Regular session of the National Bank Council

Today, the National Bank Council held its regular session at which the Annual Report for 2018 was discussed and adopted. It was emphasized that in the previous year as well, the central bank successfully attained the monetary policy objectives of maintaining price stability by preserving stability of the denar/euro exchange rate, and ensured further strengthening of the financial stability in the economy. In this manner, the National Bank continuously contributes to maintaining a favorable environment for the economic activity, it was emphasized at the session.

The adopted Report noted that the environment for the conducted monetary policy in 2018 was considerably more favorable than that in 2017.   Indicators of economic activity showed its recovery, inflation remained low and stable, credit flows continued registering solid growth, while the deposit growth accelerated, given favorable changes in the savings structure from currency and maturity aspect, thus indicating improvement in the economic entities’ expectations and strengthened confidence in the domestic currency. The confidence of the entities and the sound fundamentals of the economy contributed towards maintaining a favorable external position, with a low current account deficit and significant flows of foreign investments, and as a result, during the year the National Bank intervened on the foreign exchange market only by purchasing foreign currency. At the same time, the largest purchase of foreign currency in the last ten years was realized, and consequently high increase in the foreign reserves, which were maintained at adequate level, was registered.

In conditions of absence of inflationary pressures, solid external position, favorable movements in the banking sector and stabilization of the expectations of the economic agents, last year, the National Bank continued with gradual easing of the monetary policy, reduction of the reference interest rate on three occasions for a total of 0.75 percentage points.

The adopted Annual Report also contains an overview of other activities of the National Bank. Last year its institutional capacity continued to strengthen through numerous activities for adoption of the highest international standards in various central banking areas, also being involved in various inter-institutional activities for improving the regulatory framework and the functioning of the financial system and the economy as a whole. Among other things, during 2018 the final phase for accession to the latest Data Dissemination Standard - SDDS plus the IMF was carried out, after which in January this year the country joined the standard, and thus becoming one of the eighteen countries in the world that are part of this standard.

At the session, a strong determination for further improvement of the central banking operations in the country was emphasized, because of for which this year’s National Bank Program envisages a large number of activities and projects, some of which are already underway.

The Council discussed and adopted the Report on the Risks in the Banking System of the country in 2018. It was emphasized that last year, the activity of the domestic banking system significantly intensified  in conditions of prudent risk management, which contributed also for improvement in the banks’ risk profile.  The discussion underlined that the materialization of the credit risk, measured by the trend of non-performing loans, decreased last year, while the share of non-performing loans in the total loans to non-financial entities dropped, down to the level of 5.2%.

When discussing the Report, it was emphasized that in the past year, most of liquidity indicators of the banking system improved, in conditions of solid annual growth of banks' liquid assets. This growth accounts for slightly more than 40% of the overall assets growth of the system. The direct exposures of the banking system to currency risk and interest rate risk are small.

Regarding the improved profitability of the banking system, at the session it was emphasized that in conditions of annual decrease in the net interest income, it is mainly due to the lower impairment costs, as a result of the banks' activities for foreclosure. ROAA and ROAE rates reached solid levels of 1.7% and 16.0%, respectively. If these single effects are exempted, in that case the profitability of the banking system in 2018 is very close to the level registered in 2017.

The stable and satisfactory solvency of the banking system strengthened further in the preceding year. The capital adequacy ratio equals 16.5%, while the correlation between the most quality own funds of the banking system and the risk weighted assets is 15%, which is more than in 2017 in both cases. Aggregately, at the end of 2018, the banking system had capital available above the regulatory and supervisory requirement of 8.6% of the total own funds.

Within the discussion on the Report, it was emphasized that the transition in the second phase of the Stabilization and Association Agreement concluded between the country and the European Communities and their member states undoubtedly brings changes in the business environment of the domestic banks, which are expected to increase the level of integration of the domestic with the global financial system. It is expected that in the future, they should offer a wider range of products and services for their customers. At the same time, it was stressed that the entry of the FinTech activities and the announced adoption of the Law on Payment Services and Payment Systems are challenges that domestic banks will face in the coming period.

The Council has also discussed other matters within its jurisdiction.