The National Bank Council held its fifteenth session

Today, the National Bank Council has held its fifteenth session and reviewed the Report on the risks in the banking system of the Republic of Macedonia in the third quarter of 2017. It has also concluded that in the third quarter this year the stability and the resilience of the banking system were maintained, primarily reflecting its satisfactory liquidity position and stable and high solvency, but still weak performances in the basic banking activities - lending and deposit-taking. 

In the third quarter this year, amid gradual stabilization of the expectations of domestic economic entities, the overall activities of the Macedonian banking system continued to grow, i.e. registering a quarterly growth of 0.2%, but still slower compared to the previous quarter and the same period last year. After the minor increase in the banks’ deposit activity in the second quarter of 2017, in the third quarter of the year, the growth of deposits of non-financial entities accelerated, but still at a modest pace of 0.4%. Deposit growth was driven by household deposits, with the corporate deposits registering a decrease. The propensity to save in domestic currency, which was reduced during the domestic political crisis in 2016, has been slowly restoring, as seen through the modest growth of denar household deposits of 0.2%. Generally, the modest growth of banks' activities confirms the importance of deposits for their financing, whose potential growth largely depends on the developments and the performance of banks on the deposit market and the maintenance of confidence among domestic depositors.

The credit growth continued in the third quarter of 2017 with 0.3%, but at a pace slower by 2.2% compared to the previous quarter. The growth of lending activity was driven by denar household loans, amid reduced credit support for the corporate clients.

In conditions of modest changes in the lending and deposit activity, in the third quarter of 2017, the changes in some other balance sheet items were brought to the fore. On the assets side, there was a 14% growth in the short-term loans with foreign banks, amid lower securities investments (by -5.3%). On the liabilities side, the higher financial result in the third quarter of 2017, despite its annual decline, determined the growth of the total financial potential of the banking system. At the same time, in the third quarter of 2017, the banks’ liabilities to parent entities declined by -12.2%, taking into account the expected temporary nature of the growth of these liabilities in the second quarter of the year, for the purposes of dividend payment.

Credit risk materialization indicators have been stable. Total nonperforming loans to the banking system declined by 2.0% on a quarterly basis, which is mostly the result of settling non-performing claims on non-financial companies by means of foreclosure of assets given as collateral for those claims. The share of non-performing loans in total loans to the non-financial sector registered a certain quarterly decrease of 0.2 percentage points and reduced to 6.6%. The decrease in the share of non-performing loans in total loans was present in the segment of non-financial companies, and as of 30 September this year, it was 10.4%, where non-performing loans experienced faster quarterly decline, compared to the decrease in banks' lending activity to these clients. In contrast, the growth of non-performing loans to households has been accelerated since early 2017, which, amid increase in prolonged loans and loans that are past due between 61 and 90 days, creates the need for closer monitoring of this portfolio. However, the higher growth of household lending kept the non-performing to total loans ratio stable at 2.6% as of 30 September this year. The high coverage of non-performing loans with allocated impairment of 78.3%, amid satisfactory volume and quality of the banks' own funds, limits the risks of default of these loans to the solvency of the banks.

The liquidity of the banking system is satisfactory, as seen through the relatively stable share of liquid assets in total assets and the satisfactory coverage of household short-term liabilities and deposits with liquid assets. In the third quarter of 2017, amid slower growth in the total sources of financing, the liquid assets of the Macedonian banking system registered a modest decrease of -0.5%.  The small quarterly decline in the liquid assets caused a minor decrease in the liquidity indicators of the banking system, present only in the denar liquidity indicators. In contrast, in the third quarter of 2017, the gap between assets and liabilities by contractual residual maturity narrowed in most of the observed maturity segments, primarily up to seven days.

The profitability indicators of the banking system remained solid in the first nine months of 2017, despite the decrease compared to the same period in 2016. The profit of the banking system declined on an annual basis, for the first time after six years of continuous growth, which was particularly high in the last few years. The reduced financial result is a consequence of the increased cost of impairment of financial assets, as well as the rather slower growth of net interest income, primarily due to the larger decline in the net interest income from non-financial companies, as well as the significant slowdown in the growth of this income from households. Hence, unusual for the traditional Macedonian banking system, in the first three quarters of 2017, the non-interest income of banks, especially net fee and commission income, made the highest contribution of two thirds to the increase in total income from regular operations. However, banks continue to deliver high rates of return on average equity and average assets, of 12.6% and 1.4%, respectively. At the same time, on an annual basis, the operational efficiency of the banks improved, with operating costs accounting for half of the total operating income, which is an improvement of half a percentage point.

Solvency and capitalization ratios of the banking system improved in the third quarter of 2017, which is mostly due to the growth of capital positions, amid fairly modest growth, or even a decrease, in some categories of activities. The increase in own funds, due to the issuance of new subordinated instruments, while reducing the risk weighted assets, as a result of the smaller lending activity with non-financial companies, improved the capital adequacy ratio to 16.2%. In addition to the capital conservation buffer requirement, under the regulation, starting from 30 September this year, systemically important banks have been required to fulfill at least half of the capital buffer for systemically important banks. This capital buffer engaged additional 3.9% of the own funds of the banking system. The results of the stress tests in this quarter confirm the stability of the banking system and its resilience to shocks, whereby the capital adequacy of the banking system would not fall below 8% at none of the simulations.

Due to the positive effects on the lending activity of the banks and the overall domestic economy, at this session the Council decided to re-extend the application of non-standard measure to reduce the reserve requirement base in denars of commercial banks for the amount of newly approved loans to net exporters and domestic producers of electricity for additional two years. Consequently, banks are expected to continue their active lending support to these companies through a wide range of new loan products and more favorable interest rates in order to make greater contribution to the increase of loans to the corporate sector as a whole.

At the session, the Council has also reviewed and adopted the Basic Policies on accounting records and financial reporting of the National Bank of the Republic of Macedonia in order to comply with the new International Financial Reporting Standard (IFRS) 9 - Financial Instruments and the abandonment of the application of IAS 39 Financial Instruments - Recognition and Measurement. The Council has also adopted the Plan of Activities of the National Bank of the Republic of Macedonia for 2018, which contains a detailed review of activities planned for the coming year. Regarding the regulations pertaining to the central bank operations for the next year, the Council has discussed and adopted the Plan of Activities of the Internal Audit Department for 2018 and the Medium-Term Plan of Activities of the Internal Audit Department for the period 2018 - 2020. At today's session, the National Bank of the Republic of Macedonia Council has reviewed and adopted the Financial Plan, the Investment Plan and the Public Procurement Plan for 2016.

The Council has also discussed other matters within its jurisdiction.

NATIONAL BANK OF THE REPUBLIC OF MACEDONIA