Interview for "Utrinski Vesnik" - Zoran Jovanovski, May 29, 2007
Banks shall be assessed according to their risk management
Zoran Jovanovski
The Advisor to the Governor says that the banks are coming into a safe zone, and they are generating their profits from regular operations
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"Financial institutions have become dominant shareholders in the banks"
SUPERVISION "Supervision will focus on the risks in banks' operations"
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Mirce Jovanovski
Mr. Jovanovski, the new Banking Law has been recently supported by the representatives in the Parliament. What are the main novelties it brings about?
- The Banking Law enables to a significant extent further harmonization with the relevant EU regulations. Few things may be emphasized as being of key relevance. First, strengthening of the criteria for becoming a bank shareholder, as problems usually appear in a bank in which shareholder is an entity which maybe should not have become a shareholder at all. Hence, the appropriately established entering criteria reduce the possibility for further problems. Second is the improvement of banks, i.e. strengthening of the role and the responsibilities of the management bodies, internal control systems, the role of the external auditor, etc. Third, the risk management function, which is essential, among other things, for making parallel with activities in the NBM in the part of the Supervisory Development Plan. The Law provides for an increase in the capital requirement necessary for founding of a bank from present 3.5 million Euro to 5 million Euro as minimum capital.
Do you think that the new provisions will open enough room for foreign banks, especially their branches?
- The legal framework is set, and from that viewpoint the perception for liberalization of the banking market is valid. The time will show whether the reaction of the foreign banks for opening branches will be adequately aggressive. What one should emphasize here, is what are the expectations from the potential entering of the branches, what is the motivation for a particular bank to enter the banking market in the Republic of Macedonia with a branch. If it is directed toward the corporate sector, which involves operations only with companies, entering through a branch may be attractive. If, however, a bank intends to deal with the household sector, it will need a distribution channel: sub-branches, windows, etc. It means that, ultimately, the decision depends on the focus of its interest, what the branch would like to do on the market. Societe Generale has not chosen the option to open a branch, but to purchase a bank, to enter and compete in all segments with the other competitors on the market.
You mentioned that NBM envisages changes in the part of the supervision. What are they?
- A major multy-year project is underway, for which we receive technical assistance from the IMF. It involves a shift towards risk-based supervision. Upon completion of the on-site supervision in a bank, the question for the supervisor is: what are the risks that the bank faces, does it have a developed management mechanism - to identify, measure and manage such risks or that is not the case. So, the focus is on the risks in banks' operations. At the moment, more attention is paid to identifying if the bank has violated some regulation throughout its operations, etc. This element will still be monitored, but the accent will be placed on what is the essence of the bank: is it capable of managing the risks it encounters during its operations. This is a quantitative change in the philosophy of supervision. The part that has been completed is already being tested in the on-site examinations in some of the banks. This process should be completed in the beginning of 2008, as a methodology and procedures and then, gradually, a complete shift toward the new manner of supervision should be made.
What are your current findings, how do banks manage risks?
The idea is to test the new procedures with different types of banks: large, medium, small, and if possible with more than one bank. This is part of the Arrangement with the IMF. From what we have seen so far, we can say that the results are satisfactory.
This is a period when the NBM gives an assessment of banks' operations for the last year. How did the banking sector perform last year?
Last year was a good business year for the banking sector. The trend of improvement of the operations which started in 2003, has continued. Not only the quantity but also the quality of banks' operations has significantly improved. Deposits have additionally increased, which indicated increased confidence in the banking sector. That confidence and the deposit base were used to deliver a significant credit support for the economy and to support the economic growth. Efficiency and profitability have improved, and new jobs in the banking sector have been created. There are some areas in which no significant changes were made, such as the number of banks, also the three largest banks still cover two thirds of the total banking operations...
What are the reasons behind the increased profits of banks?
- If we observe the quantity, in 2006, the net profit after taxation stood at Denar 2.8 billion, and the banks' profit was 76 percent higher than in 2005. The key moment, however, is the quality improvement. In 2004, banks registered loss from regular operations, but due to the high extraordinary income eventually they showed net profit after taxation. In 2005, they registered a relatively small profit from regular operations of Denar 431 million, but again, due to the significant amount of extraordinary income the net-profit after taxation amounted to 1.6 billion. Last year, 2006, was a completely new story - banks had a few times higher profit from regular operations - Denar 2.359 billion, while the extraordinary income was twice lower than in 2005, when they stood at 1.7 billion, now they are Denar 740-750 million. With such a difference, the profit amounted to Denar 2.8 billion, i.e. 76 percent higher than in 2005. This means that the banks are coming into a safe business zone where they generate their profit from regular operations. This is a very important perception about the banks' operations.
What is the ownership structure of banks?
For the first time, the share of the financial institutions, which at the end of 2006 accounted for 44 percent, was higher compared with that of the non-financial legal entities as shareholders in the banks, whose share was 36.7 percent. So far, dominant bank shareholders were companies - enterprises, while now financial institutions are dominant. It is a preferable profile of an ownership structure also for the central bank and we encourage the entrance of financial institutions as shareholders in the banking sector. At the end of 2006, foreign capital participated with 56.1 percent in the total shareholders' capital of the banking system in the Republic of Macedonia. This capital was present in 17 banks, and in eight of them with majority holding. Those eight banks where the majority holding is in the hands of foreigners cover 50 percent of the total assets of the banking sector. Had Societe Generale entered the banking market before the New Year, these percentages would have been higher, we would have had nine banks with foreign owners with a share of around 58 percent in the total assets. These are not negligible percentages. In 2006, the total banks' assets increased by 24 percent and reached approximately Euro 2.9 billion. The level of financial intermediation, although registering an upward trend, is still relatively low and there is a significant room for further increase. The total assets to GDP ratio reached 57.4 percent. In the EU it is around 300 percent. The level of financial intermediation in the Republic of Macedonia, however, is a little bit higher than that in Romania, as an EU Member State. This means that things are moving in the right direction, but there is still a significant room for growth. What is important is that around 80 percent of the increase in the total assets of is a result of two elements: the credit expansion (two thirds of the assets growth are a result of the credit expansion), and around 19 percent are a result of the increase in the securities portfolio. It is important, that the share of deposits in foreign banks was by 3.6 percentage points smaller at the end of 2006 compared with 2005, at the expense of the increase in the loans to non-financial entities.
How does the NBM view the credit expansion in the Republic of Macedonia?
- In 2006, credit expansion amounted to Denar 21 billion, or 30.5 percent. This is the highest growth rate of credit activity ever. It means that NBM has provided for a satisfactory liquidity of the banking system, i.e. the monetary policy has not been restrictive. With respect to the individual sectors, loans to enterprises registered faster growth in absolute amount, Denar 11.6 billion, or around 25 percent, while the loans to households went up by Denar 9.3 billion, but that is an increment of approximately 43 percent. A portion of the loans to households, although recorded as such, are actually microcredits for business purposes. What is important from the macroeconomic viewpoint is that despite such credit expansion, especially directed toward the household sector, according to the official statistics there is no increase in the share of the import of consumption goods in the total import. On the contrary, it is by around one percentage point lower compared with the end of 2005.
A year ago in the Chamber of Commerce, you sent a word to the banks to prepare for foreign competition. How do you assess the newly set environment after the entrance of Societe Generale and are there announcements for entrance of other foreign banks?
- I was neither the first one nor the last one from the central bank who did that. The question is which one of the bankers anticipated this situation. Still, speaking of the presence of foreign banks on the Macedonian market, I would like to emphasize few things. First, practically half of the banking system is owned by foreign shareholders. I would not agree with certain perceptions that the foreign banks present here are not brand names. At the end of 2005, Nova Ljubljanska banka had total assets of Euro 9.3 billion, at the end of 2006, the total assets of NBG amounted Euro 76.6 billion, while the total assets of the overall banking system in the Republic of Macedonia stood at Euro 2.9 billion at the end of 2006. We should have this perception in mind when we assess the players present on the market. My personal opinion is that the banking sector in the Republic of Macedonia benefited a lot from these banks, which brought new quality about. Societe Generale is an even bigger player and we as a central bank look on the entrance of that bank with affinity, and we expect it to be one more impetus to the development of the banking sector. We have to be realistic though: we are not a large market to be easily attractive for great names. It is more logical the top-brands to enter Macedonia indirectly, through some large regional bank which would have a bank in the Republic of Macedonia in its network. I think that it is a much more plausible scenario compared with the probability some of the top-brands to enter directly in the Republic of Macedonia.