Regular session of the National Bank Council

Today, the National Bank Council held its regular session and discussed and adopted the Financial Stability Report in 2018 and the latest Quarterly Report of the central bank.

The Financial Stability Report concludes that the financial stability was maintained last year, amid a simultaneous deepening of the level of financial intermediation. Financial institutions operated in a relatively favorable domestic environment, and the risks coming from the international environment had a limited impact.

The banking system, as a dominant segment of the financial sector, improved the risk exposure indicators, and the stress tests indicate a solid capacity to absorb potential shocks. Last year, the growth of its activities accelerated significantly, amid growth of both the deposits and the capital positions. The de-euroization process continued, which is visible through reduction in shares of loans and deposits with currency component in total loans and deposits. 

When discussing the Report, the Council emphasized that the banking system is liquid, and also with a high level of solvency, with a capital adequacy ratio of 16.5% and domination of the highest-quality, so-called Common Equity Tier 1 capital in the total regulatory capital.  The quality of the banks' assets is also at a solid level, with a share of non-performing in total loans to the non-financial sector of 5.2% and high coverage of these loans with provisions set aside for expected credit losses of 76.3%.

Last year, the supervision and regulation of the financial, and especially the banking system was subject to detailed control, conducted by the International Monetary Fund and the World Bank, within the so-called FSAP mission, which positively assessed the domestic supervisory and regulatory standards in relation to the internationally acceptable standards in this domain.

At its session, the Council emphasized that in 2018, the domestic corporate sector improved the operating results, increased the value added, created new jobs also in conditions of growth of the salaries of the employees. The indicators of profitability, indebtedness and ability to regularly repay the corporate sector liabilities, also recorded a moderate improvement which is significant in terms of credit risk management, that the domestic financial system takes when financing domestic companies.

The indicators of solvency and liquidity position of households, together with the low and stable share of non-performing in total loans in the banks' portfolios, continue to suggest a relatively limited vulnerability of this sector to shocks and general maintenance within controlled frames of the risks to financial stability arising from this sector. The National Bank closely and regularly monitors the situation with the indebtedness of both the corporate and the households sectors and if necessary, will take appropriate measures.

Regarding the fully funded pension insurance, as the second segment by asset size in our financial system, the Council concluded that no major risks coming from the operations are expected. Recent amendments to the legislation in the area of pension insurance should enable strengthening of the sustainability of the total pension system in the long run and stable payment of pensions to the insured. Pension funds management companies apply a prudential investment policy within the regulatory limits and rules. However, these institutions face a significant challenge from their exposure to the volatile movements in international financial markets. The establishment of a third pension company is expected to contribute to increasing the competition in this segment of the financial system.

The Report notes that the activities of other segments of the financial system are rather modest by volume and do not represent a more significant factor for the overall financial stability in the country.  Their assets are less than 7% of the assets of the financial system, and half of them account for the insurance sector.

At its session, the Council emphasized that it is necessary to closely monitor the activities of financial companies, although they serve a small part of the households. This segment registers a relatively rapid growth of activities, which can create risks.

The latest Quarterly Report of the National Bank notes that the monetary setup is adequate to the current economic and financial conditions, amid sound economic fundamentals, favorable external position of the economy, stable expectations of economic agents and absence of imbalances. The latest macroeconomic indicators and assessments do not deviate significantly from the projected path. The economic growth achieved in the first quarter of the year is solid and close to the expectations, whereby the export of goods and services remains the component with the highest individual positive contribution to the growth. Data from the external sector for the first quarter, as seen through the balance of payments, continue to point to a generally favorable external position of the economy.

Foreign trade data point to a potentially slight widening of the trade deficit in the second quarter compared to the same period last year. Despite this, the movements in the foreign exchange market remained favorable, whereby the National Bank continued to intervene by purchasing foreign currency, which contributed to further growth of foreign reserves. According to all adequacy indicators, foreign reserves are still maintained in a safe zone.

At the same time, at the session the Council emphasized that domestic prices registered no significant pressures, and the inflation rate during the second quarter was low and stable. The average annual inflation rate for the second quarter of this year is 1.2% and is somewhat below the expectations.

In the second quarter of this year, favorable developments were also registered in both the credit and the deposit flows, which show no major deviations compared to the April forecast. More specifically, on an annual basis, the credit growth at the end of the second quarter this year reached 8.1%, which is close to the forecast, while the annual growth of total deposits at the end of the second quarter amounted to 10.7% and is slightly higher than expected.

The Council has also discussed other matters within its jurisdiction.