Ninth session of the National Bank Council

Today, the National Bank of the Republic of Macedonia Council has held its ninth session and reviewed and adopted the Report on the risks in the banking system of the Republic of Macedonia in the first quarter of 2017, and concluded that the total activities of the banks in the given period decreased by 1.6% influenced by the seasonal factors, slower economic activity, and the risks arising from the still present domestic political developments.

The banks' deposit potential declined in the first quarter of 2017, primarily reflecting the lower corporate deposits. Household deposits grew by a mere 0.2%. The banks' lending activity in the first quarter of 2017 decreased, given the lower credit support to the corporate sector and higher lending to households. However, given the maintenance of the assessments for stability of the fundamentals of the domestic economy, the expectations of economic agents continued to stabilize notably and permanently, which enabled the National Bank to continue normalizing the monetary policy in January and February 2017. The policy rate was cut by 0.50 percentage points and reduced to 3.25%, which is the level before the escalation of the political situation and speculation on the foreign exchange and the deposit markets at the beginning of the second quarter of 2016. Changes in the policy rate were followed by changes in the level of the offered amount of CB bills.

The credit risk indicators continued to improve, albeit with a more moderate dynamics compared to the previous period. After the substantial "cleansing" of the banks' credit portfolios from old and fully provisioned non-performing loans last year, at the end of the first quarter of 2017, the share of non-performing to total loans recorded a slight downward movement to 6.4% (31 December 2016: 6.6%). The share of non-performing loans to total household loans is stable, at around 2.5%.

High coverage of non-performing loans with own impairment of 77.7%, amid satisfactory volume and quality of the banks' own funds, restricts the consequences of any full default of these loans on the banks' solvency positions.

In the first three months of 2017, the banks' liquid assets moderately decreased, partly due to seasonal factors, as well as the influence of the uncertainty of the domestic political situation in this period on the funding sources, especially the deposits of non-financial entities. The fastest decrease was registered in short-term foreign currency deposits in foreign banks, as well as the banks' demands for treasury bills that reduced to a somewhat smaller extent. Despite these developments, liquidity ratios remained stable and satisfactory. Liquid assets account for over 30% of the assets of the banking system and simultaneously cover about 53% of the total short-term liabilities and about 58% of the total household deposits.

Profitability and efficiency ratios of the banking system have further improved, remaining at a solid level. The profit of the banking system registered a growth rate of 9.1% compared to the same period in 2016. Banks continue to deliver high rates of return on average equity and average assets of 13.8% and 1.5%, respectively, which is particularly relevant for the process of internal capital formation, amid mere presence of capitalization by means of share issues.

The new amendments to the Banking Law and the amendments to the bylaws at the end of 2016 allow further harmonization with the reforms of the international capital standard Basel III. Solvency and capitalization ratios of the banking system somewhat improved in the first quarter of 2017, which is mostly due to the reduction of banks' risk weighted assets, primarily currency risk weighted assets. The results of the stress test conducted on 31 March 2017 are generally better, compared to the end of 2016 and indicate satisfactory resilience of banks to simulated shocks.

The exposure of the banking system to other risks is of minor significance. The high share of loans with currency component to households and non-financial companies emphasizes the significance of currency risk for their stability and, consequently, for the bank stability, which is also essentially supported by the policy of stable exchange rate of the denar against the euro, thus making the likelihood of materialization of the currency risk relatively low.

At today's meeting, the National Bank Council also adopted the Decision amending the Decision on reserve requirement, which allows the banks' funds allocated to the recently established Reserve Guarantee Fund of the Clearing Interbank Systems AD Skopje (KIBS) to be included in the fulfillment of the banks' reserve requirement in denars. With this amendment, the funds allocated to the reserve guarantee fund, established for the purpose of optimal management of liquidity risks to the KIBS, have a neutral liquidity effect on the banking system.

At today's session, the National Bank of the Republic of Macedonia Council, based on the schedule and pace of activities, adopted the Decision on issuing and the Decision on putting into circulation the collector coin "Faith, Hope and Charity and their mother Sophia", in denomination of 100 denars, in 5000 pieces, as well as the Decision on issuing and the Decision on putting into circulation the collector coin "Wheel of Fortune" in denomination of 10 denars, in 7000 pieces.

The Council also discussed other matters within its jurisdiction.