BANKING SECTORS IN THE WESTERN ALKANS - JVI · 2002 2004 2006 2008 2010 2012 2014 2016 1 Does not include Kosovo. 2016 uses GDP projections. Sources: BIS, IMF IFS, and IMF staff estimates.

February 2018

BANKING SECTORS IN THE WESTERN BALKANS

European Department

IMF Macroeconomic Policy Seminar for Members of ParliamentVienna, AustriaJune11-13 2018

Ruud VermeulenIMF Resident Representative for Kosovo

European Department 2

Context

Income convergence and credit deepening stalled.

0

20

40

60

80

100

2002 2004 2006 2008 2010 2012 2014 2016

Bank Credit to the Private Sector

(Percent of GDP)

UVK

MNE

NMS

WB

0

10

20

30

40

50

60

70

2002 2004 2006 2008 2010 2012 2014 2016

Sources: IMF WEO, IFS, and World Bank WDI.

GDP per Capita

(PPP, percent of Euro Area)

NMS

WB

European Department 3

Context

Foreign banks financed a credit boom…

0

10

20

30

40

50

2002 2003 2004 2005 2006 2007 2008 2009

Sources: BIS, IFS, and IMF staff estimates.

Foreign Bank Funding to Peak

(Percent of GDP)

MKD

MNE

BIH

SRB

ALB

WB

0 5 10 15 20 25

Crisis Asia (1989–97)

Latam (1977–82)

WB (2002–08)

NMS (2001–08)

Leveraging Episodes

(Increase in foreign bank funding, percent of GDP)

European Department 4

Context

…but this went into reverse when the crisis hit.

0

10

20

30

40

50

2009 2010 2011 2012 2013 2014 2015 2016

Sources: BIS, IFS, and IMF staff estimates.

Foreign Bank Funding From Peak

(Percent of GDP)

MKD

MNE

BIH

SRB

ALB

WB

0 5 10 15 20

WB (2008–14)

NMS (2008–14)

Crisis Asia (1997–05)

Latam (1982–95)

Deleveraging Episodes

(Drop in foreign bank funding, percent of GDP)

European Department 5

This led to a sharp drop in credit growth...

Context

-140 -120 -100 -80 -60 -40 -20 0

SRB

UVK

BIH

MKD

ALB

MNE

Decline in Real Credit Growth

(2010-11 vs 2007-08, drop in pps SA smoothed1)

1/ Smoothed growth rates measure the growth against

previous 12 months average.

Sources: HAVER, IMF IFS, and IMF staff calculations.

-5

-4

-3

-2

-1

0

1

2

3

4

UVK SRB MKD BIH MNE ALB

Change in Credit from Trough to 2016

(percentage points of GDP)

Note: Change from 2012 for countries with no trough.

Sources: MFS and IMF staff estimates.

European Department 6

…and a widening of credit gaps.

Context

-20

-15

-10

-5

0

5

10

15

20

NMS MNE SRB BIH KOS WBS ALB MKD

IMF (2015b) 1/

HP 2/

1/ The fundamentals-consistent of private sector credit is

estimated based on its key demand and supply determinants

over 1995–2016 (see IMF, 2015b).

2/ Actual minus HP filter.

Sources: Staff estimates using WEO, IFS, BIS, World Bank WDI

and other data; World Bank FinStats.

Estimated Credit Gaps in 2016

(Actual minus fundamentals-consistent level of

private credit in percent of GDP)

ALB

MKD

MNEBIH

UVK SRB0

50

100

150

200

250

6 7 8 9 10 11 12

Cre

dit

h d

ep

th

Log of GDP per Capita in PPP Terms

Others

WBs

GDP per Capita and Credit Depth in 2016

(Bank credit to the private sector, percent of GDP1)

1The sample includes all countries for which data are

available.

Sources: IMF staff estimates using WEO, IFS, BIS, WB WDI.

European Department 7

What are the prospects for credit deepening?

• Weak funding

• Impaired balance sheets

• Non-bank structural factors

Context

European Department 8

Parent bank funding has not come back…

Weak Funding

0

5

10

15

20

25

30

2002 2004 2006 2008 2010 2012 2014 2016

1Does not include Kosovo. 2016 uses GDP projections.

Sources: BIS, IMF IFS, and IMF staff estimates.

External Bank Claims on Western Balkans1

(Percent of GDP, all sectors)

0

10

20

30

40

50

60

Reduce

operations

Selectively

reduce

operations

Maintain

the level of

operations

Selectively

expand

operations

Expand

operations

2016H2

2013-15

Source: EIB CESEE Bank Lending Survey.

Banks' Long-Term Strategies in CESEE

(Percent of respondents)

European Department 9

…and the region has not attracted many new entrants.

Weak Funding

Major Bank Ownership Transactions (2009 – 2017)

within EU

with USA

with TUR New

Foreign Entrants

Other

ALB 1 1 0 0 0

BIH 1 1 0 0 1

MKD 3 0 2 0 0

MNE 0 1 0 0 1

SRB 4 1 1 1 3

UVK 0 0 0 3 0

Sources: Bankscope, Fitch, and country authorities.

European Department 10

Deposits alone cannot fund meaningful deepening.

Weak Funding

-20

-15

-10

-5

0

5

10

WB NMS Asia Latam

Change from Peak to Trough

(Percent of GDP)

Resident deposits

Foreign bank funding

Note: Regional weighted average for deposits; aggregate

for foreign funding. Residential deposits not available for

Latin America and Asia. Deposit data in real terms for Latin

America and Asia.

Sources: BIS, IFS, MFS, World Bank, CBK, CBM; and IMF

staff estimates.

-20

-15

-10

-5

0

5

10

15

ALB BIH MNE MKD SRB UVK

Scenario 1

Scenario 2

Sources: MFS, IFS, and IMF staff estimates.

Scenario 1: 2026 credit projected by applying 2010–16

average annual deposit growth to 2016 credit level.

Scenario 2: Scenario 1 less potential deleveraging. For

each country, half of the post-crisis decline in foreign

funding to banks is subtracted from 2026 credit level.

Simulated Change in Credit Depth

(Percent of GDP)

European Department 11

The crisis hit bank balance sheets…

Impaired Balance Sheets

ALB

BIH

UVK

MKDMNE

SRB

ALB

BIH

UVK

MKD

MNE

SRB

-30

-20

-10

0

10

20

30

40

0 5 10 15 20 25 30

RO

E

NPL ratio

pre-crisis max/min

post-crisis max/min

NPLs and ROE before and during crisis

(2006-14, percent)

Sources: Country authorities, FSI, and IMF staff estimates.

ALB

BIH

UVK

MKD

MNE

SRB

ALBBIH

UVK

MKD

MNESRB

-30

-20

-10

0

10

20

30

40

0 5 10 15 20 25 30

RO

E

NPL ratio

post-crisis max/min

latest

NPLs and ROE post-crisis

(2010-17, percent)

European Department 12

…which remain a drag on credit growth…

Impaired Balance Sheets

European Department 13

… that economic growth alone will not resolve.

GDP Growth Needed to Bring NPL Ratios to 2007 Levels 1/

(Percent)

2007 2016Actual

(2016)

Needed

(3 yr) 2/

Needed

(5 yr) 2/

Albania 3.4 18.3 3.4 7.1 4.2

Bosnia-Herzegovina 3.0 11.8 2.5 4.2 2.5

Kosovo 4.1 4.9 3.6 0.8 0.5

Macedonia 7.5 6.3 2.4 … …

Montenegro 3.2 11.1 2.4 3.8 2.3

Serbia 8.4 17.0 2.8 4.1 2.5

1/ Assuming no new NPL formation on top of the existing stock.

Source: IMF staff estimates.

NPL Ratio GDP Growth

2/ GDP growth needed to bring the existing NPL stock back to 2007 levels in a period of

three (five) years.

Impaired Balance Sheets

European Department 14

Non-Bank Structural Factors

Non-bank structural factors have also stymied lending.

• Gaps in land titling and cadastre systems

• Absent/incomplete credit registries

• Understaffed courts/large case backlogs

• Weak insolvency regimes

European Department 15

Policy Recommendations

Policy action is needed:

• Repair balance sheets:- AQRs- supervised action plans- distressed asset market development- enhanced supervision

• Expand funding bases:- manage potential further external deleveraging- develop local capital markets

• Address non-bank obstacles to credit:- Land and property titling- Court procedures and backlogs- Insolvency frameworks

European Department 16

Policy Recommendations

ALB SRB BIH MNE UVK MKD

Loan classification and provisioning

Write-offs

Sale/Transfer of NPLs

Bankruptcy Law

Private bailiffs law

Taxation

Cadastral information

Policy measure completed

Policy measure ongoing

Policy measure recommended Source: Regional Economic Outlook, CESEE, November 2017

Balance sheet repair requires multipronged approach…

European Department 17

Policies

…focused on reducing NPLs.

5

10

15

20

25

30

2008Q

4

2009Q

2

2009Q

4

2010Q

2

2010Q

4

2011Q

2

2011Q

4

2012Q

2

2012Q

4

2013Q

2

2013Q

4

2014Q

2

2014Q

4

2015Q

2

2015Q

4

2016Q

2

2016Q

4

2017Q

2

2017Q

4

2018Q

2

2018Q

4

Albania: NPLs(Percent of total loans)

Sources: Bank of Albania; and IMF staff estimates.

Mandatory

write-offs started to be

implemented

NPLs

Strategy

launched

▪New insolvency law

▪New bailiffs law.

▪Amendments to the

civil procedures and

civil code.

Mostly

write-offs

▪ Increased supervision inspections

▪Two large one off bankruptcies

5

10

15

20

25

2008Q

4

2009Q

2

2009Q

4

2010Q

2

2010Q

4

2011Q

2

2011Q

4

2012Q

2

2012Q

4

2013Q

2

2013Q

4

2014Q

2

2014Q

4

2015Q

2

2015Q

4

2016Q

2

2016Q

4

2017Q

2

2017Q

4

2018Q

2

2018Q

4

Serbia: NPLs(Percent of total loans)

Sources: National Bank of Serbia; and IMF staff estimates.

NPL Strategy launched

Tax deductability

clarifications

New law for real

estate appraisers

Special

Diagnostic

Studies

(AQRs)

Mostly write-offs

European Department 18

Thank you