in RSD mln)

30.09.2016 30.06.2016 31.12.2015 30.06.2016 31.12.2015

Finance and insurance sector 58,977 -2,660 -209 -4.3% -0.4%

Public sector 39,727 -5,015 8,752 -11.2% 28.3%

Public enterprises 138,377 5,111 18,881 3.8% 15.8%

Household sector 1,177,362 10,154 45,887 0.9% 4.1%

Companies 461,145 39,491 31,038 9.4% 7.2%

Foreign entities and foreign banks 135,765 23,170 14,694 20.6% 12.1%

Other sectors 150,342 22,107 33,010 17.2% 28.1%

T o tal depo sits 2,161,695 92,358 152,053 4.5% 7.6%

Source: NBS.

Table 4.2. Changes in deposits levels

Amount


Nominal Relative

Sectoral structure Currency structure Maturity structure

Chart 4.2. Banking sector deposits structure(30 September 2016)

Up to 3 m1,662 bln

77%

3 to 6 m157 bln

7%

6 to 12 m188 bln

9%

Over 1 year

155 bln7%

Households

1,177 bln54%

Corp. (public and

private)600 bln

28%

Foreign entities136 bln

6%

Other depositors

249 bln12%


RSD653 bln

30%

EUR1,337 bln

62%

Other currencies

172 bln8%


26

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.

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 (end-

Q2 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%).

(in RSD mln)

30.09.2016 30.06.2016 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 6,578 -3,565 131 -35.1% 2.0%

Total borrowing 252,029 -27,156 -44,537 -9.7% -15.0%

Source: NBS.

Table 4.3. Changes in the level of bank borrowing

Amount

Change relativ e to prior periods

Nominal Relativ e


27

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).

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.

(in RSD mln)

30.09.2016 30.06.2016 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 1,027 -1,751 106 -63.0% 11.5%

Total borrowing 149,027 -15,252 -46,846 -9.3% -23.9%

Source: NBS.

Table 4.4. Changes in bank external borrowing

Amount


Nominal Relativ e


28

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 off-

balance sheet items and for total off-balance sheet items exceeded 1,000.

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 risk-

bearing) amounted to RSD 687.4 bln, rising by RSD 11.6 bln or 1.7% q-o-q.

8% 6% 6% 6%

8% 6% 7% 7%

85%

88% 87% 88%

6,156

7,134 7,086 7,130

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

12.2014 12.2015 6.2016 9.2016

Other off-balance sheet items Derivatives Operation on behalf of third parties Contigent liabilities

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



29

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%).

11 Issued guarantees and other sureties, irrevocable commitments regarding undisbursed loans and placements, and other

irrevocable commitments.

(in RSD mln)

30.09.2016 30.06.2016 31.12.2015 30.06.2016 31.12.2015

Issued guarantees and other sureties 258,513 4,452 -12,494 1.8% -4.6%

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%

Securities receiv ed as collateral 161,432 10,550 13,328 7.0% 9.0%

Sureties f or liabilities 93,657 1,161 9,013 1.3% 10.6%

Other of f -balance sheet assets 7,130,232 44,730 -4,189 0.6% -0.1%

Source: NBS.

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

Amount


Nominal Relativ e


30

2.162.09 2.10

2.18

1.68 1.67 1.671.78

1.03 0.99 0.98 0.96

0.36 0.34 0.34 0.35

0.00

0.50

1.00

1.50

2.00

2.50

3.00

12.2014 12.2015 6.2016 9.2016

Liquidity indicator Narrow liquidity indicator

Loan to deposit ratio LTD Liquid assets to total assets

Chart 6.1. Banking sector liquidity indicators


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).


31

303 331

358 362

45 41

40 41

-8

-8 -10 -11

19.9620.89

21.6021.15

0

5

10

15

20

-150

-50

50

150

250

350

450

550

650

12.2014 12.2015 6.2016 9.2016

Deductibles Tier 2 Tier 1 CAR

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

* CAR = Regulatory capital adequacy ratio


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 end-

September 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%).

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%).


32

87.0%

1.3% 11.7%

Credit risk Market risk Operational risk

Chart 7.2. Capital requirements

(in %)(30 September 2016)


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 Balance sheet capital to balance sheet assets ratio.


33

9.48

5.49

10.28

12.78

4.22

13.56

2.220.56

3.93

4.44

3.55

4.25

0

1

2

3

4

5

6

0

2

4

6

8

10

12

14

16

12.2014 12.2015 6.2016 9.2016

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 bln)


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).


34

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 Off-

Balance 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.

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