Banking Systems of SEEEs : Crisis Effects, outlook and Banking Systems of SEEEs : Crisis Effects, outlook and risksrisks

Radovan Jelašić, Governor - National Bank of Serbia

Greece, 16th October 2009

Effects of the financial crisis were reflected in all major Effects of the financial crisis were reflected in all major economic indicators (1/2)economic indicators (1/2)

RSD/EUR exchange rate

75

80

8590

95

100

Sept. Oct Nov.

2008

Dec J an Feb Mar Apr May J un.

2009

J uly Aug Sept. Oct.

Household FX savings

4.9

5.35.2 5.3

5.2

5.7

4.94.84.8

4.9 4.94.95.1

4.9

4.5

5.0

5.5

6.0

Sep2008

Oct Nov Dec Jan2009

Feb Mar Apr May Jun Jul Aug Sep 08. Oct

EUR bn

- 16%

Financial loans* (by maturity)

-800

-300

200

700

1,200

1,700

2,200

I II2007.

III IV I II2008.

III IV I II2009.

Long-term Short-term

* Financial loans are shown in net amount and include net foreign borrowing by banks and enterprises.

RSD

In EUR mn

+26%

+512

bps

Yield of London Club (debt in USD)

6.00

7.00

8.00

9.00

10.00

11.00

12.00

13.00

9/1

/20

08

10

/1/2

00

8

11

/1/2

00

8

12

/1/2

00

8

1/1

/20

09

2/1

/20

09

3/1

/20

09

4/1

/20

09

5/1

/20

09

6/1

/20

09

7/1

/20

09

8/1

/20

09

9/1

/20

09

10

/1/2

00

9

%

Effects of the financial crisis were reflected in all major Effects of the financial crisis were reflected in all major economic indicators (2/2)economic indicators (2/2)

Employment

2,000

2,200

2,400

2,600

2,800

I II

2008

III IV I II

2009

1012

141618

202224

2628

(in %)

Number of employ ed persons (lef t scale)

Unemploy ment rate (right scale)

Industrial production (seasonally-adjusted data, 2008=100)

75

80

85

90

95

100

Sep-08

Oct Nov Dec Jan-09

Feb Mar Apr May Jun Jul

Industrial production Manuf acturing Industry

Current account deficit

0.0

0.5

1.0

1.5

2.0

Q1

2008.

Q2 Q3 Q4 Q1

2009.

Q2

17,9% GDP

21,3% GDP

12,5% GDP

16,1`% GDP 14,8%

GDP

2,4% GDP

In EUR bn

In thous.

5.4 5.3 5.85.5

4.4 3.2 3.0

0.5 0.8

7.86.4

5.5 6.44.6

3.0

-4.2-4.0

8.8

-10

0

10

II

2007

III IV I II

2008

III IV I II

2009Agriculture, fishing and forestry Industry and construction

Services Tax minus subsidies

GDP (%)

Contribution to y-o-y GDP growth(in percentage points)

*Serv ices include: Wholesale and retail trade, hotels and restaurants, transport and communication, f inancial intermediation, real estate, renting and other serv ices.

*

*Including registered farmers

““You only find out who is swimming naked when the tide You only find out who is swimming naked when the tide goes out”goes out”

NBS was quite restrictive until the beginning

of the crisis* because of:

High capital adequacy ratio: 23.3%;

Substantial holdings of National Bank of

Serbia repos by commercial banks: EUR

3.2bn, representing 13% of total assets of the

banking sector;

High reserve requirements: 40% on new FX

savings, 45% on foreign borrowing;

Low level of household indebtedness**: EUR

608 per citizen, EUR 1,680 per employed

person***)

75% of banks owned by strategic owners from

the EU;

Low country rating S&P,

Fitch : BB- /negative

outlook;

Floating exchange rate and

70% of all loans FX

denominated;

Haunting past: lost savings,

pyramid banks,

hyperinflation.

*Figures of the banking sector as of Sept 30th 2008 **Loans and leasing contracts***Including registered farmers

Stable banking sector saved the Serbian taxpayerStable banking sector saved the Serbian taxpayer

Improving international environment and several measures implemented by

government and NBS halted further deterioration of GDP: Government provided

loan subsidies while the Central bank substantially relaxed its restrictive

regulations (e.g.):

• Since 1 October 2008, banks are exempt from reserves requirements

on foreign borrowing, subordinated loans and financial leasing abroad

• Deposit insurance scheme was increased to EUR 50,000 from EUR

3,000;

• Tax on interest revenue for FX saving was abolished for 2009;

Banks regained liquidity and are again borrowing money from abroad. None-

performing loans are bottoming out, exchange rate got stabilized without NBS

being active on the FX market. Based on the “Vienna agreement”, foreign

banks decided not to lower the country exposure till the end of 2010!

Bank stress tests have been carried out as part of the Bank stress tests have been carried out as part of the Vienna InitiativeVienna Initiative

Vienna Initiative (FSSP – Financial Sector Support Program) was launched in March

2009 – the number of participating banks has in the meantime risen from 10 to 27;

Carry out stress tests of the banking sector

as a whole until end-2009 – so far,

diagnostic analyses of 16 biggest banks

(83% of balance sheet total) have been

conducted;

Provide dinar (short-term liquidity loans)

and FX liquidity (EUR/RSD swap

transactions between the NBS and banks)

- COMPLETED;

Relax the arrears criteria in case of

rescheduling the repayment terms for loans

granted before April 2009 - COMPLETED.

Maintain the level of exposure to Serbia

(direct channel: cross-border borrowing +

indirect channel: investments through

subsidiaries) and maintain the level of

regulatory indicators above the

prescribed minimum (capital adequacy,

liquidity ratio…);

Define methodology and participate in

stress tests coordinated with the IMF;

Consider pre-emptive capital increase if

stress tests prove it necessary.

Banks’ commitments NBS’s commitments

Model and assumptionsModel and assumptions

Моdel – regression using output gap, depreciation and changes in interest rates as independent variables

and their impact on the worsening of credit portfolio and losses from rising NPLs over 2 years (2009 and

2010);

The NBS uses a standardized “bottom-up” IMF testing of credit risk (which has the strongest impact);

Assumptions of the downside scenario have been used.

Elasticity demonstrating the intensity of impact of macroeconomic scenario on the rise in NPLs (based on

the IMF panel regression implemented in around 50 countries)

Assumption Expected 2008 2009 2010 2009 2010 Changes in GDP 5.4 -6.0 -3.5 -3.0 +1.5

Output gap 0.7 -5.8 -8.5 -6.0 -5.8

Depreciation 11.8 12.0 10.0 13.0 1.0

Changes in interest rates / 0.1 2 -6.75 ?

Output gap 0.7

Depreciation 0.3

Changes in interest rates 0.4

Composite results of bank stress testing Composite results of bank stress testing (83% (83% of balance of balance sheet total sheet total – 16 – 16 banksbanks) ) are positiveare positive!!

In the downside scenario, the

volume of NPLs would rise by

13.9%;

Even if the downside scenario

materialized, the composite

regulatory indicator (capital

adequacy) would remain high

above the regulatory minimum

(12%).

Banks in Serbia do not need

pre-emptive capital increase;

The strongest impact on the rise

in NPLs comes from declining

economic activity reflected in

declining GDP and output gap.

Starting basis after diagnostic analyses (RSD bn)

Capital adequacy 19.01%

2009

Estimated annual loss from the rise in NPLs -63.09

Capital adequacy 18.04%

2010

Estimated annual loss from the rise in NPLs -34.81

Capital adequacy 16.42%

ConclusionConclusion

NPLs in total loans (% ) and nominal NPLs (RSD mln)

0%

3%

6%

9%

12%

31.03.08. 30.06.08. 30.09.08. 31.12.08. 31.01.08. 28.02.08. 31.03.08. 30.04.08. 31.05.08. 30.06.08. 31.07.08. 31.08.08.

0

20,000

40,000

60,000

80,000

100,000

120,000

Total loans in nominal terms (right scale) Total loans (share)

Materialization of a downside scenario would lead to а) a 13.9% increase in NPLs (from 8.1% to 22%), i.e.

175% nominal increase relative to the March 2009 level and b) a drop in capital adequacy from 19.0% to

16.4% at end-2010;

In the year to August, NPLs rose by 25% (from 8.1% to 10.1%), with a trend of stagnation - minimum

chances of materialization of the downside scenario until end-2010!

Results of the stress tests have shown that even in a downside scenario, the banking sector (with its current

level of capital and reserves) is capable to absorb all potential losses, and level of 37% above the capital

adequacy regulatory minimum!

Even today there are several key lessons regarding the Even today there are several key lessons regarding the effects of the crisiseffects of the crisis

Bank shareholders are playing a key role in case of crisis

a) strategic owners deserved the confidence;

b) in Serbia, private owners (non-state) caused some concern;

Countercyclical fiscal policy should be practiced also during good times

i.e., government should use the periods of economic prosperity and boom

for building up savings or at the very least, it should try not to increase

public debt;

Legislation should allow fast and efficient handling of crises;

Credit growth in good times should be more aggressively curbed;

Both capital adequacy ratio and liquidity ratio of banks should be higher in

emerging countries;

Central bank should maintain an adequate (higher) level of FX reserves

as a lender of last resort not only in local currency but FX as well;

Outlook for the banks in SEE will be determined by several Outlook for the banks in SEE will be determined by several factors !factors !

1. Growth model: Domestic demand or more export driven growth model ?

2. Macroeconomic policies : To which extent will adjustment take place in

fiscal or monetary policy ?

3. International capital market conditions : Will money be available at the

price and in the amount as previously?

4. Conditions in the country of the banks’ headquarters : Will the origin of

the bank be an asset or a liability?

5. Speed of adjustment : How fast will particular bank adjust to a new reality?

Serbia and the regionSerbia and the region

Croatia

2.73.6 3.4 1.8

2.9 3.3 4.01.7

-1.9

3.85.4 5.0

4.2 4.7 5.5

2.4

-6.5

4.2

-10

0

10

2001 2002 2003 2004 2005 2006 2007 2008 2009*Agriculture, fishing and forestry Industry and construction

Services GDP (%)

Contribution to y-o-y GDP grow th(in percentage points)

FYROM

0.7

0.6 2.6 1.8

3.4 3.2 2.1

-0.2

0.9

2.84.1 3.9

5.94.9

-1.2

4.1

-10

0

10

2002 2003 2004 2005 2006 2007 2008 2009*

Agriculture, fishing and forestry Industry and construction

Services GDP (%)

Contribution to y-o-y GDP growth (in percentage points)

Serbia

2.0

3.3

5.4 3.9

0.7

4.34.7

2.4

8.3

5.6

6.95.5

-4.1

5.2

-10

0

10

2003 2004 2005 2006 2007 2008 2009 H1

Agriculture, hunting & forestry, fishery Industry & ConstructionServices Tax minus subsidiesGDP (%)

Contribution to y-o-y GDP growth (in percentage points)

Bulgaria

2.9 2.4 2.84.1 3.6

3.8

3.0

1.2

4.5 5.0

6.6 6.3 6.2 6.0

-4.2

6.2

-10

0

10

2002 2003 2004 2005 2006 2007 2008 2009*

Agriculture, fishing and forestry Industry and construction

Services GDP (%)

Contribution to y-o-y GDP growth (in percentage points)